HOT TOPICS I OCTOBER 2015
LEGAL AND
REGULATORY CHANGES
Hot Topics | October 2015
Leading opinion: A new look at laws and regulations
ALEXANDER FORBES
Contents
Question
Page
1
How is the implementation of the twin peaks model of supervision progressing?
2
2
National Treasury will be expecting funds to implement default options.
What are these and what are the implications for funds?
8
3
What are the implications for retirement funds related to the latest Taxation Laws Amendment Bill?
16
4
The change to the tax treatment of disability income policies was effective from 1 March 2015
– what has been observed as the impact?
20
5
What insights are there from Pension Fund Adjudicator cases?
24
6
What other proposed regulatory changes should trustees and management committees be aware of?
27
HOT TOPICS I OCTOBER 2015
We would like to thank the following employees for contributing to this workbook:
Fiona Renton
Nancy Andrews
Lizzie Vambe
Shirdhi Baijnath
John Anderson
Michael Prinsloo
Vickie Lange
The issues surrounding laws, regulations, savings, investments and trustee duties are complex and depend entirely on the
particular circumstances of each fund. Trustees and management committees must in all cases take their own decisions on
issues based on their particular fund’s circumstances at the time. It is for this reason that trustees and management committees
cannot rely simply on what we have discussed here today, neither should they regard our discussions as legal advice. Trustees and
management committees should get specific assistance where they are uncertain of the consequences or reasonableness of any
contemplated action.
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without the express written permission of Alexander Forbes.
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responsibility for any actions taken based on this information, all of which require financial advice.
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ALEXANDER FORBES
Preface
‘Change on the horizon’ has been a dominant theme characterising the retirement fund landscape over several years.
We’ve seen significant legislative changes in recent times and potentially far-reaching reforms proposed. The need for
employers, management committees and trustees to keep abreast of the various changes is crucial as these have a bearing
on benefit offerings.
For a trustee, management committee, employer or member in this environment it is vital to have these changes distilled into
practical implications. Understanding how policy is being shaped for the retirement fund environment provides trustees and
employers with invaluable information on how to structure their retirement fund, people and communication strategies.
Hot Topics provides trustees and management committees with an update on some of the significant legislative and policy
changes relevant to our environment to aid in this process.
At this Hot Topics session we will explore the implementation of the twin peaks model of supervision followed by a detailed
discussion on the implications of the draft default regulations on preservation rules, investment portfolios and annuity strategies.
These pieces of legislation are far reaching and should be seen in the context of the broader retirement reforms, including the
Treating Customers Fairly framework and discussion documents issued by National Treasury.
Our panel of experts will also discuss the impact of the Taxation Laws Amendment Bill, 2015 on retirement funds and provide
some clarity around the expected T-day changes (alignment of tax treatment between pension, provident and retirement annuity
funds, and annuitisation requirements for retirement benefits from provident funds) which were postponed by the Taxation Laws
Amendment Act, 2014, to an implementation date of 1 March 2016.
Before closing the session off with a few adjudicator cases and general regulatory update that trustees and management
committees should be aware of, we’ll take a look at what has transpired since the implementation of tax changes to disability
income policies on 1 March 2015.
We trust that you will find this session valuable and insightful, and we invite you to share your feedback with us as we continue to
strive towards bringing you really Hot Topics!
HOT TOPICS I OCTOBER 2015
QUESTION 1
1
ALEXANDER FORBES
How is the implementation of the twin peaks model
of supervision progressing?
What is the twin peaks model of
supervision?
At a high level, what will the twin peaks
model look like?
The twin peaks model was initially proposed in the 2011
Budget Speech by the National Treasury.
The twin peaks model places equal focus on prudential and
market conduct supervision. Two authorities will be created
and will be responsible as follows:
The shift to a twin peaks approach to financial regulation
was part of a broader financial regulatory reform agenda.
These proposals were contained in the government’s policy
document, A safer financial sector to serve South Africa
better, and were formally approved by Cabinet in July 2011.
Twin peaks is a comprehensive system for regulating the
financial sector. It aims to ensure better outcomes for
financial customers and the wider economy, by ensuring that
customers are treated fairly, that their money is protected
against the risk of institutions failing, and by reducing the
risk of using taxpayer money to protect the economy from
systemic failures.
The twin peaks model places equal focus on prudential and
market conduct supervision. It envisages that there will
be two authorities created, one responsible for prudential
supervision and the other responsible for market conduct
supervision.
Is there legislation to establish the twin
peaks model?
The Financial Regulatory Reform Steering Committee
(FRRSC), comprising National Treasury, the South African
Reserve Bank and the Financial Services Board, was tasked
by the Minister of Finance and the Governor of the Reserve
Bank to prepare detailed proposals on the implementation of
twin peaks.
The first draft of the Financial Sector Regulation Bill, which
established the twin peaks system, was released in 2013.
In December 2014 a second draft of the Financial Sector
Regulation Bill (the bill) was issued.
Government proposes that the bill will become law in 2016.
In conjunction with the bill, the National Treasury issued a
discussion document called ‘Treating Customers Fairly in
the financial sector: a market conduct policy framework for
South Africa’.
2
■■ Financial Sector Conduct Authority (FSCA) – to protect
financial customers and ensure that they are treated fairly
by financial institutions.
■■ Prudential Authority (PA) – to strengthen the financial
safety and soundness of financial institutions. The
Prudential Authority will be an authority within the South
African Reserve Bank (SARB).
The twin peaks model will be introduced in
two phases
The phased approach will minimise the risks associated with
the change.
Phase 1 (2015–2016)
In the first phase the new FSCA and PA will be created.
The Financial Services Board (FSB) and the Bank
Supervision Department will cease to exist. It is
important to note that existing regulatory institutions will
not merely be renamed under the twin peaks system.
The new authorities will have clearly defined mandates
relating to market conduct and financial soundness
respectively.
Phase 2 (2016–2018)
This phase will focus on how the regulators will regulate
and what they will regulate. This will need substantial
legislative reform. Industry-specific legislation may be
repealed and new market conduct legislation will be
introduced where necessary. The changes are likely to
happen over a number of years.
The second draft of the Financial Sector
Regulation Bill
The bill will implement phase 1 of the twin peaks model.
It establishes the Financial Sector Conduct Authority and
Prudential Authority and sets out their respective powers.
The two authorities must cooperate in fulfilling their
obligations. The bill sets out a clear process of consultation
and coordination. The authorities must draw up memoranda
of understanding with each other.
HOT TOPICS I OCTOBER 2015
How will the FSCA work?
Enforcement and appeals
The name of the market conduct authority in the first draft
of the bill has been changed to the FSCA in the second
draft. The term ‘market conduct’ was viewed as being limited
and ambiguous.
Clear and fair enforcement mechanisms are a crucial part
of an effective financial regulatory system. In addition to
reforming the structure of the financial regulatory landscape,
the twin peaks reform process also aims to strengthen
and improve the nature of regulation, supervision and
enforcement. The new authorities will be more proactive and
intrusive in their supervision, and more principles-based in
taking action where necessary.
The objective of the FSCA is to protect financial customers by:
■■ ensuring that financial institutions treat financial
customers fairly
■■ enhancing the efficiency and integrity of the financial
system
■■ providing financial customers and potential customers
with financial education programmes, and promoting
financial literacy and financial capability.
The FSCA will focus on the manner in which an institution
provides financial products or services.
Financial services include:
■■ providing advice about financial products, for example
advising pensioners how and where to invest their life
savings
■■ distributing products (marketing and selling)
■■ dealing in products (trading equities, trading debt
instruments)
■■ administering and providing supporting services (record
keeping, investment platform administration, valuations).
■■ Financial services require conduct oversight to ensure
that product characteristics are appropriate and properly
disclosed, and that the products and services are delivered
in a way that is fair and efficient.
The authorities will regulate, supervise and take enforcement
action against all financial institutions over which they each
have jurisdiction, from their first day of operation. These
powers are in addition to existing powers in industry-specific
laws, and will ensure that the authorities are not limited by
gaps in existing legislation.
While the bill follows an internal model for administrative
action, it also ensures these actions are transparent. The
bill requires the authorities to adopt written administrative
action procedures regarding the administrative actions that
they may take, to promote a fair and consistent approach to
administrative action.
Inspections
The bill provides for the authorities to access necessary
information from regulated institutions. This information can
be in whatever form the authority requires, and information
requests may be made by the authorities whenever required
– both routinely and from time to time.
