This Act provides for regulation, registration and supervision of retirement benefit schemes including pension schemes that are key for housing financing from both the supplier and demand side.
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· Section 38 of the Act generally provides for restrictions on use of retirement benefit schemes’ funds. In particular, the act provides that no scheme funds shall be used to make direct or indirect loans to any person; invested with a bank or building society or any other institution with a view to securing loans at a preferential interest rate or any other consideration to the sponsor, manager, trustee or custodian of a scheme. The only permissible investment of scheme funds under the particular provision is government securities or infrastructure bonds issued by public institutions.
· Admittedly, the restriction on investment of scheme funds and their limitation to investment in government securities and infrastructure bonds of public entities is meant to avoid risky investments thereby putting retirement savings/benefits of retirees at risk. Government securities and infrastructure bonds are considered generally safe. However, these restrictions have meant that a substantial part of funds held by retirement benefit schemes are non-utilised or underutilised, yet they could potentially serve as a financing option for housing developers on the one hand, as well as prospective home buyers.
· Despite the above however, Section 38(1) A of the Act was amended, vide the Tax Laws Amendment Act 2020, to provide an exception to the general rule above. The said section now provides that a prescribed proportion of the benefits accruing to a member in a scheme may be assigned and used by the member to secure a mortgage loan or to purchase a residential house from such institutions and on such terms as may be prescribed in regulations to be made by a Minister.
Pursuant to this provision, there were published the following regulations:
1. Retirement Benefits (Mortgage Loans) Regulations, 2009
· Following amendment to section 38 of the Retirement Benefits Act 1997 vide the Finance Act 2007 to allow for use of scheme funds as security for mortgage financed by other institutions, there were gazetted the Retirement Benefits (Mortgage Loans) Regulations 2009 on 11th June 2009 through Legal Notice No. 85 of 2009.
· These Regulations sought to allow members of pension schemes to assign up to 60 percent of their accumulated pension benefits as collateral/security to access mortgage loans for housing. This would provide financing for prospective home buyers to purchase housing units. Before 2009, members of pension schemes were expressly restricted from assigning their benefits under the scheme for whatever purpose or reason.
· Importantly however, members of pension schemes did not utilize this opportunity for the most part, despite being enshrined in law. Stakeholders in the industry considered the 2009 Regulations as inadequate to the extent that they only allowed scheme members to assign a particular portion of their benefits in consideration for the pension scheme providing a guarantee in favour of an authorised financial institution.
· Further, despite the provision that the pension benefits would provide security against the home mortgage, the primary security tended to still be the charge registered against the residential house acquired by the member thereby taking away from the attractiveness of the product.
2. Retirement Benefits (Mortgage Loans) (Amendments) Regulations, 2020
The regulations were quashed and an order was issued against their implementation by the High Court after it found that Section 38(1A) of the Retirement Benefits Act and the Regulations were introduced through a flawed parliamentary process and lack of public participation.
For a more detailed analysis of these regulations see here.
