Explore the alarming state of retirement fund arrears in South Africa's local government and the implications for municipal workers' financial security. Picture: Pexels.
Retirement fund arrears are spiralling out of control in local government, putting municipal workers’ retirement savings in jeopardy. With billions in unpaid contributions, this could result in a situation that could devastate the financial futures of those relying on these funds. The FSCA released its latest list of employers allegedly non-compliant with section 13A of the Pension Funds Act (PFA) as of 31 December 2023. They reported receiving the details of 7,770 employers who violated section 13A of the PFA by 31 December 2023. The list consists of 109 pages, named no less than 2 330 entities. Of the list, it is evident that there is a major non-compliance issue in the Private Security industry.
2. Another disturbing fact is that 149 municipalities out of a total of 257 are in arrears as well, which is equivalent to 58% of the municipalities in the country being in arrears. Resulted from a combination of challenges over time, including a consumer culture to not pay for services, inefficiencies in municipalities and Eskom, unintended consequences/gaps in legislation, Eskom's inability to assist municipal revenue collection of property rates and service charges in Eskom supplied areas within municipal demarcations, etc. Some municipalities are in a position of financial gridlock that requires a radical change towards their insolvent trajectory while being mindful that a persistent culture of financial mismanagement behaviour coupled with a consumer culture of not paying, primarily led to their position.
Municipal Eskom debt is a material risk to the Eskom debt relief
3. Not only is the debt position of municipalities a problem facing the government so too is the financial health of municipal pension funds a great concern for employees and retirees. There are several different public pension funds: National Fund for Municipal Workers, there is also a separate fund called The Municipal Councillors Pension Fund (MCPF) which was established on 01 May 1988 in terms of the Pension Benefits for Councillors of Local Authorities Act No. 105 of 1987, there is also a Fund named Joint Municipal Pension Fund and the largest public Pension Fund is The Government Employees Pension Fund (GEMPF). In addition, there is Die Vrystaat Munispale Pensioenfonds (the Fund) which is registered with the Financial Sector Control Authority as a registered pension fund in terms of the Pension Funds Act (No 24 of 1956) with a Registration Number of 12/8/412.
The unpaid contributions from municipalities alone are estimated at R1.4 billion across ten retirement funds. The consequence management is in operation. One example of action against wrongdoing is that of Johnny Mackay, the former municipal manager of Kai Garib Municipality, who was arrested for violating the PFA during his tenure. As has become the norm that a person is seen as not guilty until final proof, Mackay has since become the head of the Department of Public Works in the Northern Cape. The court will pronounce his action in due course. Unathi Kamlana, the Commissioner of the FSCA, has pointed out that various other cases are being investigated and that people in contravention of the Municipal Finance Management Act and the PFA will be prosecuted by the SIU.
Kamlana stated that there were R5.2 billion in arrear contributions – representing 0.2% of the total R3.15 trillion in assets within South Africa’s retirement funding system. It may appear insignificant but the individual who may be affected by his or her Fund’s shortage could not rely on the industry as a whole to make good for a specific Fund that has a shortage.
4. The Registrar of Pension Funds provides a central database on the FSCA website to assist members of the public to ascertain through the search engine if there are any unclaimed benefits due to them. An enquirer will be required to input basic information onto the Unclaimed Benefits Search Engine, i.e. name, surname, identification number, fund name, name of employer, etc. for the search engine to check if there is a possible match. On a successful match, the enquirer will be provided with the contact details of the fund and/or administrator.
The pension fund industry can now allocate up to 45% of its assets offshore. Additionally, about 40% of the revenue from the Top 40 companies on the JSE is generated outside South Africa, effectively externalizing capital. Theoretically, South African Funds can have a maximum exposure of 45% plus 40% of the remainder 55% being 22% bringing the total foreign exposure to 67%. We, (me included) are always quick to criticise the ANC government, but one must give credit where credit is due. This statistic is phenomenal and ought to be highly regarded, much in the same light as the high level of freedom of speech that we have in this country.
5. There has been much speculation as to whether local investments can match offshore investment returns. Now three years later into the shootout between local and offshore investing, Piet Viljoen is well ahead of his rival Magnus Heystek of Brenhurst.
The consideration of prescribed assets can be seen as an acknowledgment of the government's shortcomings in infrastructure development and economic management. In a low-trust environment where corruption and inefficiency are rampant, the pension fund industry faces the challenge of whether it can confidently allocate funds to government projects. The idea of prescribed assets suggests that the government is now looking to the pension fund industry to compensate for its failures.
6. Conduct of Financial Institutions Bill (COFI Bill) which commences on 31 March 2025
The CoFI Act amends the Financial Markets Conduct Act 2013 to ensure financial institutions treat consumers fairly. The CoFI regime, , is designed to protect consumers by putting the consumer at the forefront of institutions’ decisions and actions1. The COFI Bill aims to move away from a ‘rules and regulations’ approach to a ‘principles and outcomes-based approach. If only all government institutions could take cognisance from this principle the lives of our citizens would be so much better. A good example of a rules-based approach that is in place in the CIPC office. They have a tick list and only act based on their tick list. No effort is made to look at underlying principles. For them in adjudicating if a company application for reregistration is warranted, they simply reject, and the result is the applicant must spend thousands of Rands to obtain a court to intervene.
6. Tax and the Two Pot retirement system
Citizens finding themselves under financial pressure may look at the prospect of withdrawing funds from their savings port. However, the tax man lurks and is only too happy to collect his slice of the withdrawal. Contributions to retirement funds are not taxed. Therefore, the tax will be deducted from any amount withdrawn. Tax will be calculated at the tax rate applicable to the individual. Taxpayers must also ensure that they have no outstanding returns and do not owe Sars. Debt owed to Sars will be deducted from the withdrawal amount. Zwelinzima Vavi (born 20 December 1962[1][2]) is the General Secretary of the South African Federation of Trade Unions (SAFTU). Zwelinzima Vavi has come out fighting against the paying of tax on retirement payouts. His arguments that we are already overburdened have fallen on deaf ears. A well-known advice often given is “pay and the pain goes away” which may come in handy to deal with the two everlasting realities, death and taxes. Extensions are possible but avoidance is never possible.
* Kruger is an independent analyst.
PERSONAL FINANCE