The underserved market: a world of opportunities

Ever considered providing financial advice to customers employed in the public sector? In a report titled: The Indebtedness of Public Servants dated November 2007, Prof. S.S Sangweni states that, “good financial management skills and ability, coupled with financial discipline and planning, are crucial competencies for public servants.”

This is still relevant today, but unfortunately, many financial advisers working in the public sector have only focused on regional and metropolitan areas such as hospitals and schools.

Defining government employees

There is a need to also focus on provincial and national departments, because there are more than 325 government departments. There is potential for financial advisers to reach out to underserved areas in more innovative ways.

The Government Employees Pension Fund (GEPF) is Africa’s largest pension fund, with more than 1.2 million active members and around 360 000 pensioners and beneficiaries. The GEPF was established in May 1996 when various public sector funds were consolidated.
This fund manages and administers pensions and other benefits for government employees in South Africa, and is governed by the Government Employees Pension Law.

The GEPF is a defined benefit pension fund meaning that benefits are determined by a formula contained in the fund rules linked to the number of years of service. As such members of the GEPF have access to comprehensive risk and retirement benefits. However, does this mean that they have enough risk cover and retirement savings should something happen?

Approaching government employees

What do financial advisers need to take note of when providing financial advice to government employees? Unless otherwise stipulated in their contracts, the normal retirement age for GEPF members is 60, which could have an impact on the remaining retirement planning term available.

Furthermore, the GEPF Rules require the Board to award a basic pension increase at a rate of at least 75% of the average increase in the consumer price index, on all items, over a period of 12 months. This could mean post-retirement increases could only be limited to 75% of the inflation rate, resulting in inflation eroding the buying power of the monthly retirement income. Have you considered the financial costs of frail care in later years?

Tax on benefits could also raise some questions after the payout. Beneficiaries could expect a specific amount for funeral or death payments, but the shortfall could even be greater if tax is also taken into account.

In the past, GEPF employees were not taxed on their lump sum retirement benefits, however, since 28 February 1998 their benefits are taxed in the same way as for non public sector funds.

Counting the years

With regard to the risk benefits, the challenge is that there is a big difference in risk cover between having more or less than ten years of service. Members with more than ten years’ of service qualify to receive a lump sum as well as a monthly income (pension) payout on death or disability. Members with less than ten years of service will generally only receive a taxable lump sum and no monthly income.

So on a practical level, how do you plan for a client in the public sector? How do you incorporate existing benefits offered by the GEPF, into a needs analysis to highlight any potential shortfalls or specific needs?

In the absence of member benefit statements highlighting individual benefit entitlements, financial advisers have the option to access the online benefit calculator on the GEPF website.

Public servants need your help, and as a financial adviser, you need to reach out to traditionally underserved areas with regard to offering holistic advice. Perceptions need to be changed and financial advisers need to engage in more innovative ways. Have you considered offering your financial planning expertise to a selected government department in your area? There are opportunities.