How will the PA work?
Investigations
Financial institutions providing financial products must be
able to deliver on the financial promises they make to their
customers.
If material wrongdoing is suspected, the nature of the
interaction between the authority and the institution moves
into investigation mode. The powers of investigation are
stronger than that of inspection. They also generally need to
be carried out with the legal backing of a warrant.
The objective of the Prudential Authority is to promote and
enhance the safety and soundness of financial institutions
that provide financial products, market infrastructures and
payment systems to:
■■ protect financial customers, including depositors and
policyholders, against the risk that those financial
institutions may fail to meet their obligations
■■ assist in maintaining financial stability.
Breaches
If the authority detects a breach of a financial sector
law, including of a prudential or conduct standard, it can
choose to take remedial or punitive action. The bill provides
the power to issue directives, enforceable undertakings,
interdicts, debarment orders, and impose administrative
penalties. In addition, criminal prosecutions may be
instituted in relation to offences in terms of the bill or a
financial sector law.
3
ALEXANDER FORBES
Licensing
Licensing requirements set by the relevant industry-specific
laws, for example in the Banks Act, the two Insurance Acts,
the Pension Funds Act and the Financial Advisory and
Intermediary Services (FAIS) Act, will remain in place in
phase 1.
At a high level, responsibility for licensing under the Banks
and Insurance Acts will fall under the PA, and other licences
under the FSCA.
New licences and renewals and termination or variations of
existing licences will require the licensing authority to seek
the input of the other authority.
Provisions are made in the bill to allow the PA or FSCA
to license financial products and services that are newly
designated in the bill rather than through an existing law.
An agreement will be put in place between the PA and the
FSCA regarding their collaboration on licensing.
Standards
The authorities will be empowered to issue and supervise
standards over all financial institutions, regardless of which
authority licenses the institution.
The bill allows the authorities to issue standards
independently, without needing ministerial approval. This
provides for the independence of the regulatory authorities
on the one hand. To balance this independence, on the
other hand, the authorities will operate within the approved
policy framework laid out in the bill. Provisions are made to
ensure transparency and accountability, including a clearly
defined consultation process to follow before standards may
be issued.
The authorities are also required to consult with each other
prior to issuing any standards.
Financial services ombud schemes
The twin peaks model aims to ensure efficient and effective
customer dispute resolution mechanisms. Ombuds should
follow equal standards so that customers can be sure of the
level of protection and assistance they will receive.
The current Financial Services Ombuds Schemes Act, which
governs existing statutory and voluntary ombud schemes, will
be repealed and relevant provisions will then be included
in the bill. Discussions will take place to debate the
effectiveness of the existing ombud schemes, and whether
they should be centralised.
4
What’s currently happening and what can
we expect in the near future?
Comments had to be submitted on the bill by 2 March 2015.
On 11 August 2015 the Parliamentary Finance Standing
Committee met to debate the bill.
It was noted that the 2008 global financial crisis proved
that big benefits were associated with the financial sector,
but also big risks. Financial sector regulation had to be
intrusive, intensive and effective to make the financial sector
safer. South Africa had opted for the twin peaks model to
shift from a banking and non-banking prudential regulatory
system to a focus on prudential and market conduct
objectives for both.
Currently in South Africa there are about 15 regulators.
The concern was how regulators coordinated their activities.
National Treasury submitted that the Finance Standing
Committee had a role to play in the conceptual, strategic,
policy and organisational aspects of the bill. The critical
question was whether the bill went far enough to deal with
a fragmented regulatory system.
The committee were concerned about what was termed
a plethora of regulators and questioned whether the bill
could address regulatory fragmentation. Questions were
also raised about the financial implications of the twin
peaks model and especially the manner of levies being
raised to pay for the regulators. It was proposed that the
funding mechanism for the regulators be more transparent,
with no surprises in the process.
There were also questions raised about the role of asset
managers, as trustees depended on them to make investment
decisions, which may not always be in the best interests
of members. Asset managers will be governed under the
twin peaks model and, in particular, the market conduct
provisions would apply to their relationship with trustees and
retirement funds.
The committee concluded their discussions by stating there
would be further engagement with National Treasury.
Treating Customers Fairly
In December 2014 the National Treasury issued a discussion
document called ‘Treating Customers Fairly in the financial
sector: a market conduct policy framework for South Africa’
(the discussion document).
HOT TOPICS I OCTOBER 2015
Government’s market conduct policy is about protecting
consumers and ensuring that financial services customers
are treated fairly by financial services providers. This policy
will be driven by a dedicated market conduct regulator called
the FSCA.
In implementing the policy, existing legislation will be
reviewed and revised where necessary, to ensure that we have
more effective regulation, rather than just more regulation.
The discussion document comprehensively covers various
industries, including retail banking, retirement funds,
insurance products and investment products, but we will
focus on those proposals which impact on occupational
retirement funds.
What are government’s concerns?
Many financial services firms have poor practices when
dealing with customers, such as:
■■ complex and high fee structures
■■ product design that may reduce investment returns (for
example causal event charges)
■■ fragmented legislation allowing for unregulated products
to be sold to customers
■■ poor or confusing disclosure of product terms
■■ conflicts created by the remuneration structures of
advisers
■■ a focus on selling products, rather than on providing
advice on products.
Government also has concerns about the effectiveness of
existing dispute resolution forums, as well as consumer
education and financial literacy.
What is market conduct regulation?
Normal consumer protection laws do not go far enough in
protecting consumers of financial services. The combination
of more complex products and vulnerable consumers means
that additional protection is needed.
The FSCA will be responsible for regulating and supervising
a wide range of financial services and products. The FSCA
powers will be assertive, intrusive and outcomes focused.
This means the FSCA will be focused on the customer
experience – do customers receive good value, appropriate
products and services?
What laws will be put in place to underpin
the market conduct policy?
A strong and accountable market conduct regulator
must be established, supported by flexible and intrusive
administration and enforcement powers. This will be done
through the Financial Sector Regulation Bill (the bill).
Existing laws will be strengthened to implement the Treating
Customers Fairly outcomes. This will be done through the
Conduct of Financial Institutions (CoFI) Act. The CoFI Act
will focus on customer outcomes and empower the FSCA to
act proactively if poor conduct practices occur. The FSCA
will also be able to act intrusively to change the cultural
attitude of financial institutions to be more customer
focused.
Project plan to promote better outcomes
for savers
This section focuses on the proposals in the discussion
document for improving market conduct by retirement funds.
The better governance of stand-alone retirement funds
through steps to promote:
■■ strong, representative and independent boards of trustees
that are properly trained and qualified
■■ clear fiduciary duties for trustees, including mechanisms
to avoid conflicts of interest
■■ a strengthened regulatory framework for retirement fund
service providers, including clear fiduciary duties and
mechanisms designed to avoid possible conflicts of
interest.
The better governance of multi-employer funds, such
as commercial umbrella funds and union funds, through
steps to:
■■ improve member representation
■■ prohibit fund rules that make the use of a specified
service provider compulsory
■■ strengthen governance and reporting requirements in
cases where the trustees use the services of the sponsor or
related company, to address potential conflicts of interest
■■ require periodic independent expert evaluation of the
governance function.
Enhanced comparability and value of investment products
across the sector by:
■■ incentivising product simplification and portability, for
example fund rules should prohibit terms and conditions
considered by the FSB or FSCA as inherently ‘unfair’
(causal event charges may be banned as an example)
■■ introducing standardised point-of-sale disclosure
documents for all investment products, including longterm insurance products and retirement funds
■■ working with industry to introduce a standardised measure
for calculating and disclosing charges for investment
products and the impact of those charges on benefits.
Implementing Treating Customers Fairly (TCF)
The TCF framework is being implemented by the FSB. TCF
is an activities-based and outcomes-driven approach to
regulation and supervision, designed to ensure that regulated
financial institutions apply specific standards of fairness to
all financial customers.
5
ALEXANDER FORBES
Institutions, including funds, are expected to demonstrate
that they deliver specified outcomes to their customers,
from design and promotion, to advice and servicing, claims
handling and complaints.
The FSB is embedding TCF in its regulatory and supervisory
frameworks incrementally, and the approach will form an
important foundation for the new FSCA.
Although there will be explicit inclusion of TCF principles
in future market conduct legislation, existing legislative and
regulatory frameworks already allow for the application of the
TCF outcomes.
