Funds : The Changing Landscape
By Karin van Wyk - CEO
National Treasury Task Team recently released a discussion
paper on the transformation of the retirement fund industry.
The Pension Funds Act dates back to 1956. It therefore stands
to reason that industry developments have outpaced the legislative
framework by far and modernisation is overdue.
Various commissions have investigated and
commented upon the retirement fund industry dating as far
back as 1992 with the Mouton Commission. The regulatory framework
was amended on an ad hoc basis however, with no systematic
overhaul of the system.
Some of the problems identified in the current
retirement fund system include:
- Too many people reach retirement age without adequate
- Savings are too often interrupted.
- The costs of retirement fund provisioning are too high.
- There is a lack of cost-efficient retirement vehicles
for low to middle income people and people with an irregular
The National Treasury Task Team (NTTT) concluded
that a substantial review and update of the current legislation
is warranted. The recommendations of the various commissions
and international standards of pension fund practice over
the years have been taken into consideration in formulating
the recommendations in the Discussion paper. (The Discussion
paper is available on www.finance.gov.za)
The proposed regulatory regime relating to
investments is of particular interest as the current regulation
28 that contains prescribed limits of investment in particular
asset classes has been a bone of contention in the retirement
industry for many years.
Standard prudential guidelines will no longer be applicable
to all funds, but only to those funds that are unable to adopt
a properly formulated investment strategy certified by the
fund’s actuary as appropriate in the light of the fund’s
liabilities. Funds, who have adopted and implemented the necessary
investment strategy, must implement it, inform its members
thereof, monitor compliance therewith, annually review it
and report to the Regulator compliance with these conditions.
Prescribed maximum investment limits will
however apply in respect of investments in the employer, any
single investment and foreign investments. Insurance policies
will be subject to the same constraints as direct investments.
The Regulator will have to set performance
benchmarks against which trustees must assess the performance
of their asset managers from time to time.
Trustees must be required to send a written
document to their members and participating employers if they
intend investing in socially desirable investments that may
yield returns lower than that of other investments. Funds
should be permitted to invest up to 10% of assets in such
investments if it is expected that they would yield returns
of not less than the increase in the inflation rate over the
period of investment.
Investment choice may only be granted to
members if the portfolios reflect investment strategies appropriate
to the likely profile of those members and the investment
risks to which they will be exposed. Each investment strategy
with the concomitant risks must be explained to members. There
should be a limited number of options with a default option
to apply. The performance of each portfolio must be monitored
against criteria in the investment strategy and the option
removed if the performance is inconsistent with those criteria.
to Retirement Funds vehicles
The current system whereby membership of a particular fund
forms part of an employer’s conditions of employment,
should be retained. If an employer does not require compulsory
membership of a retirement fund however, the employer should
provide education on the desirability of saving for retirement
and payroll facilities for the deduction of contributions
to a retirement fund of the employee’s choice.
A new savings vehicle, called the National
Savings Fund (NSF) should be created for people with low or
irregular incomes, as no suitable retirement fund vehicles
currently exist to cater for the needs of these people. Benefits
from this fund must however be exempted from the means test
for the social old age pension to prevent the means test becoming
a disincentive to contribute to the NSF. It is envisioned
that the NSF will ensure affordable administration costs as
a result of economies of scale and pay competitive investment
returns with possibly a bonus payable if the funds are retained
until retirement. Irregular payments must be permitted to
cater for the informal sector.
People of middle to higher incomes, particularly
the self-employed and people who work on a contractual basis
should have access to retirement vehicles outside of the employer-employee
relationship and favourable tax treatment for such funds should
be harmonised for all retirement funds. Discrimination on
the basis of age, race, gender, state of health, employment
status or sexual orientation in the payment of benefits will
not be allowed. The risk profile of the fund as a whole however
may be taken into consideration when determining premiums
for risk benefits or restricting benefits. People with poorer
risk profiles may not be expected to pay different rates of
contribution or receive different benefits as a result of
their risk profile.
Individual retirement funds emerging from
the harmonisation of the tax dispensation with retirement
annuities and occupational pension funds, should be structured
on a defined contribution basis and accept regular or irregular
contributions. A choice of benefits and contribution rates
should be offered with full transferability if the transferee
fund meets the same conditions as the transferor fund. Costs
should be disclosed while the regulator must publish the cost
structures of all service providers to ensure comparisons
can be made. Fund members must receive an annual statement
disclosing costs, actuarial withdrawal amount, net amount
invested, average annual return and other prescribed information.
No fees or commission may be paid to an intermediary for inducing
a member to join the fund.
An interesting development is the recommendation that provident
funds be converted into pension funds. This will certainly
change the retirement landscape in South Africa, as we know
it. Benefits must be taken in the form of an annuity, with
only a modest amount may be paid in the form of a lump sum.
Provident funds will be given a reasonable period to amend
their rules to cater for the new dispensation.
The current requirement with regard to minimum
benefits must be retained. Benefits must be preserved when
members change jobs at a retirement fund of the members’
choice. No direct or indirect reward may be paid to any person
for inducing the transfer to the transferee fund.
Ancillary benefits through a pension fund
should be encouraged by the removal of current restrictions
provided that a prescribed minimum percentage of total contributions
are applied towards retirement benefits. Members must be informed
of the breakdown between retirement savings, administration
expenses and insurance premiums. Increases in administration
costs and insurance premiums must lead to a reduction in insured
benefits and not retirement savings. Contrary to the current
dispensation, retirement funds should be allowed to pay an
income on temporary and permanent disability.
