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Retirement Funds : The Changing Landscape
By Karin van Wyk - CEO - SAIFM

he 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 accumulated savings.
  • 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 income.

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.

Investment Guidelines
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.

Accessibility 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.

Benefit and contribution structures
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 responsibly.

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 breached.

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 fund.
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.

Governance
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 the law.

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 of experts.

Service and Product Providers
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.

Regulation and supervision
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.

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