The FSB is identifying opportunities to align existing
legislation to support TCF delivery, for example, in improved
disclosure and internal complaints mechanisms.
Improving internal complaints mechanisms
A customer’s first port of call when resolving a complaint
should be to the financial institution concerned. The FSCA
will require all financial institutions to develop, implement,
monitor and report on an appropriate and effective internal
process to manage complaints, called a complaints
management process.
A complaints management process (CMP) must contain
the following:
■■ A detailed description which makes it clear to customers
and employees how the system works and how, and by
whom it is maintained and overseen.
■■ A simplified outline that makes it quick and easy for
consumers to understand who to contact, what is required
from them, what the firm will do and any waiting periods.
6
■■ Standards for record keeping and reporting, to make sure
complaints are captured correctly and reported correctly.
This will enable the FSCA to exercise oversight, and to
require publication of complaints data in a manner that
makes it possible for the financial sector to learn from
customer feedback obtained through the CMPs.
■■ Standards whereby financial institutions have to
demonstrate how they are monitoring, and learning from,
customer complaints, including not only those captured
by their own system but also from data published by the
regulator on complaints handling throughout the
financial sector.
An integrated ombuds system
Customers should have access to affordable, effective and
independent mechanisms to address complaints, resolve
disputes, and secure a fair outcome.
Problems which have been identified with the operation of
the current ombud schemes include:
■■ a general lack of knowledge by consumers about
ombud schemes
■■ inadequate transparency and accountability of ombuds
■■ jurisdictional boundaries of the various ombuds and
customer confusion
■■ the need for greater coordination and consistency
between ombuds.
Implementation of the new regulatory
framework
Comments were submitted by April 2015 and we are
awaiting an updated discussion document and draft
legislation. It is anticipated that the policy and legislation
will be submitted to Cabinet for approval and tabling to
Parliament in 2016, with implementation to follow in 2017.
HOT TOPICS I OCTOBER 2015
QUESTION 2
7
ALEXANDER FORBES
National Treasury will be expecting funds to implement
default options. What are these and what are the
implications for funds?
The National Treasury has released draft regulations to
the Pension Funds Act (the act) which set out how various
defaults should be implemented in retirement funds.
The issuing of these draft regulations should be seen in the
context of broader retirement reform, including the Treating
Customers Fairly framework and discussion documents
released by National Treasury since 2011.
The press release accompanying the draft regulations talked
to the paper ‘Charges in South African Retirement Funds’
published on 11 July 2013. This paper found that there were
complex products with high charges offered in the retirement
fund system. As a result, it is difficult for members to make
appropriate decisions which support a decent outcome for
them on retirement. Furthermore, lack of preservation and
participation leads to higher costs and charges.
The defaults options in the regulations are aimed at
improving market conduct by ensuring that trustees’ duties
include considering options and putting in place various
default arrangements.
Implications for funds
The impact of the new default regulations, once
implemented, will be far reaching – especially as they affect
trustee duties and responsibilities. At present, there is not
yet a date set down for implementation, nor any transition
period that has been communicated, so it is unclear by when
each fund will need to demonstrate compliance.
However, that does not mean that trustees should pay no
attention to these draft regulations at this time. Quite the
opposite in fact. As with any new strategy, decision to be
made and the resultant process, a fairly generic cycle of
events can be followed to help guide trustees. The problem
needs to be analysed, a solution designed, it must be
implemented, and finally it must be reviewed. And then we
start again – it is an iterative process. Each of the default
regulations (and several of the definitions too) will require
trustees to spend time (and perhaps money) on coming to
grips with the issues, devising a strategy, executing it and
reviewing the impact.
The draft default regulations cover three categories –
preservation rules, investment portfolios and annuity
strategies.
1
Understand
the regulations
Once the regulations are finalised, these would become law
and binding on all funds that fall under the act.
What is a default option?
A default option is an automatic choice made on behalf of
members who do not exercise a choice in a given situation.
National Treasury is concerned that funds either do not offer
default options, or where they do, the option favours service
providers rather than members. An example of a bad default
option would be that withdrawal benefits are paid in cash
as a default. This does not assist members when they exit
– they end up paying tax and not saving their benefits for
retirement.
It is important that default options are appropriate, serve
members’ best interests and provide good value for money.
Implemented correctly, suitable default options should
reduce complexity, be cost effective and easily accessible.
6
2
Review the
impact (ongoing
monitoring and
reporting)
Understand
and analyse
membership
5
3
Implement
the strategy
or solution
Analyse
problems
4
Devise a
strategy
That then brings us to the first few general implications,
before we get to the potential implications of some of the
detailed requirements.
8
HOT TOPICS I OCTOBER 2015
General implications
1.Rules will need to be amended
Rules will need to be amended to cater for the preservation
options as well as the annuity defaults.
2. Understanding of the membership and their needs and wants
The regulations will require trustees to have an
understanding of their membership to structure the
defaults appropriately. Specifically, the trustees will need
to understand the following about their membership (and
there may be additional aspects added in time):
Demographic insight required on each member
Tools, like LifeGauge, with which trustees may be familiar,
will assist trustees in gaining insight into their membership’s
demographics and expected outcomes. It is suggested that
trustees, with their consultant’s assistance, use these tools to
assist them in fulfilling the requirements.
3. Additional duties and responsibilities
Regulations 37, 38 and 39 will not only require trustees
to put in place compliant defaults, and in some cases take
action on behalf of members (transfers on preservation,
conversion of living annuities to life annuities where
sustainability of income is questionable). This means
that ongoing monitoring and reporting will be required, in
addition to the actions that need to take place.
ANNUITIES
REGULATION 39
The regulations will require trustees to demonstrate certain
aspects of their decision-making process. This means
that the decisions, and the reasons for them, need to be
accurately recorded and available.
Full names
(matching ID)
Aggregate
retirement
savings
The regulation does not appear to offer trustees protection
for when they do all the right things, but the final outcome
to members and pensioners is poor. Indemnifying trustees
in these cases was discussed previously, but the current
draft is silent on this. Alexander Forbes has appealed to
National Treasury to consider this aspect.
Aggregate
retirement
savings
Address
Salary in the
year before
retirement
Pensionable
salary (at
retirement)
ID number
Health status
Preferences for
risk and return
Tax number
Level of income
required relative
to savings
Likely future
term of
membership
Contact details
Financial
sophistication
Aggregate
retirement
savings
INVESTMENTS
REGULATION 37
Age or
likely retirement
date
Access to
financial advice
PRESERVATION
REGULATION 38
Degree of income
security needed,
for pensioner
and/or spouses
Marital status
Financial
expertise
Ability to afford
advice
4. Increased governance budget
A governance budget refers to the amount of time, skill
and resources (financial and otherwise) that trustees can
dedicate to a particular issue (or even the running of the
fund as whole). A lower governance budget means that
the trustees will naturally tend to simpler options in any
decision. Note this does not imply those trustees do not
care – simply they may not have the time or skills needed,
or the financial capability to bring in experts where
needed. The opposite may also be true.
Many such boards of trustees have considered moving
away from stand-alone funds to multi-employer funds
(umbrella funds).
The requirements of the new regulations will be to increase
the amount of time, effort and cost it takes to run a fund.
In other words, it requires a higher governance budget. In
our view, the consequences of this could be as follows:
■■ Increased training requirements
Trustees, even long-serving trustees, may need to spend
time being trained. The training is not simply on the
requirements of the regulations as set out in this workbook,
but rather on the technicalities of the various decisions
needed. What do we mean? For example, most trustees
of defined contribution funds in office today would have
had little to no exposure to annuities and the annuities
market. It is therefore important to allow a sufficiently long
transition period so that trustees may upskill themselves
in the required areas to implement the most appropriate
structures for their members.
Level of protection
required on
early death
9
ALEXANDER FORBES
■■ Revised communication strategies
Each of the new regulations requires some additional
levels of communication with the membership. Somewhat
complicated concepts (such as the future impact of fees)
need to be communicated in clear and understandable
terms. Trustees will need to review their communication
strategies to ensure that they are meeting the requirements
in respect of the defaults.
■■ Consideration of umbrella funds
This may lead boards of trustees to look or relook at
whether running a stand-alone fund is still correct for
their circumstances, or whether joining an umbrella fund
would better suit them. There is no clear-cut answer to
this question for many funds, especially the larger or more
established stand-alone funds that already have scale.
