Last Updated on 07/05/2024 by Carl-Peter Lehmann
Are you a South African government employee gearing up for retirement? Understanding the Government Employees Pension Fund (GEPF) is pivotal for securing your financial future. As Africa’s largest pension fund, the Government Employee Pension Fund offers a range of retirement choices. Let’s explore its defined benefit structure, GEPF benefit options, and the role of independent financial planning to help you assess your options.
Understanding the GEPF
Established in 1996, the Government Employees Pension Fund (GEPF) stands as Africa’s largest pension fund, (R2.32 trillion as at 31 March 2023) serving employees across various governmental departments. Its provisions cater to the retirement needs of national, provincial, and local government workers, as well as those in affiliated institutions like the Auditor-General.
Decoding the GEPF's Defined Benefit Framework
GEPF operates on a defined benefit model, a unique feature distinguishing it from defined contribution funds. In a defined benefit scheme like GEPF, your retirement benefit (income) is pre-determined, based on factors such as your final salary, years of service, and a specific formula outlined by the fund. This assures a stable income post-retirement, unaffected by market fluctuations. In addition, while a member of the fund, you have access to additional benefits like death benefits, funeral benefits, and a spouse/child pension etc.
Pre-Retirement Contribution Levels
The employer’s current contribution rate stands at 16% of pensionable salary for ‘services’ members and 13% for ‘other’ members. These rates reflect the varying benefit structures tailored to each category of member. Additionally, all members of the Fund are required to contribute at a rate of 7.5% of their pensionable salary
Calculating Your GEPF Retirement Benefit
Normal retirement is regarded as age 60 and the GEPF calculates retirement benefits using a formula that considers factors such as:
• Final Average Salary: Typically, GEPF calculates your final average salary based on your average salary over a specific period before retirement.
• Years of Pensionable Service: This refers to the total number of years you’ve contributed to the fund. The nature of your benefit depends on whether you have more or less than 10 years of pensionable service.
• Accrual Rate: The GEPF applies an accrual rate to your final average salary and years of service to determine your pension benefit. This rate varies depending on your membership category and years of service.
The formula typically takes the form: Pension Benefit = Final Average Salary x Accrual Rate x Years of Pensionable Service
Here is a useful GEPF Benefits Calculator that gives you an indication of different benefits you might receive in various scenarions (example: retirement, resignation, death, divorce)
Risks of Defined Benefit Retirement Schemes
While GEPF’s defined benefit structure offers stability in the form of a guaranteed income at retirement, there are always risks to consider:
• Funding Shortfalls: Economic downturns or demographic shifts can strain pension funds, leading to funding shortfalls and potential benefit cuts. That doesn’t appear to be threat now with a 110% funding level – but something that needs to be constantly reviewed and monitored.
• Inflation Risk: Defined benefits may not keep pace with inflation over time, eroding purchasing power in retirement.
• Longevity Risk: Not a risk typically associated with a defined benefit scheme – but with increasing life expectancy – actuarial calculations will need to adjust to ensure the fund can continue to meet its obligations. There is a reason most defined benefit schemes around the world have closed. Maintaining adequate funding levels, higher operating costs etc. are all things that make sustaining a defined benefit pension fund more difficult compared to defined contribution schemes.
GEPF Performance: Solid Report Card
Managed by the PIC (Public Investment Corporation) – to end March 2023, the 10-year performance of the GEPF was 6.5% p.a. It has grown from a R126 billion fund with a 72% funding level when it launched in 1996 … to a R2.3 trillion behemoth today with a far healthier funding level. The fund is also net cash flow positive – meaning that it can pay all of its benefits from investment income and contributions – and therefore not have to sell assets to fund these.
Annual Increases in Pension Benefits in the GEPF
The GEP Law and Rules allow the Fund to grant increases based on 75% of CPI. Higher increases are at the discretion of the Board and take into consideration the Fund’s investment performance. The GEPF aims to grant increases that enable pensioners to keep up with inflation, provided that the Fund can afford to do so. In the last financial year, the GEPF granted a 5.5% pension increase from 1 April 2023. Unfortunately the funds returns could not support a 100% of CPI increase in the most recent year. The potential implications of this should be carefully modelled and considered when comparing in and out of fund solutions.
