Retirement Fund Trustees play a significant role in ensuring fund members can access housing finance
The average price of a South African house was sitting at around R 930 000 at the end of 2007. Property prices have increased 20% per annum on average since 2002 and for those building or improving existing homes input costs have increased 14% per annum in this same period. Financing costs relating to housing have also soared as we have seen nine interest rate hikes since June 2006. Prime now sits at 15%, its highest since July 2003, having moved up 4,5% since the rate hike cycle began.
Despite house prices coming off significantly in recent months, owning a house has become beyond the reach of many South Africans and innovative products, both in physical housing and in financing, are required to resolve this problem. One such product that addresses financing of a home is the pension-supported housing loan (PSHL).
A PSHL is available to members of a retirement fund, provided the fund’s trustees have agreed to PSHLs. The retirement fund member borrows funds required, usually over a ten year period loan, from a lending institution such as a bank, and a percentage of the member’s share in the retirement fund is used as collateral security in favour of the fund, and the fund in turn provides security to the lending institution for the PSHL. The tangible asset, being the house, is not used as security as it would be in a conventional mortgage transaction, so it will not be lost in the case of loan default. The retirement fund guarantees the loan but if the member leaves the fund before the loan is repaid the outstanding balance must be settled.
Trustees of retirement funds, whether pension or provident, are entrusted with the granting of PSHLs to fund members or providing security to lenders for the benefit of members. These trustees have a fiduciary responsibility towards members and their loyalties lie with the members and the fund, in sharp contrast to other parties such as lenders who understandably are transacting to maximize business returns.
The Pension Funds Act does regulate the amount of the loan that trustees can advance in terms of a PSHL. Where the loan is secured by a pledge of benefits to the fund, the amount of the loan is limited to the lesser of 1) the amount of the lowest benefit the member would receive on termination of his membership (net of income tax) or 2) the fair value of the property concerned.
In practice, trustees do not advance the full amount that would be available to the member in terms of Section 19(5) and 37D of the Pension Funds Act. Currently, the retirement fund industry average is between 50-80% of the total benefits sitting in the fund to that member’s credit. As one can see, this is quite a wide range and would differ from fund to fund. The decision of what percentage to advance is a totally independent decision by the trustees and is usually incorporated into the fund rules and in the agreements with lenders.Trustees might have the discretion to go above the percentage as specified in the fund rules but may never exceed the limits as prescribed by the Pension Funds Act. Funds also tend to set a minimum amount, although this is not required by the Pension Funds Act, that has to be borrowed by the member and this could be as low as R 5 000.
The ideal situation for a member wanting to access a PSHL at this point in our economic cycle is that hopefully his salary, and therefore his retirement fund contribution, has kept pace with house price or building cost increases. Another factor influencing what is available in the fund to serve as collateral, and therefore determining the size of the loan, is how well the fund has performed. But if the member’s salary has not kept up with increased prices, and/or the fund investments have not performed, he may be looking at a property in a bracket or market below what he ideally would have liked.
During a period of rate hikes as we have seen in the past few years and may continue to see in June and August, where market commentators are forecasting further rate hikes of up to 1, 5%, the monthly repayment amount might remain fixed as this is in line with what the member can afford, and the term of the loan can be extended. Although retirement fund trustees, subject to the Pension Funds Act, have ultimate discretion as to whether a PHSL term can be extended, the general principle of extending the loan occurs automatically.
With PSHLs, one big advantage is that the interest rate on the loan is often lower than a traditional mortgage, sometimes even as low as prime less 2%. There are other smaller cost advantages to the PSHL route, such as no bond origination or bond registration fees.
The PSHL is governed in the main by two significant pieces of legislation. The Pension Funds Act, Sections 19(5) and 37D, regulate the granting of loans or the furnishing of guarantees in terms of withdrawal benefits available. The National Credit Act, fully effective as from June 2007, regulates credit granting in general and its Section 79 requires advancers of credit to ensure that the borrower is not over-indebted; and Sections 80 and 81 prohibit and prevent the reckless granting of credit. The National Credit Regulator, empowered by Section 82, has not at this stage issued any specific guidelines relevant to PSHLs.