If trustees are considering umbrella fund options, it is
advisable to do this with the support of their consultant, as
the umbrella fund market is a complex place, and side-byside comparisons are still tricky.
■■ Reliance on experts
The draft default regulations will require all funds to
secure competent, expert consulting and actuarial advice
in structuring appropriate defaults.
In the following sections we consider the draft default
regulations and potential implications of the detailed
requirements for funds in respect of: 1) preservation rules,
2) investment portfolios and 3) annuity strategies.
1. Default preservation rules
A) Summary of Regulation 38
Exiting members often do not understand the choices
they have on leaving a fund and the consequences of
those choices. Low preservation rates are a problem. The
current position is that most withdrawal benefits are paid out
in cash.
All retirement funds where members are enrolled as a
condition of employment will have to implement default
preservation rules which will allow members who leave
the service of the participating employer to become
automatically paid up in the fund.
Members will not automatically become paid up if their fund
credit is below an amount still to be specified.
However, at their written request members can still opt to
withdraw their fund benefit when they leave employment or
preserve it in another fund. Members who want to withdraw
their benefits by way of cash or transfer should be given
access to a retirement benefits counsellor.
10
Funds will have to provide members with a paid-up
membership certificate within one month after leaving
the employer’s service, which records the following:
■■ Details of the fund and its administrator
■■ Details of the member
■■ Date the member became paid up and the fund value
at that date
■■ Investment portfolios the benefit is invested in.
The conditions around paid-up members and their benefits
are as follows:
■■ If it is a defined contribution fund, then the paid-up benefit
must be invested in the fund’s default investment strategy,
unless the member opts out of that default investment
strategy in writing.
■■ The fees payable by active members and paid-up members
for investing in the default investment strategy may not differ.
■■ No charges may be levied as a direct consequence of a
member becoming a paid-up member.
■■ Paid-up members cannot continue contributing to the fund
they leave their benefits in and they are not eligible for risk
benefits.
■■ The same eligibility requirements for early retirement and
retirement apply to active members and paid-up members.
■■ The benefit paid, in respect of defined benefit components,
on withdrawal, retirement and early retirement to a paid-up
member may not be less than the value of their benefit when
they became paid up, increased or decreased by CPI.
New members must be allowed to transfer in monies from
other funds, and funds must follow certain procedures to
facilitate these transfers:
■■ The receiving fund must get a list of all paid-up membership
certificates for that member within two months that they join
the fund.
■■ The fund must ask the member if they want to keep all of
the amounts referred to in the list of paid-up membership
certificates outside the fund.
■■ The fund must arrange for the transfer into the fund of
an amount that the member wants to transfer in, without
deducting a charge against those amounts for the transfer.
B) Implications of Regulation 38 for funds
Immediate implications of the regulation on default
preservation are as follows:
■■ Investment implications: Trustees will need to ensure
that the default investment options for paid-up members
are appropriate. In addition, increased preservation could
result in increased assets under management over time –
although it is likely that any effect here will take some
time to materialise.
HOT TOPICS I OCTOBER 2015
■■ Rule changes: Rules would need to be amended. It will be
important to ensure that the rules do not create unintended
consequences, and deal with all types of scenarios. For
example, what happens when paid-up members reach
retirement age? Do they become deferred retirees?
■■ Administrative implications: these can be broken down
into two sections, members joining and members leaving
the fund:
• Member joining the fund: the new fund is obliged to
call for all certificates of paid-up membership. This
could entail tracking down multiple funds, assuming
the members actually provide the information. Funds
are typically only aware of new members joining,
after the fact. The first touchpoint is likely to be the
employer (HR) and thereafter the administrator and
finally trustees. The trustees will need to ensure that
the employers, and possibly the administrator, have
adequate and compliant procedures in place to meet the
requirements in tracking down and transferring previous
paid-up monies.
• Member leaving the fund: Trustees will, through their
administrator, need to ensure that a compliant certificate
is issued within 30 days of leaving (which is often a
challenge as funds don’t always know about exits in
good time). Thereafter the paid-up record in the fund
will need to be administered and kept current. This has
proven difficult in the past, as members do not stay in
touch with their past employers or funds and records go
stale. Therefore trustees will need to consider strategies
to mitigate against this risk. There is a question mark
about what, if anything, paid-up members can be
charged. In our view, there needs to be at least some
charge as it is not equitable for active members to cover
all the costs related to paid-up members. Trustees will
need to determine how and what paid-up records are
charged, subject to the regulations.
■■ Retirement benefits counsellors will be needed: Section 2(e)
requires access to a retirement benefits counsellor before
a withdrawal benefit is paid to a paid-up member. Several
areas of clarity are still required on the role and scope of
these counsellors, but once clarified, trustees will need
to do due diligence and appoint, pay and manage the
performance of these counsellors.
2. Default investment portfolios
A) Summary of Regulation 37
All defined contribution funds (including retirement annuity
funds) will have to amend their rules to allow for a simple,
cost-effective and transparent default investment portfolio
for members who do not make investment choices. Funds
can apply for exemption from this requirement from the
Registrar of Pension Funds.
Fund trustees must ensure, and be able to demonstrate, the
following:
Default investment portfolios are appropriate for
the members
■■ The design of the default portfolio must include considering
the high-level objective, asset allocation, fees and charges
and risks and returns of the portfolio.
■■ The default takes into account, as far as reasonable possible,
the members’ preferences for balancing risk and return, likely
term of membership of the fund, financial sophistication and
ability to access individual financial advice.
The objective, composition and performance of the portfolio
are adequately communicated to members
■■ The objective, asset allocation and return net of fees and
charges must be communicated to members regularly, clearly
and understandably. The format may be prescribed.
Default investment portfolios are good value for money
■■ Fees and charges must be reasonable and competitive, taking
into account market conditions, size of the portfolio, asset
allocation and other characteristics of the fund as a whole
and the portfolio specifically.
All fees and charges and their impact on benefits are
disclosed regularly and accurately
■■ This disclosure must include all direct and indirect costs,
irrespective of whether the fund pays the costs or whether
they come off the assets or investment return.
■■ The impact of the costs on current and prospective benefits
must be explained to members regularly, clearly and
understandably.
Passive and enhanced passive assets
■■ Trustees must at least consider the use of passive
or enhanced passive investments as part or all of the
default portfolio.
Purely for investment purposes
■■ The investment strategy must not contain any insurance
element but must be purely for investment purposes, so no
risk benefits may be paid to members out of the savings in
the default portfolio.
■■ Benefits paid to members and the fees and charges
levied – relating to the savings invested in the default
portfolio – may not depend on the member’s retirement,
disability, death or withdrawal.
Performance fees and loyalty bonuses
■■ No fees can be charged that depend on the return earned on
the assets (in other words, performance fees are not allowed).
■■ No fees or charges deducted, amounts credited to a
member’s savings and benefits paid to a member may depend
on the period of membership or amount of contributions
paid in or any other similar measure (in other words, loyalty
bonuses are not allowed).
Assets in the portfolio must comply with Regulation 28
No lock-in
■■ Members may not be locked into a portfolio and must be able
to switch between portfolios.
■■ The fund can deduct reasonable administration costs from
the member’s benefit when switching between portfolios.
Funds must regularly review the default investment portfolio.
11
ALEXANDER FORBES
B) Implications of Regulation 37 for funds
Some of the immediate implications of the regulation on
default portfolios are:
■■ Trustees will need a deeper understanding of member
demographics. See the illustration on page 9.
■■ A typical life stage default approach is generally well suited
in principle. However, trustees may need to ensure that their
strategies take into account the various factors listed, as
well as potentially the following, which we have suggested to
National Treasury:
• Contribution rate
•Gender
• Stated preferences
• Age and retirement date rather than age or
retirement date
•Salary
• Projected retirement income
• Members’ likely annuity choices (in other words, preretirement investment strategy defaults should link to
and take account of the post-retirement investment
strategies, which we have addressed in detail in previous
Hot Topics seminars)
■■ Trustees will need to show how they have arrived at their
particular strategy, and in doing so demonstrate that they
have considered passive and enhanced passive options. These
decisions will need to be recorded in the fund’s investment
policy statement.
■■ Should performance fees be banned on default portfolios,
trustees should take note of several known effects:
• Fee increases: Asset managers will set a higher base
fee, leading to the same (or higher) overall costs to what
is now being borne by members. Despite the increased
transparency, potentially worse retirement outcomes
may result. In the short term, as active managers have
struggled somewhat in the recent past, the timing of
removing performance fees (if it happens now) may be
unfortunate.
