AN INTRODUCTI ON TO RETIREMENT FUNDS C H AP TE R 9
CHAPTER 9
AN INTRODUCTION
TO RETIREMENT FUNDS
Learning Outcomes
When you have completed this chapter you will be able to
explain what a retirement fund is;
give a brief overview of the history of the development of
retirement funds;
explain why an employer is usually quite easily convinced to install
a retirement fund for his employees;
discuss the need for negotiations with staff representatives when
an employer decides to install a retirement fund;
explain the differences between a defined benefit and a defined
contribution fund and how each of the funds works;
explain why there has been a major shift in membership from
pension to provident funds in South Africa;
describe the structure, purpose and advantages of a preservation
fund;
explain, in some detail, the eligibility criteria of the Social
Assistance Act in South Africa and the benefits provided to
persons who qualify.
RSK3701 LI Page 197
Ver 31072011
,AN INTRODUCTI ON TO RETIREMENT FUNDS C H AP TE R 9
9.1 ORIGINS AND HISTORY OF RETIREMENT
FUNDS
In traditional cultures the elders were considered productive and respected members of
society until their death. They were highly valued for their accumulated wisdom, insight and
experience. Nobody considered “retiring” them because they were integral to how traditional
society functioned. Sure, their roles changed as they aged, but they always had an important
role to play.
As industrial society developed people continued working until their health failed. Life spans
were simply too short to support an extended period of leisure and there was no mechanism
to financially support life without income because no pension system existed. The concept of
retirement planning hadn’t taken form yet.
All that changed in the early 1900’s when social security was created. Shortly thereafter
companies and governments began offering pension plans to supplement social security.
Around the same time average life spans were beginning to extend beyond 65 years. This
combination of factors - increasing longevity and financial programs that provided resources
to support a period of leisurely old age, created the first phase of retirement planning.
9.1.1 A DEFINITION OF A RETIREMENT FUND
A retirement fund is a systematic plan set up for a defined group of persons, usually the
employees of a business enterprise. The purpose of a retirement fund includes the following:
primarily to provide a retirement benefit, either as a lump sum, or a regular monthly
payment, or a combination of the two options, that will provide an income to a member
who has passed the retirement age agreed between the employer and the employee
representatives until his death;
to provide a lump sum payment, or monthly income, to persons who, for reasons such
as ill health, are no longer able to remain actively in employment; and
to provide for the dependants of an employee who might die before he reaches
retirement age and, sometimes, even after retirement has been reached, if there are
still dependants.
In its simplest form, a retirement fund is a fund of money, or assets, built up by the
contributions of the employer and employees over the working lifetime of the employees, in
order to provide a retirement benefit for the employee when he reaches retirement age.
There are, however, a number of points in the definition that need to be further explained.
These are as follows:
a retirement fund is usually set up by means of an agreement that is negotiated
between an employer and his employees;
there are exceptions like a retirement annuity fund, as there is no employer involved,
but the purpose remains the same; and
the purpose of any retirement fund is to proide some form of benefit for the members of
the fund, or their dependants, when they can no longer earn their own income.
RSK3701 LI Page 198
Ver 31072011
, AN INTRODUCTI ON TO RETIREMENT FUNDS C H AP TE R 9
Most funds do not limit benefits to money at retirement but also include other additional
features such as an early payment of the benefit as a result of:
ill health;
physical disability caused by an accident; or
death - in which case the benefits will be paid to the dependants of the member until
they can take care of themselves. Where the dependants include a surviving spouse
the benefits, if paid as a pension, may continue for as long as the survivor lives.
Note that the definition makes mention of the fact that the benefit can be paid as:
a lump sum; or
a regular monthly payment; or
a combination of the two options.
In order to have a clear understanding of the reasons for the different options, you need to
know the difference between a provident fund and a pension fund, as well as the different
ways that they can be paid to the member.
While a pension and a provident fund are both defined as retirement funds, there is an
important difference in the way that benefits can be paid to members at the time of their
retirement.
Provident Fund
A provident fund may pay the total value of the accumulated benefits due to the member as a
single lump sum. There are a number of factors that may make this option attractive. With a
provident fund, once the benefit has been paid to the member, the member has no further
claim against the fund. The money paid out to the member will, therefore, have to last him for
the rest of his life.
Pension Fund
A pension fund, on the other hand, is not allowed to pay more than 1/3rd of the accumulated
value due to the member as lump sum on retirement. It is only where the value of the
accumulated benefit is under R75 000 in total that the lump sum may be paid out as a single
amount. The balance of the money must be used to purchase an annuity or a preservation
fund for the retiree that will provide a monthly income for the rest of his life. The member
does not have to take the 1/3rd in cash, but may use the full value of the benefit to reinvest.
This will result in a greater monthly income for the retiree.
A retirement fund is set up in terms of a set of rules that will determine who makes the
decisions about:
structure of the fund;
the value of contributions; and
eligibility criteria.
