THE GOVERNMENT EMPLOYEES PENSION FUND

When dealing with GEPF clients one must remember that the Pension Fund Act which governs most registered Pension funds in SA does not apply to the GEPF. This is a fund governed by its own set of rules. The GEPF applies to all Government Employees including uniformed members such as the SAPS and the Army. It does not apply to Municipal workers, Telkom or Eskom employees. These employers were removed from the GEPF in 1995 and have established their own funds. MEMBERSHIP OF THE FUND: RETIREMENT The GEPF is a defined benefit fund. The formula which calculates the gratuity (lump sum) and therefore the monthly income is 7.5 X average salary over the last two years X years of service. Do not use the member’s payslip to calculate the final average salary. There are often many additional payments that are not included in the pensionable earnings of the member. It is prudent that the member applies for a “MEMBER STATEMENT” from the GEPF. The final average salary on which to calculate a benefit is situated in a “box” in the lower left hand corner of the statement. The GEPF is, for want of a better description, a fund that provides a “joint and survivorship” guaranteed annuity. At retirement from the fund (any age from the age of 55 but only from age 60 if no penalties are to be applied) the member has a number of options relating to the lump sum benefit, the guaranteed annuity and the spouses annuity on the death of the member, the details of which will be provided by the GEPF on application. Should a member choose to stay with the GEPF, he or she can elect to remain a subsidised member of his / her GEPF approved medical scheme which includes GEMS, Bonitas and even a few Discovery plans. If the member dies within 5 years of retirement his spouse/ family will receive an additional lump sum benefit from the scheme. Thereafter, on the death of the last dying, no further benefit will accrue from the fund. One exception to this rule is that 10% of the annuity will be paid to children of the member that are under the age of 18 until they attain majority and to disabled children for life. The GEPF guarantees an annual increase of 75% of inflation. For the past few years the increase has equated to around 5% per annum. If you are therefore using comparative quotes to illustrate relative to the GEPF income, a guaranteed escalation of at least 5% should be included. RESIGNING FROM THE GEPF Resignations are rife at present. The GEPF will pay a lump sum to a member who is resigning. This lump sum includes all benefits paid by the GEPF on retirement and additional retirement gratuities will be foregone. If the client wants to resign and you cannot persuade them otherwise, then it is critical to ensure that you have done the following: 1. Informed them that they will lose their medical aid subsidy and membership. New membership of a medical aid may

cost as much as 10 times the premium they are currently paying. In addition GEMS pays for many, many benefits that a “normal” medical aid does not cover.

2. Kindly draw a joint and survivorship (or if relevant, a single life annuity) and a living annuity quote. All quotes should make provision for a 5% annual escalation for comparative purposes.

3. The lump sum used to draw the above quotes must exclude the “gratuity” that the client would have received from the GEPF on retirement.

4. Remember to take account of the cost of medical aid replacement.

5. The income, in many instances, is likely to be significantly less than it would be on normal retirement although a living annuity does have the ability to grow at a rate adequate to accommodate increases at a higher level than 75% of inflation over time.

6. If the client insists on following this course of action, ensure that your Client Advice Record includes a comprehensive comparison between retirement benefits and resignation benefits from the GEPF as well as your comparative quotes in respect of private sector solutions and ensure that the client acknowledges that they understand the decision they have made.

DIVORCE When a non-member has a claim against a member spouse in terms of a final divorce order the non- member is now entitled to claim that benefit when they want it. Until a recent ruling by the Constitutional Court, GEPF non-members had to wait until the member retired or resigned before they could claim their awarded benefit (with no interest). However, being a defined benefit fund, the GEPF rules were unclear on how to deal with the loss of capital due to divorce order claims against a member’s portion of the fund. This has now been settled: A non –member spouse’s portion will be paid out to them and will reflect as a loan from the GEPF to the member that will attract interest currently at a rate of 8,5%. Thus, if you are advising the member on divorce, it may be prudent to find out what the interest amount is and for the member to repay the interest so that when he comes to retire he does not owe the GEPF any more than the original amount. Alternatively from an advice point of view, make sure that your Client Advice Record reflects that you have advised the client of this fact. Please note that while care has been taken to ensure that the information provided in this Circular is correct, it represents an overview of the topic under discussion and as such does not constitute advice. Extracted from a circular drafted by TRICIA REED, Legal Adviser Manager, Broker Distribution East Coast Region,Old Mutual Life Assurance Company (SA) Limited.

THE GOVERNMENT EMPLOYEES PENSION FUND