• Certain types of assets or asset classes may be excluded
altogether. Arguably performance fees (when structured
correctly – and we appreciate that it is not always
so) do align the incentives and limit overpayment
for poor performance. Consider, for example, private
equity investments. In these types of investments, the
investment manager often gets involved in managing
the business. It makes good sense for the manager
to be rewarded with performance fees (and where the
fund manager typically has some of their own assets
exposed too). Hedge funds also operate on performance
fee bases internationally, so this regulation will create
the unintended consequence of certain asset classes or
types of assets simply being excluded, even though they
are appropriate investments for pension funds. The same
is arguably true of investments into Africa as encouraged
by Regulation 28.
12
• The National Development Plan requires significant
amounts of investment (for example into infrastructure)
and a lot of the capital needs to come from the private
sector and pension funds. We need to encourage
investment into the non-traditional space and not
discourage it. This regulation discourages any
investment into non-traditional investments (on the
basis that they may not be simple, may be difficult to
communicate the detail, may have performance fee
structures and so on) and this could have significant
unintended consequences for the country.
• A further concern with an outright ban is that precluding
certain asset classes or asset types limits investment
into alternatives which may be required not only to meet
developmental goals but also to achieve a reasonable
trade-off between risk and return in the expected lower
return environment of the future. It also limits the
diversification benefits available to boards of trustees.
These are exacerbated by the lack of a transition period.
■■ Analytical tools may be required to assist and gain an
understanding of the scope and impact of fees, both current
and projected.
■■ Communication strategy implications are not trivial. We
believe improved transparency and disclosure, not just of
fees, but also of objectives, structure and performance
relative to the goals or objectives. However, we are cognisant
of the costs as well as the fairly small benefit received by
individuals of doing so. In this respect, we have suggested
that detailed communication to trustees is more important,
and meaningful, than to individual members. There needs
to be clear guidance on how “the impact that such fees
and charges will have on members’ actual and prospective
benefits” as referred to in Regulation 37 2(d) is to be shown.
Is it total expense ratio (TER) or reduction in yield (RIY)
or something else, and – if so – can we reasonably expect
that such complicated concepts can be communicated to
members in “clear and understandable language”? The ideals
are commendable, but unlikely to be met in practice.
■■ The cost disclosures required at member level may also result
in negative behaviour. For example, a member may switch to
the lowest cost portfolio, which may be wholly inappropriate
as a long-term investment strategy. The cost to the member of
such a decision will be high in terms of final benefit. Trustees
will need to be sensitive to this potential, and monitor their
membership accordingly.
■■ What is important is the increased disclosure of exactly
the measures proposed, but to the trustee boards rather
than individuals. It is, in our view, the difference between
important and meaningful information. Members should only
receive information that they understand and can use and
therefore has meaning to them. It is important for trustees
to have full disclosure of all fees. This is something trustees
will be expected to receive and interpret. These can then be
disclosed in turn in an understandable format to members.
HOT TOPICS I OCTOBER 2015
3) Default annuity strategies
A) Summary of Regulation 39
Members are vulnerable when they retire and National
Treasury wants to ensure that funds provide protection to
retiring members.
The regulations state that all funds will have to amend their
rules to implement a default annuity strategy. The press
release says that only defined contribution funds, including
retirement annuity funds, will need to implement this.
Fund trustees must ensure, and be able to demonstrate, the
following:
Default annuity strategies are appropriate
As far as possible, funds must implement an appropriate
default annuity strategy:
■■ The level of income to be provided considering the amount
of the benefit
■■ Degree of income security required by the member and
their surviving spouse or spouses
■■ Investment, inflation and other risks on the level of
income to be received
■■ Ongoing decision making required by the member, taking
into account their financial expertise and ability to afford
ongoing financial advice
■■ Level of income protection for beneficiaries when the
member dies.
Objective, composition and performance of the annuity
strategy are adequately communicated to members
■■ Communication must be regular, clear and
understandable. The format may be prescribed.
■■ High-level objectives, average incomes and changes in
income must be communicated.
Good value for money
■■ Fees and charges must be reasonable and competitive,
taking into account the benefits provided and the size,
asset allocation and other characteristics of the fund as a
whole and the portfolio specifically.
All fees and charges and their impact on benefits are
disclosed regularly and accurately
■■ This disclosure must include all direct and indirect costs,
irrespective of whether the fund pays the costs or they
come off the assets or investment return.
■■ The impact of the costs on current and prospective
benefits must be explained to members regularly, clearly
and understandably. The format may be prescribed.
Access to a retirement benefits counsellor
■■ Members must have access to a retirement benefits
counsellor not less than three months before their
retirement date.
A retirement benefits counsellor has been defined in the
draft regulations as someone:
■■ with the prescribed qualifications
■■ who explains the default annuity strategy and the default
preservation policy and assists individuals
■■ who does not receive income directly or indirectly as a
result of the choices made by the members as a direct or
indirect consequences of their retirement or withdrawal
from the fund – other than any income paid to them by
the fund.
Funds must regularly review the default annuity strategy
Assets held by the fund in respect of the annuities comply
with Regulation 28
Allowable annuity options and opt-out
Members will not be compelled to follow the default annuity
strategy and may opt out of the strategy into products they
themselves choose, if they wish to.
The annuity options can include:
■■ in-fund guaranteed annuities
■■ in-fund annuities without guarantees
■■ in-fund living annuities, provided that they comply with
the requirements and drawdown rates specified in the
regulations
■■ certain out-of-fund life annuities guaranteed by an insurer.
Trustees can provide a mix of annuity products as part of
their strategy.
Living annuities can be part of the default or a customised
default strategy. The regulations impose the following
conditions for living annuities:
■■ Living annuities must be paid out of the fund.
■■ No more than three investment portfolios are offered.
■■ Portfolios comply with the conditions for default
investment portfolios.
■■ The drawdown rate is age dependent, so the older the
member is, the higher the permitted drawdown.
■■ Trustees have to monitor the sustainability of living
annuities, including identifying members vulnerable
to substantial decreases in income levels, warning
those members in writing and arranging for those living
annuities to convert to life annuities (unless the member
requests otherwise).
If the fund does not provide a guarantee of the level of the
pension income, then the following conditions must be met:
■■ Clear and understandable communication must be given
to the members, explaining that the level of income can go
up and down, depending on the value of the assets, how
long the member lives for and fund expenses.
■■ The assets underlying this type of annuity must be kept
separate from the rest of the fund’s assets.
13
ALEXANDER FORBES
■■ The income and expenses related to the members
receiving these pensions can only be deducted from this
pool of assets.
■■ The asset mix must be decided by the trustees in
consultation with a valuator, taking into account the
nature and term of the pension liabilities, the pension
increase policy, the risk and expected return of the assets
and the ability of the pensioners to manage any falls in
income level.
■■ The pension funding ratio must be calculated using bestestimate assumptions to price the pensions in payment,
be regularly updated for economic and demographic
conditions and be communicated to members.
■■ Any surplus or deficit in the pool of pensioner assets must
be distributed over a period of no more than two years by
increasing or decreasing pension payments.
The fund can choose annuities (but not living annuities)
from a long-term insurer. However, the following conditions
must be met:
■■ Annuity increases must be checked from a public and
independent source.
■■ No direct sales commission must be paid from the
member’s benefit.
■■ Trustees must be satisfied with the insurer’s long-term
financial strength.
their scope and qualifications allowed. Where a default
annuity is offered without advice, the trustees could be
held responsible for members’ decisions regarding the
default annuity. Financial advice is still, in our view, the
most effective method of ensuring that members invest in
the annuity product that is most suitable based on their
particular circumstances. We therefore regard advice as
even more important than a specific default retirement
product. A fund arrangement with an adviser can also
support the take-up of any default annuity products
trustees make available:
■■ Trustees will need to upskill themselves on annuities
(which is a complicated field).
■■ Trustees will need to gain significant insight into their
membership base (see the illustration on page 9).
■■ Trustees will need to consider the various administrative
implications and communication strategy requirements
of having pensioners within the fund (even if the
administration thereof is outsourced to an insurer).