RSK3701 LI Page 199
Ver 31072011
CHAPTER 9
AN INTRODUCTION
TO RETIREMENT FUNDS
Learning Outcomes
When you have completed this chapter you will be able to
explain what a retirement fund is;
give a brief overview of the history of the development of
retirement funds;
explain why an employer is usually quite easily convinced to install
a retirement fund for his employees;
discuss the need for negotiations with staff representatives when
an employer decides to install a retirement fund;
explain the differences between a defined benefit and a defined
contribution fund and how each of the funds works;
explain why there has been a major shift in membership from
pension to provident funds in South Africa;
describe the structure, purpose and advantages of a preservation
fund;
explain, in some detail, the eligibility criteria of the Social
Assistance Act in South Africa and the benefits provided to
persons who qualify.
RSK3701 LI Page 197
Ver 31072011
,AN INTRODUCTI ON TO RETIREMENT FUNDS C H AP TE R 9
9.1 ORIGINS AND HISTORY OF RETIREMENT
FUNDS
In traditional cultures the elders were considered productive and respected members of
society until their death. They were highly valued for their accumulated wisdom, insight and
experience. Nobody considered “retiring” them because they were integral to how traditional
society functioned. Sure, their roles changed as they aged, but they always had an important
role to play.
As industrial society developed people continued working until their health failed. Life spans
were simply too short to support an extended period of leisure and there was no mechanism
to financially support life without income because no pension system existed. The concept of
retirement planning hadn’t taken form yet.
All that changed in the early 1900’s when social security was created. Shortly thereafter
companies and governments began offering pension plans to supplement social security.
Around the same time average life spans were beginning to extend beyond 65 years. This
combination of factors - increasing longevity and financial programs that provided resources
to support a period of leisurely old age, created the first phase of retirement planning.
9.1.1 A DEFINITION OF A RETIREMENT FUND
A retirement fund is a systematic plan set up for a defined group of persons, usually the
employees of a business enterprise. The purpose of a retirement fund includes the following:
primarily to provide a retirement benefit, either as a lump sum, or a regular monthly
payment, or a combination of the two options, that will provide an income to a member
who has passed the retirement age agreed between the employer and the employee
representatives until his death;
to provide a lump sum payment, or monthly income, to persons who, for reasons such
as ill health, are no longer able to remain actively in employment; and
to provide for the dependants of an employee who might die before he reaches
retirement age and, sometimes, even after retirement has been reached, if there are
still dependants.
In its simplest form, a retirement fund is a fund of money, or assets, built up by the
contributions of the employer and employees over the working lifetime of the employees, in
order to provide a retirement benefit for the employee when he reaches retirement age.
There are, however, a number of points in the definition that need to be further explained.
These are as follows:
a retirement fund is usually set up by means of an agreement that is negotiated
between an employer and his employees;
there are exceptions like a retirement annuity fund, as there is no employer involved,
but the purpose remains the same; and
the purpose of any retirement fund is to proide some form of benefit for the members of
the fund, or their dependants, when they can no longer earn their own income.
RSK3701 LI Page 198
Ver 31072011
, AN INTRODUCTI ON TO RETIREMENT FUNDS C H AP TE R 9
Most funds do not limit benefits to money at retirement but also include other additional
features such as an early payment of the benefit as a result of:
ill health;
physical disability caused by an accident; or
death - in which case the benefits will be paid to the dependants of the member until
they can take care of themselves. Where the dependants include a surviving spouse
the benefits, if paid as a pension, may continue for as long as the survivor lives.
Note that the definition makes mention of the fact that the benefit can be paid as:
a lump sum; or
a regular monthly payment; or
a combination of the two options.
In order to have a clear understanding of the reasons for the different options, you need to
know the difference between a provident fund and a pension fund, as well as the different
ways that they can be paid to the member.
While a pension and a provident fund are both defined as retirement funds, there is an
important difference in the way that benefits can be paid to members at the time of their
retirement.
Provident Fund
A provident fund may pay the total value of the accumulated benefits due to the member as a
single lump sum. There are a number of factors that may make this option attractive. With a
provident fund, once the benefit has been paid to the member, the member has no further
claim against the fund. The money paid out to the member will, therefore, have to last him for
the rest of his life.
Pension Fund
A pension fund, on the other hand, is not allowed to pay more than 1/3rd of the accumulated
value due to the member as lump sum on retirement. It is only where the value of the
accumulated benefit is under R75 000 in total that the lump sum may be paid out as a single
amount. The balance of the money must be used to purchase an annuity or a preservation
fund for the retiree that will provide a monthly income for the rest of his life. The member
does not have to take the 1/3rd in cash, but may use the full value of the benefit to reinvest.
This will result in a greater monthly income for the retiree.
A retirement fund is set up in terms of a set of rules that will determine who makes the
decisions about:
structure of the fund;
the value of contributions; and
eligibility criteria.
RSK3701 LI Page 199
Ver 31072011