Understanding Your Retirement Options
When retiring from GEPF, as a member you have two primary options:
1. Retire In-Fund: Members can opt to retire within GEPF, choosing from various pension options provided by the fund. These options include monthly pensions for life or lump sum payments coupled with reduced monthly pensions. Length of service (whether 10 years or longer) – also determine the options available to you.
2. Transfer Out-of-Fund: Alternatively, retirees can transfer their pension benefits out of GEPF to an external pension or retirement fund. This provides more control over investment choices and potential flexibility in withdrawal options.
What Are Your Out-of-Fund Options?
Living Annuities: Living annuities offer retirees flexibility in managing their retirement income. They allow you to draw a variable income, subject to regulatory limits, based on your investment returns. This option suits individuals seeking flexibility in managing their retirement income and investment strategy.
Compulsory Annuities: also known as life annuities, provide a guaranteed income for life, typically purchased from a life insurance company. While they offer peace of mind with a guaranteed income stream, they may lack flexibility compared to living annuities.
Further Reading: What the new two-Pot System means for your GEPF Benefits
Analyzing In-Fund vs. Out-of-Fund Retirement Options
Whether you should choose to go with the pension available directly from the GEPF (In-Fund) – or consider moving your pension to a 3rd party provider (like one of the big insurance companies or asset managers) will depend on your unique circumstances and needs.
For the majority of GEPF members – getting your pension directly from the fund at retirement will make the most sense because you are guaranteed an income for life … and your spouse + children (up to age 22) will continue to receive generous benefits if you die before them.
However, in certain cases (particularly when you have accumulated a large member interest), you may prefer the flexibility and ability to construct an investment portfolio that fit your needs that an out-of- fund option like a Living Annuity can provide you with.
Advantages of Retiring In-Fund:
1. Stability: GEPF’s defined benefit structure ensures a stable and predictable retirement income, offering peace of mind.
2. Administrative Simplicity: Retiring in-fund simplifies administrative processes, eliminating the need to manage external accounts or investments.
Disadvantages of Retiring In-Fund:
1. Limited Flexibility: In-fund options may offer fewer choices compared to external alternatives, restricting retirees’ ability to customize their retirement plans.
2. Survivor Benefits: While survivor benefits are available, they may be limited compared to options offered outside the fund.
Advantages of Transferring Out-of-Fund:
1. Investment Control: Transferring out of the fund grants retirees greater control over their investment decisions, potentially yielding higher returns.
2. Flexibility: External options often offer more flexibility in terms of withdrawal options and beneficiary arrangements.
Disadvantages of Transferring Out-of-Fund:
1. Investment Risk: Managing investments outside the GEPF involves inherent risks, and returns are subject to market fluctuations.
2. Administrative Complexity: External options may entail more administrative tasks and paperwork, requiring retirees to be more hands-on with their retirement planning.
Partnering with Henceforward for Independent Retirement Planning
Navigating retirement decisions, especially with the complexities of GEPF, demands expert guidance. At Henceforward, we’re a fee-based, independent wealth planning business who can be instrumental in this process. Here’s how we can assist:
1. Tailored Retirement Strategies: Henceforward offers personalised retirement strategies aligned with your financial goals and circumstances. Whether you opt to retire in-fund or transfer out, we’ll craft a plan tailored to your needs.
2. Weighing In-Fund vs. Out-of-Fund Options: Henceforward helps you evaluate the pros and cons of retiring within GEPF versus transferring out. We provide insights into factors like investment control, tax implications, and survivor benefits, empowering you to make informed decisions.
3. Optimising Retirement Benefits: Leveraging our expertise, Henceforward maximizes your retirement benefits within GEPF or through external options. We ensure your retirement income stream is optimized to meet your lifestyle needs and long-term financial security.
If you have investable assets (including your GEPF Retirement Fund credit) of greater than R10 million, we have the ability to craft bespoke retirement and discretionary investment portfolios to ensure your future and legacy is secured. Contact us via the button below.
Conclusion: Secure Your Retirement with GEPF and Henceforward
As you embark on your retirement journey, GEPF stands as a robust pillar of financial security. Whether you choose to retire in-fund or explore external options, partnering with Henceforward ensures you navigate this transition with confidence. With our tailored retirement planning services, you can unlock the full potential of your retirement benefits and pave the way for a fulfilling post-career life.
Steven Hall
Steven is the Founding Partner and a Director at Henceforward. He is a CERTIFIED FINANCIAL PLANNER with more than 20 years experience and an expert in helping GEPF members navigate their retirement options.