Benefits must be distributed according to
a beneficiary form, unless compelling reasons exist why it
should not be done. Funds must require their members to update
dependants and beneficiaries every five years. Trusts may
be created for dependants not able to manage their income
The current provision that pension funds
must give inflation-proofed pension increases subject to affordability
will be retained. Assets backing the pension liability must
be separately invested and pensioners receive the return earned
on these assets.
No minimum rates of contribution should be
prescribed while variable rates of contribution must be allowed
as long as the limit on tax-deductible contributions is not
Withdrawals for life crises should be allowed
while retention should be promoted by an enhanced rate of
interest if moneys remain invested until retirement.
Funding by employers for medical aid contributions
by way of contributing to an employer surplus account should
be allowed. Members will acquire no rights to these contributions
unless they retire from the fund, in which case they will
be entitled to a subsidy of their medical aid contributions
The never-ending problem of unclaimed benefits
will be addressed by requiring retirement funds to trace individuals
entitled to unclaimed benefits actively. If the fund is unsuccessful,
the benefit must be paid to a central unclaimed benefits fund
that will also be obliged to trace the beneficiary. If the
central unclaimed benefits fund is also unsuccessful, the
benefit will be released to the State. If beneficiaries come
to the fore at any stage thereafter, the central fund may
still make the payment.
Housing guarantees only (as opposed to housing
loans) should be allowed in respect of a member’s primary
residence. The amount may not exceed the member’s individual
reserve less tax. A maximum will be prescribed. The loan should
be repayable before retirement, or the outstanding amount
must be expected not to exceed the cash amount available on
retirement. Full disclosure of material terms like payment
period and interest rate must be made to the member and the
Apart from deductions due to the default on a housing loan,
only tax may be deducted from benefits. No other deductions
allowed under the current section 37D should be allowed.
The dispensation with respect to divorce
should be changed as follows: The member’s minimum individual
reserve should be deemed to form part of his/her assets and
split according to the court order. The spouse should thereafter
be deemed to be a member of the fund with a paid-up minimum
reserve equal to the amount awarded by the court. This benefit
will grow with the investment return on a defined contribution
basis. The spouse must also be given the option to transfer
the benefit to a fund of his/her choice.
As far as Boards of Trustees are concerned,
the NTTT recommended that each fund must have a board of trustees
of which 50% must consist of member representatives. The Registrar
will only exempt a fund from this requirement if it will be
in the best interests of the members. In such a case, 50%
of the Board and 50% of the quorum with decision-making powers
must consist of independent trustees approved by the Registrar
as “fit and proper”
Trustees must owe a fiduciary duty to the
fund and a duty of good faith to all stakeholders. The main
common law duties of trustees should be codified, including
the duty to protect past services benefits and a duty to disclose
information necessary for a member to make informed choices
and to protect their rights. Trustees may not amend the rules
to reduce the capital value of a member’s unconditionally
accrued retirement savings based on past service unless it
is necessary for the fund to remain financially sound and
the majority of members have indicated that they would prefer
a reduction in benefits to the liquidation of a fund. Trustees
may not advance the interests of one group of stakeholders
at the expense of another without their written consent. If
an employer and its employees agree to a rule amendment, the
trustees must implement it unless it is inconsistent with
A trustee’s conduct will be measured
at the same standard of a person that is familiar with the
relevant issues. Trustees who lack appropriate expertise must
undergo training at the expense of the fund or seek the advice
Service and product providers must disclose any interest in
a service or product offered to the fund and may not participate
in a decision relating thereto. The advice and reasons for
the advice must be set out in writing. Service providers to
whom discretionary power is granted or who may make or influence
a decision must act in the fund’s best interests. Service
providers may not accept inducements from third parties or
if they accept rewards, disclose the value to the fund and
the reason why it is justified.
Service and product providers quoting for
services or products must disclose the value of any commissions
or rewards payable to a third party for facilitating the business
and what the price would have been without it.
Material changes were recommended with regard to the regulatory
framework of retirement funds. The Registrar of Pensions Funds
should fall under a Board to make decisions in the context
of deadlocks between stakeholder constituencies without being
overridden by other policy boards or committees.
Certain of the supervisory functions should
be eliminated and replaced by licensed practitioners authorised
to certify for example that the rules of a fund are not inconsistent
with the Act. These practitioners must have whistle blowing
rights and obligations to ensure that the Registrar is informed
of breaches in a timeous manner.
Transfers must take place according to a certified process.
Upon receipt of evidence that the process has been followed,
the Registrar may approve the transfer.
The Registrar should be given greater powers
of inspection and enforcement actions like fining or suspending
trustees or service providers or withdrawing licences. The
Registrar should also follow a risk-based approach to regulation
while education amongst members of retirement funds must be
promoted to empower them to guard against abuse.
The Registrar may draft codes of good practice
that may not have legal enforceability, but may be used as
evidence in proceeding before the proposed specialist retirement
funds disputes tribunal.
The Registrar should be empowered to request
regular or ad hoc information to monitor trends that may require
legislative or regulatory intervention. This information would
be over and above the annual financial statements and triennial
statutory valuation reports used to identify funds at risk
of funding shortfalls or mismanagement. A specialist tribunal
(which may be an extension of the Adjudicator’s office)
should be created to deal with occupational and individual
retirement funding disputes.
The Discussion paper is an ambitious document
with far-reaching and sometimes controversial proposals. It
will certainly be interesting to see how many of them would
eventually become part of the law and how the retirement fund
industry will change over the next couple of years.