Two birds with one stone
South Africa faces a number of challenges in addressing the rampant poverty and rising inequalities faced by its citizens. Although government is throwing billions in taxpayer contributions at the problem, we believe this expenditure is ‘cure’ rather than ‘prevention’ focussed. Government’s current social development grants tackle the results of poverty rather than the causes.
For this reason the latest public-private partnership, announced at a reception in Sandton on 12 November 2007, is welcome news indeed. The Fundisa Fund is a joint venture between the Department of Education and the Association of Collective Investments (ACI). The ACI will work closely with the National Student Financial Aid Scheme (NSFAS) which has been providing accessible student loans to low-income families for some time now.
Two birds with one stone
Billed as a savings scheme for further and higher education, the Fundisa Fund hopes to reduce poverty on two fronts. The first is through boosting savings – with the fund providing a much needed savings vehicle for lower income South Africans. ACI chief executive Di Turpin says “South Africa needs to take urgent action to reverse the dismal savings rate and Fundisa is one of the initiatives being launched by the industry to encourage a savings habit. Collective investments, because of the low costs and highly regulated environment, are an ideal vehicle for savings.”
And the second is to enable more students to take up tertiary (or higher) education, with the long-term knock-on effect on employment and economic growth. Turpin points out that “Education is a key factor in promoting wealth generation and higher living standards and we believe Fundisa can play a meaningful role by providing an incentive to families to save for a child’s education beyond basic schooling.”
The Fundisa Fund is a tool to assist parents (and guardians) to save funds to allow children to progress their education beyond secondary school. Contributions start from as little as R40 per month and savers will be encouraged to make these monthly contributions by debit order. For this reason one of the requirements to open a Fundisa Fund account will be an Mzansi or similar transaction bank account. Once off payments will be allowed and there will be no penalties if instalments are missed.
Unique features make Fundisa an interesting option
The product is unique in a number of respects. Any adult saver can open a Fundisa Fund and can elect any child as beneficiary. Thus the saver does not have to have a direct family relationship with the child. The invested funds belong to the saver until such time as the child is ready to attend an approved college or tertiary institution.
At this stage the saver will approach the institution where the Fundisa Fund was initiated and obtain an award certificate, which will have to be presented directly to the learning institution. This prevents the problem of funds saved for education being used for unintended consumption expenditure.
In addition, the beneficiary of the Fundisa Fund is transferable. This means the saver is allowed to change the name of the student benefiting from the savings. But the real kicker is that the government and private partnership will pay each account holder a benefit of up to 25% of contributions made in a given year. This bonus payment is capped to a maximum of R600, or 25% of an annual R2, 400. There are some reasonable conditions attached. Should the saver be forced to withdraw the saved portion at any point in time for use other than education of the child beneficiary, then the balance held in the bonus portion of the account will fall away. And the child beneficiary must use the fund before they are 35 years of age.
Government has supplied R20 million to the venture, which has been matched by NSFAS. The ACI also announced that R14 million has been committed by various collective investment players. Minister for Education, Naledi Pandor welcomed this positive start, saying: “I would like to challenge the private sector, including those who have already contributed, to significantly increase their support for this very important intervention. We need to see this as an investment in the collective future of our country.”
Not one for the broker channel
Investments in the Fundisa Fund will take place through the direct sales channels at the various banks and institutions that have signed up to distribute the product. Currently these include most collective investment companies, Absa, Nedbank, Standard Bank and the Post Office.
Brokers will probably give this product a miss, as the ACI has set a maximum 1% charge for broker commission. So a broker assisting a client in signing up for this product would receive R2.00 per month for a R200 per month Fundisa Fund contribution. Apart from this fee, fund management fees are capped at 1.25% per annum.
The fund will be conservatively invested in income funds, mainly in money market securities, bank deposits and government bonds. It might be appropriate to consider various equity alternatives at a later stage. Pandor believes great things will come from this initiative. “If the [three year] pilot scheme is successful, we will be able to expand Fundisa’s reach. We will not see the impact of Fundisa for many years, but when children begin to redeem their Fundisa funds, we will be able to see how far sighted we’ve been.” And ended with the quote: “A mind is a terrible thing to waste.”
Editor’s thoughts:
The Fundisa Fund offers an alternative to the existing education policies available on the market. It is not limited to poor savers only and might make a great ‘enhancer’ to existing education savings mechanisms. Costs look reasonable – if only we could convince banks to do away with debit order charges for transactions to savings and retirement funding institutions. We welcome any comments you might have on this scheme. You can post your comment online or e-mail me [email protected]