■■ Trustees should go through a thorough process, together
with their consultants, in putting an annuity strategy
together. We have previously suggested that the following
process be followed:
Analyse member
needs and wants
B) Implications of Regulation 39 for funds
Some of the immediate implications of the regulation on
default annuity strategies are:
■■ Annuity strategy, not annuity: Pleasingly, National Treasury
has referenced and made it clear in the regulations that
multiple annuities could be part of the overall annuity
strategy. This is in line with our previous research (and
responses to National Treasury) in which we found that
no single annuity could be optimal for all members,
as they all have different needs and wants, as well as
savings histories and preferences for income into the
future. The implication for trustees though is that it is not
about appointing one annuity or provider, or only offering
an in-fund living annuity. It is clear that for most funds
(with diverse memberships), a range of annuity choices
will be required, incorporating an advisory function
where appropriate to ensure that individuals end up in
the right annuity, understand their choice and manage it
sustainably where needed.
■■ How to get members into the right annuity: The important
thing is that members must choose the option that is
most appropriate for them. It is unlikely that a default
annuity will be most appropriate for all the members of
a fund. The financial adviser takes the responsibility of
ensuring that retirees receive appropriate advice and
understand the advice to make an informed decision. The
retirement benefits counsellors could fulfil this role, if
14
Monitor take-up
Identify
appropriate annuity
or annuities
In-fund
or external
Implement
Appoint service or
product providers
Identify an
advice strategy
■■ Each of the blocks in the circle will require detailed
discussion and decisions. See Hot Topics Summit 2013
for a discussion of the blocks and a list of factors to
consider in these discussions, especially around what the
important considerations are in structuring defaults in
the fund.
HOT TOPICS I OCTOBER 2015
QUESTION 3
15
ALEXANDER FORBES
What are the implications for retirement funds related to
the latest Taxation Laws Amendment Bill?
The Taxation Laws Amendment Act 31 of 2013 (TLAA
2013) was promulgated in December 2013. It introduced
provisions to align the tax treatment of contributions to
retirement funds, to allow for a single tax deductible
contribution rate applicable to both employer and member
contributions and to all types of funds (in other words,
pension funds, provident funds and retirement annuity
funds). In addition, provisions relating to the retirement
benefit design of provident funds were introduced to make
them similar to pension and retirement annuity funds, with
the preservation of the current regime for contributions
made before 1 March 2015. These are the so-called
T-Day changes.
The Taxation Laws Amendment Act of 2014 (TLAA 2014)
was promulgated in January 2015. This postponed the
implementation of the tax reform principles, as explained,
contained in TLAA 2013.
Alignment of tax deductibility of
contributions to all retirement funds
Currently the amount members and employers can contribute
before tax into a pension fund, provident fund or a retirement
annuity fund differs for each fund option:
Employer contributions – currently, employer contributions
to pension funds, provident funds, medical schemes and
benefit funds are in practice tax deductible up to a limit of
20% of an employee’s approved remuneration. Contributions
made by the employer for and on behalf of the employee
to pension, provident and benefit funds are tax exempt
in the hands of the employees. Employer contributions to
retirement annuity funds are treated as a fringe benefit,
generally leaving the employee to claim the tax relief on
submission of their tax return.
Employee or member contributions – currently, an employee
may contribute to all or any one of a pension, provident and
retirement annuity fund. The allowable employee deductions
are as follows:
■■ Pension funds: up to 7.5% of taxable income
■■ Provident funds: not tax deductible
■■ Retirement annuity funds: limited to the greater of
• R1 750 per year, or
• R3 500 less pension fund contributions, or
• 15% of non-retirement funding income.
16
It was proposed in TLAA 2013 that the law on retirement
contribution deductions would change. The tax deductibility
on contributions made to any type of retirement fund will be
uniform but limited as follows:
■■ All employer contributions to pension, provident and
retirement annuity funds will be an unlimited tax
deduction for the employer [amended section 11(l) of
the Income Tax Act].
■■ This employer contribution will be a taxable fringe
benefit in the hands of the employee. The amount of the
fringe benefit differs for defined contribution or defined
benefit funds.
■■ These employer contributions will be deemed to have
been made by the employee and the employee can claim
a deduction for that contribution.
■■ The employee is entitled to combine the employer and
employee contributions to pension, provident or retirement
annuity funds and claim a deduction up to 27.5% of
the greater of remuneration or taxable income, up to a
maximum of R350 000 per year. [section 11(k) of the
Income Tax Act].
Comment: In summary, the deduction for retirement fund
contributions will change to a member deduction of 27.5%
of remuneration or taxable income. This will apply on an
individual basis to all funds that a person may be a member
of, with a rand-based contribution deduction ceiling of
R350 000 per annum. Any contribution by the employer will
be included in the income of the member as a fringe benefit
and will qualify for deduction by the member, subject to the
27.5 % and R350 000 caps. There are still some questions
which need to be clarified in the legislation. For example, it
is still not entirely clear whether capital gains are included in
taxable income.
Alignment of the annuitisation rules at
retirement
Currently most pension funds and retirement annuity funds
limit the amount you can access as cash at retirement to a
maximum of one-third of your total benefit and the balance
has to be used to buy a pension. Provident funds allow you
to access the full amount in cash at retirement.
TLAA 2013 states that all pension, provident and retirement
annuity funds will have the same regime at retirement in
terms of access to lump sums and annuity requirements. So
retirees can access a maximum of one-third of their benefit
in cash and the balance must be used to buy a pension.
HOT TOPICS I OCTOBER 2015
This may have caused some fears among provident fund
members and people wanting to retire or resign now to
protect their existing rights as a provident fund member.
However, the legislation allows for the protection of vested
rights in the following way:
■■ Any provident fund balance saved prior to 1 March 2016 plus
the future growth on this until retirement won’t be affected – it
will only affect contributions saved after this date.
■■ Provident fund members who are 55 years old or older on
1 March 2016 will not be affected by this change at all.
In other words, the retirement benefit will be treated in the
same way as it is currently being treated when they retire
if they stay a member of the same provident fund that they
were in on 1 March 2016 until retirement.
■■ The last change here is that currently members of a
pension fund retiring with R75 000 or less don’t have
to buy a pension. However, any members retiring after
1 March 2016 from a pension, provident or retirement
annuity fund will not have to buy a pension if the benefit
is R150 000 or less.
Following the release of the TLAA 2014, various queries
were raised with National Treasury regarding implementation
by 2016. Some of the issues that required clarity related to
whether or not accumulated contributions in the fund before
implementation date included surplus benefits which have
accrued and divorce benefits which were transferred as a
result of a divorce settlement. We also raised a query on how
permitted deductions in terms of section 37D will be applied
after implementation and whether or not the accumulated
contributions at implementation date will be impacted by
meeting 37D obligations.
The Taxation Laws Amendment Bill of 2015 (TLAB 2015)
addresses some of these issues.
Updated annuitisation provisions in the
TLAB 2015
In TLAA 2013 and 2014 the drafting of the vested rights
portion in a provident fund (the amount which need not be
annuitised) was inadequate. It only allowed for contributions
before T-day plus growth to be included in the vested rights
portion. It failed to take into account other amounts which
were credited to the member’s account or amounts by which
the fund interest had been reduced, such as by divorce
awards and housing loans.
Following comments made to National Treasury, this has
been amended in TLAB 2015 and the vested portion is as
follows:
Members 55 years of age or older on 1 March 2016
■■ any amount contributed before and after 1 March 2016
to a provident fund which that person belonged to on
1 March 2016, and
■■ any other amounts credited to the member’s individual
account before 1 March 2016, and
■■ any fund return
less
■■ reasonable fund expenses, and
■■ amounts permitted in terms of any law to be deducted from
the member’s individual account.
Members under age 55 on 1 March 2016
■■ any amount contributed before 1 March 2016, and
■■ any other amounts credited to the member’s individual
account before 1 March 2016, and
■■ any fund return,
less
■■ reasonable fund expenses, and
■■ amounts permitted in terms of any law to be deducted
from the member’s individual account.
Comment: Even though the intention is for T-day changes to
be effective from 1 March 2016, some issues still remain
unresolved. We have made certain proposals to National
Treasury and some of them include that the vested right
protection be provided to members of provident funds who
are 55 years and older on 1 March 2016 on all contributions
made in respect of such members after 1 March 2016,
irrespective of whether their retirement interests are
transferred to another retirement fund thereafter.
In addition, our view is also that in the case of a member
who is older than 55 years on 1 March 2016, the protected
amount should not be limited to amounts credited prior to
1 March 2016. Amounts credited on or after 1 March 2016
while remaining a provident fund member should also be
protected.
