With interest rates almost certain to rise and pension funds still not fully reinstated in the publics confidence, now might be a good time for the government to consider allowing taxpayers to make privately owned properties part of their retirement funds, says Bill Rawson, Chairman of Rawson Properties.
Rawsons comments follow on the Alexander Forbes debacle where AF was forced by the Financial Services Board to pay back R380 million after admitting to 'deducting' R368 million worth of benefits from members of their pension funds.
The latest Old Mutual Actuaries and Consultants retirement funds survey, says Rawson, shows that only one-third of retirement funds believe the living standards of their pensioner-members to be moderately or very good, while an alarming 20 percent of funds acknowledge that their pensioners standards are poor.
'Perhaps the surveys main message is that you cannot rely on your retirement fund to provide you with a financially secure retirement, particularly if you cash in your retirement savings before you retire or make poor investment decisions,' says Rawson.
'A recent article in Business Report estimates that there are now 16 000 pension funds in SA, managing more than R1 trillion,' said Rawson. 'It makes no sense that a proportion of this is not invested directly in property'
In the UK, said Rawson, recent changes in legislation have made it permissible to contribute 100% of your earnings in any tax year towards a Self Invested Personal Pension. This pension scheme can used to purchase property and the investors can borrow up to 50% of the gross value of the fund for this purpose. Properties bought in this way qualify for tax relief on pension contributions as well as on Capital Gains Tax when they are eventually sold and their rentals incomes are exempt from UK income tax.
By contrast, in South Africa, said Rawson, taxpayers are only allowed a deduction for contributions to a pension fund, with such deduction being limited to the greater of R1 750 or 7,5% of their salary.
Employers themselves are now showing less confidence in pension schemes, says Rawson. According to the Sanlam Employee Benefits Survey (in which 188 funds participated), the average employers contribution to employees retirement savings dropped in 2005 to 9,95% of the payroll from 10,17% two years ago and the average employer contribution is now only 5,95% of payroll.
Many employers, said Rawson, have resisted giving their staffs pensions - because until recently many funds had poor track records and the administrative costs of such funds have seemed excessive. This, he said, is borne out by the latest Sanlam survey which states that the average cost of administering a retirement fund is 1,2% of payroll. Thirty percent of funds are reported as employing 'good general housekeeping' to reduce costs, while 22% of funds negotiate their costs with consultants and 20% regularly rebroker services and products, such as administration and risk benefits but, says Rawson, the general perception is still that the costs are high.
Employers, Rawson believes, would happily contribute to employee housing as part of a pension fund on a rand-for-rand basis provided that they, too, could make this a tax deductible long term pension benefit.
All his experience, said Rawson, points to home ownership being a successful incentive towards steadiness and increased productivity. 'Once a person owns a home he can usually be relied upon to work day and night to keep it. That is why, for example, the German banks allow people to invest a far higher percentage of their salaries in their homes than would ever be permissible in South Africa'
Ironically, added Rawson, the pension funds are now once again becoming major buyers of property loan stocks, thereby taking pensions into property 'via a back door'.
'The traditional formula of having one-third of your investment in the money market, one-third in stocks and one-third in property has regained acceptability after a long period of disinvestment by the big institutions in property. The irony of the situation is that many private investors would prefer to be handling their retirement property portfolios themselves rather than through funds where they have far less control and where, perhaps, a knowledge of property is lacking'
Acceding to the increasing requests for pension money to be allowed in properties, added Rawson, would send a strong message to the public from the government that they support home ownership wholeheartedly and that property is a good investment medium which should always be considered seriously and is still the man-in-the-streets best investment avenue.