Pension Backed Home Loans - it's issues and solutions Understanding the product
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Pension Backed Home Loans Understanding the product – it’s issues and solutions
What is a Pension Backed Home loan?
Why was this product necessary?
• Purchasing of a home
• Buying land
• Building a new home
• Home improvements
• Renovations
• Alterations
• Maintenance
Secured by the member’s Pension/Provident
Fund in terms of section 19(5)(a) of the Pension Funds Act of 1956
When did this product surface in South Africa? & Who offers this product?
Who uses this product?
Originally targeted for
“Unbankables”
“ I have a strict budget and don’t have
much money, so I send concrete and
bricks home with the money I
loaned through my pension
Fund..and I will build my dream
house in my ancestral land...I have
already built the foundation and
two rooms!” -Member
Pro’s of Pension Backed Home Loans • No debit order fees • Often a better interest rate • No registration fees • No legal fees
Negatives of Pension Backed Home Loans
• You could get a better rate directly with your
own Financial Institution
• If the member defaults the tax implication on
the Fund is negative - seen as a withdrawal
• Lack of preservation if a member defaults
• Fraud by the member – not using the loan for
correct purposes
Who are the Stakeholders in the process?
A. Fund
Makes the decisions, chooses the
service provider
Decides on the check and control
mechanisms
B. Employer
Can support the process by insisting
on Fund education for members,
supporting application process by
providing access and counselling
C. Financial Institution
Has to make sure the loan is
affordable
Manage data
Service provider checklist
• Service your members on a national bases
• Produce references from existing funds
• Follow all legislation / legal requirements
• Tailor made Management Systems
• Quarterly statement to members
• Comprehensive reports monthly to payroll
and Funds
• Competitively priced and does not increase
rates / fees annually (excluding Reserve Bank
interest rate adjustments)
• Dedicated collections department for pension
fund Backed Housing
How does the Pension Backed Home loan work?
• Board of Trustees make a decision
• Agreements signed with Employer(s)
• Appoint a Financial Institution
• Administration process
– Complete application form with the member ensuring all
documention is in place
– If married in COP application form signed by spouse
– Completed documentation is logged by consultant
– Affordability check as per NCA by Financial Institution
– Once approved Fund Administrator checks surety value,
makes sure no previously settled loan by the Fund
– Member receives the payment
• Bank owns documentation
• Fund initiated checkpoints are put in place
• Data management with Fund and Bank
What do most Financial Institutions use to check
affordability?
• Affidavit (this is optional)
• Affordability check: In line with the NCA and Institutions policy
• Evidence that it is a primary residence:
• Rates Bill
• Municipality
• Tribal Leader (this is in dispute in some instances)
• PayslipWhy would the pay office not pay over monthly
instalments to the Financial Institution?
• Members died – settlement value
• Members absconded – no income
• Employer is threatened – no
deduction made
• Members ill – unpaid sick leave, no
incomeMembers perception –
saving plan, not a retirement plan
• “It’s my money!”
• “I won’t live long enough if I don't have a
place to stay warm and dry, who cares about
old age, I need to survive today!”
• “I have saved and budgeted so that my
children got the best education..they are now
working and it is their turn to take care of
me!”
• “I am sick, when I die I am not going to get my
money!”Case Study
You have granted a Housing Loan –
should your Fund do an inspection?
Lets create two points of view:
• Pro Inspection
– Why is this a good idea
– How would you do it?
• Anti Inspection
– Why is this not a good idea?
– What are the issues your group identified?Inspection of the Property
Who in the Fund does the inspection?
• Who pays, does the applying member pay or the Fund (all
members) subsidise this expense?
• When do you do the inspection?
• What about out of town structures?
• What do you do if member has lied?
• What do you do if you uncover fraud?
• Who pays for legal action?
• Tips and ideas:
• Calling their bluff
• Independent inspectorHas this product been given a bad name and if so
is that fair?
• Indiscriminate housing loans offered
with minimal qualifying criteria
• Insufficient controls and management
• Reduce retirement preservation
• NCA has reduced this and the average
acceptance rate of a loan is approx 45%
• This frustrates the member – it is my
money I want it!Solutions Financial Institution could utilize to
assist members regarding affordability
• Debt Consolidation through financial
institution, base income figure is adjusted to
enhance affordability, making it possible for
the member to qualify for the loan.
• Applying through the Fund may reduce Bond
interest rate .Risk Cover
• To have or not to have
• Pro’s
– In the event of a member death or becoming permanently disabled, the members fund values are
unaffected
• Con’s
– Additional cost to memberWhat are the trends?
• Loan values are going up - on average by
40% - Why is this the case?
• Used to be an old person benefit - More
and more young members using benefit to
establish themselves
• Members aren't building out of their
pockets as building/renovation costs have
gone up so much in the past four years.
They are using this benefit.Any Questions?
Thank You Presentation by Zsofi Fouche Sash Consulting (Pty) Ltd
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