It seems unfair that the contributions made to another
retirement fund in respect of a provident fund member older
than 55 years on 1 March 2016 who is forced to transfer to
another fund after 2016 will not be protected. The position
may be different where the transfer is voluntary. National
Treasury has been asked to reconsider this in favour of
members over 55 years who are forced to transfer.
When a member transfers to a preservation fund or other
type of transferee fund after 1 March 2016, the transfer will
consist of a portion which is a vested portion as well as a
non-vested portion (contributions and growth thereon made
after 1 March 2016). If the member of the preservation
fund or transferee fund takes a withdrawal benefit in cash
prior to retirement, there is no indication in the legislation of
whether the withdrawal is deducted from the vested or nonvested portion or whether it is equally apportioned between
the two parts. It is also unclear whether divorce orders made
against a member’s benefit will reduce the vested or the nonvested portion in the original fund or any transferee fund.
National Treasury has been requested to clarify this.
17
ALEXANDER FORBES
Other changes in the TLAB affecting
retirement funds
receive a deduction are included in the dutiable part of the
estate for estate duty purposes.
Paragraph (a) and (b) public sector pension funds
There are certain public sector funds which are classified as
pension funds in the Income Tax Act (more commonly known
as paragraph (a) and (b) funds). However, in their fund rules,
members are entitled to the same benefits as provident
funds on retirement. This means that the full fund benefit is
payable in cash. Since these funds are classified as pension
funds, the proposed provident fund annuitisation rules did
not apply to them.
It is proposed that the requirement to purchase an annuity
upon retirement is extended to include paragraph (a) and
paragraph (b) pension funds from 1 March 2016.
Comment: This proposal was set out in the 2015 National
Budget Review. In a submission to National Treasury, it
was proposed to protect vested rights and asked for the
amendments to apply only to non-deductible contributions
made after 1 March 2015. However, the proposed
amendments apply to all non-deductible lump sums in an
estate of the person who dies on or after that date. This
amendment is effective from 1 January 2016 and applies in
respect of the estate of a person who dies on or after that date.
Comment: A concern around the new wording in this section
has been raised with National Treasury. Our reading of
the draft legislation indicates funds may not be subject to
approval by the Commissioner of the South African Revenue
Service (SARS). We doubt this is the intention of National
Treasury but clarity has been requested on this.
Paragraph (a) and (b) funds exclude the Government
Employees Pension Fund. The Government Employees
Pension Law will be amended from 1 March 2016 to
make it subject to the same conditions that apply for other
pension funds.
Closing a loophole to avoid estate duty
on excessive contributions to retirement
annuity funds
Before 2008 there was a limitation that retiring members of
a retirement annuity fund had to purchase an annuity before
they reached the age of 70. This was removed in the 2008
Taxation Laws Amendment Act. The intention was to allow
individuals to work beyond retirement age and still save for
retirement.
In the same year, the Estate Duty Act was amended to
exclude lump-sum retirement assets from the dutiable
portion of the estate upon death (pension annuities were
already exempt). The explanatory memorandum stated
that the amendment was intended to “alleviate financial
difficulties that a family may face upon the death of the
family’s income provider” and that the change was “in
line with Government’s efforts to promote long-term
retirement savings”.
It is submitted that vested rights of members who made aftertax contributions up to 1 March 2015 should not be subject to
the new legislation. The change should apply to persons who
die after 1 January 2016 and to contributions which did not
qualify for deduction or exemption made after 1 March 2015.
Members who made after-tax contributions before the 2015
National Budget made those contributions under the law as it
existed at the time. Parties are entitled to arrange their affairs
in line with the law as it is legislated and to have certainty
that their actions taken with a long-term financial view will
be respected and protected. It was only after the budget
on 23 February 2015 that members were informed that
National Treasury were unhappy with this practice. The Davis
commission report on estate duty also recommends that it only
applies to contributions made after 1 March 2015.
A further concern has been raised that contributions made
to a provident fund before 1 March 2016 are not deductible
in terms of section 11(k) or (n) of the Income Tax Act and
therefore will be included in the dutiable value of the estate. It
is our view that contributions made by a member to a provident
fund before 1 March 2016 should also be excluded from
estate duty.
The same applies to the transfer value in a retirement fund
transferred in from the Associated Institutions Pension Fund,
which is deemed to be contributions that the person did not
receive a deduction for and will be included in the dutiable
value of the person’s estate.
Withdrawal from retirement annuity funds by non-residents
Currently, the definition of retirement annuity fund in the
Income Tax Act allows a withdrawal before retirement by a
member who emigrates from South Africa. This definition
caters only for South Africans nationals who emigrate to
another country.
These two amendments opened up an opportunity for
individuals to use retirement annuity fund contributions to
avoid estate duty. Contributions to retirement annuity funds
that did not receive a deduction, since they were above the
deductibility limit, could pass to the estate on death without
being subject to the retirement lump-sum tax tables and
could then pass to the beneficiaries of the estate free from
estate duty.
Expatriates who move to South Africa for a fixed term of
employment often contribute to a retirement annuity fund
to continue saving for retirement in a tax-efficient manner.
Some of the expatriates may stay in South Africa for a short
period of time and do not qualify as residents for exchange
control purposes. When these expatriates leave South Africa
they have not been entitled to withdraw from their retirement
annuity fund because they are not emigrating.
To limit the practice of avoiding estate duty through
retirement contributions, it is proposed in TLAB 2015 that
contributions to a retirement annuity fund that did not
It is proposed to amend the definition of retirement annuity
fund to allow for expatriates to withdraw a lump sum from
their retirement annuity fund when they leave South Africa.
18
HOT TOPICS I OCTOBER 2015
QUESTION 4
19
ALEXANDER FORBES
The change to the tax treatment of disability income
policies came into effect from 1 March 2015 – what has
been observed as the impact?
Background
benefits. Examples of changes introduced by insurers include
sliding scales and income benefit caps.
The Taxation Laws Amendment Act 2014 effected a tax
change to disability income premiums and benefits from
1 March 2015. Premiums paid for by the employer in
respect of employer-owned disability income benefits must
be included in the individual’s taxable income as a fringe
benefit. The commensurate deduction no longer applies from
this date. On the upside, the income benefit will not be taxed
when it is paid to a qualifying disability income claimant.
The effect of this change is twofold:
1.Active members where the employer is paying the
premium: an increase in taxable income, thereby
increasing their tax payable and reducing take-home pay.
2.Disabled members: an increase in the monthly disability
benefit being received, as they won’t be paying tax on this
benefit from 1 March 2015.
How insurance companies are dealing with
the change
The tax changes to disability income policies led to certain
changes being implemented by insurance companies, in
particular changes to the levels and/or structure of disability
Sliding scales have typically been introduced to limit the
disability income benefit to an amount not exceeding the
post-tax disability income benefit a member would have been
entitled to under the old regime. Instead, certain sliding
scales may limit the disability income benefit to an amount
not exceeding the post-tax salary a member would have
been entitled to before becoming disabled. An example of a
sliding scale could be:
■■ 75% of first R7 000
■■ 60% of the next R20 000
■■ 50% of the remainder.
Let’s consider a practical example using the above sliding
scale. Assuming: Joe earns R40 000 per month (total
guaranteed package), his pensionable salary is R28 000
(70% of R40 000), his tax is R10 000 and net take-home
pay is R30 000 per month.
The impact on Joe’s disability income benefit before and
after 1 March 2015 (assuming PAYE tax rates remain
constant) is demonstrated as follows:
Active
Disabled – before
1 March 2015
Disabled – after
1 March 2015
Disabled – after
1 March 2015
Disabled – after
1 March 2015
Disability benefit
-
75% of pensionable salary
75% of pensionable salary
Sliding scale
as above based
on pensionable
salary
Sliding scale as
above based on
post-tax salary
Salary or benefit
R40 000
R21 000
R21 000
R17 750
R18 750
Tax
R10 000
R4 200
R0
R0
R0
Take-home salary
or benefit
R30 000
R16 800
R21 000
R17 750
R18 750
This example demonstrates the potential gaps in cover when using a flat 75% benefit versus a sliding scale, and in addition
demonstrates gaps when using pensionable salary as opposed to a post-tax salary.
Some insurers have simply introduced income benefit caps by limiting the disability income benefit to the post-tax salary before
becoming disabled.
Insurers have raised concerns about an anticipated increase in claims, termed the moral hazard risk. However, insurers have,
generally, reported that they have not experienced any increases in disability claims as yet. Time will tell whether the moral
hazard risk will materialise, but insurers seem to be taking a pre-emptive approach.
20
HOT TOPICS I OCTOBER 2015
Alexander Forbes’s best-practice view
Alexander Forbes’s general best-practice view is to retain
the current disability benefit design, typically the flat 75%
of monthly pensionable salary rather than reduce benefits.
However, each client’s circumstances must be considered
and the benefit design reviewed where appropriate. The
rationale for this view is based primarily on two factors:
1.Pensionable salaries are typically less than total
guaranteed packages. Pensionable salaries are generally
70%–75% of total guaranteed packages. As such a 75%
disability income benefit is effectively only 52%–56% of
total guaranteed package. The gap between pensionable
and total remuneration can be even greater where
employees receive 13th cheques and bonuses which are in
most cases not pensionable. In cases where pensionable
salaries are more than 75% of total guaranteed packages
these should be reviewed to establish whether the benefit
level is appropriate.
2.We should not pre-empt the moral hazard risk and
reduce benefits. The reality is that most individuals are
underinsured for disability income benefits. The tax
changes will be welcomed by disabled members as muchneeded financial relief. Further illustrating this point, the
True South Actuaries and Consultants conducted research
to assess
Gap in 2013,
quantifying the insurance gap by reference to the financial
impact on South African households on the death or
disability of an active earner in the household. The
significant levels of underinsurance in respect of both life
and disability income benefits were confirmed as follows:
Underinsurance
Life insurance
Disability income
2010
R7.3 trillion
R11.1 trillion
2013
R9.3 trillion
R14.7 trillion
Source: The South African Insurance Gap 2010 & 2013
Should the moral hazard risk materialise, then steps should
be taken to manage this risk. In extreme cases benefits may
need to be reduced.
In terms of general insurance principles an individual
cannot be better off disabled than working. As a result,
most insurers will limit the extent of a benefit to the
employee’s post-tax salary or net take-home pay before
becoming disabled. Alexander Forbes is in agreement with
this limitation, but our view is that insurers need to consider
the remuneration structure of the client rather than take a
blanket approach.
The determination of the salary used for calculating the
disability benefit must take into account the remuneration
structure – basic plus benefits, or total cost to company, or
commission based. In addition, part of the remuneration
package may also include bonuses – which in some
instances may be considered gratuitous as opposed to
guaranteed income.
Employees have become accustomed to living off this
additional income. Therefore the gap between the actual
benefit and actual total earnings can be even more
significant than just comparing the total net taxable
income. In measuring the level of benefit in this instance,
the same treatment should apply to these individuals as
would be applied to individuals with variable pay – where
the average over the previous 12 months (or 13 months,
where applicable) must be considered in determining the
actual level of earnings and not only the earnings at the
date of disability.
In general, insurers seem to be mostly concerned about
high earners and the moral hazard risk, but please note:
■■ At present, Alexander Forbes has prompted insurers to
consider the employee’s total guaranteed package and
assess how discretionary income, such as bonuses and
share options, can be incorporated into the overall benefit.
Quite often the pensionable salary of these individuals is
only a small portion of their total remuneration.
■■ By reviewing and closely managing the claims process,
rehabilitation procedures and annual reviews of disabled
members, insurers can appropriately manage and monitor
the potential moral hazard and ensure that fraudulent
cases are detected early.
■■ These high earners are already being capped as per the
insurers’ maximum benefit and in most cases are over
the medical free cover limits (in other words, they have
to go for medicals for the cover above this limit). Insurers
should review these maximums and free cover limits to
ensure they are still appropriate going forward.
Considerations for trustees and
management committees when
reviewing disability benefits
Remuneration structures
Trustees or management committees should consider which
salary the insurer is using to determine the disability income
benefits – pensionable salary or total guaranteed package or
another salary amount as determined by the employer.
If the pensionable salary is used then the result may be that
members receive a much lower disability income benefit,
as pensionable salaries may be much lower than total
guaranteed package. Generally pensionable salaries are
70%–75% of total guaranteed packages, but can be much
more or less. Therefore it’s important for trustees to engage
with the employer regarding remuneration structures to fully
understand the impact on disability income benefits. It’s
recommended that remuneration structures be provided to
the fund’s consultant to review the appropriateness of the
level of the disability income benefit. Consultants will then
be in a position to engage with the insurer and establish
a suitable disability income benefit arrangement, should
a change in benefit be appropriate. In addition, more
transparent information will also lead to more favourable
pricing from the insurer.
More importantly, following this approach ensures that
employees’ benefit expectations are understood at the outset
rather than trying to explain differences at claims stage.
21
ALEXANDER FORBES
Treating Customers Fairly
The Treating Customers Fairly framework applies to retirement funds, but best practice extends this to employer-owned policies
which typically fall within a trustee board’s or management committee’s ambit.
Restated for the retirement fund context
6
fairness
outcomes
1
Members* are confident that the fund has the fair treatment of its
membership central to its culture, and the way it is managed.
2
The needs of the members are considered and inform the benefit
design of the fund, including investment, annuity, group insurance and
preservation strategies.
3
Members receive clear information and are kept appropriately
informed before and during membership, as well as when exiting the
fund as required.
4
Any advice provided to a member is suitable and takes account of their
changing circumstances over their period of fund membership.
5
Fund, benefits and service perform and deliver as members have been
led to expect, and all associated service is of an acceptable standard.
6
Members experience no unreasonable barriers throughout their
membership, including during times of complaints, benefit claims,
or changing products, benefits or providers if relevant.
* Members in this context would include beneficiaries in the event of death in service for example.
In particular, outcomes 2, 3 and 5 need to be carefully considered in the context of reviewing and potentially changing
the disability income benefit. It’s important to consider the impact on all members. Clear communication, and expectation
management around benefits, is critical, as this poses a financial planning risk for members if they don’t fully understand what
they’re actually covered for. If, for example, a sliding scale is introduced, will members understand this and has the implications
of this been fully explained to them? We already know that members don’t fully understand the implications of benefits being
based on a pensionable salary as opposed to total guaranteed package. Is the fund or employer doing enough to create awareness
and understanding of this?
Employment contracts and incapacity procedures
Trustees or management committees should engage with the employer to ensure familiarity with the employer’s incapacity
procedures and employment contracts in so far as these apply to or affect disability income benefits. This is to ensure that any
changes to the disability benefits align to what has been contracted with employees as well as the employer’s relevant practices.
Alternatively, contracts may need to be renegotiated or practices reviewed. However, bear in mind that ultimately the policy is an
employer-owned policy and must be approved by the employer prior to the implementation and change of any benefits.
22
HOT TOPICS I OCTOBER 2015
QUESTION 5
23
ALEXANDER FORBES
What insights are there from Pension Funds
Adjudicator cases?
1. Deductions from contributions for risk benefit cover
In the case of V versus Nedgroup Defined Contribution
Pension Fund (the fund), the adjudicator had to determine
whether the fund failed to inform the complainant that it
had insured her for risk benefits and that premiums would be
deducted from her contributions to the fund.
The complaint
The complainant who was approaching her retirement
lodged a complaint with the adjudicator, stating that she
was never informed that a portion of her fund contributions
was used to pay risk benefit cover. She also stated that her
benefit statements did not indicate that a portion of her
contributions were deducted to pay risk benefit premiums.
The complainant believed that she was unlawfully registered
for death and disability cover without her consent and
requested a refund of the deductions made.
The fund’s response
The fund argued that its rules clearly provide that premiums
towards the compulsory group life assurance cover are paid
for by the employer and not specifically by the individual
members. It stated that premiums for the death benefit
cover are deducted in terms of the rules of the fund.
The fund denied that the complainant was not informed of
the risk benefit cover. It stated that the complainant was
informed when she joined the fund and continues to be
informed annually on her benefit statement. The benefit
statement which the complainant received for 21 years
provided detailed information relating to the risk
benefit cover.
What did the adjudicator say?
The adjudicator said that the complainant’s benefit
statement explicitly indicates the percentage of the
employer’s contribution that is used to pay the risk benefit
cover. The fund could not have been any more specific in its
communication to the complainant. Based on this alone, the
adjudicator rejected the complainant’s submission that she
was not informed of the deduction for risk benefits.
The adjudicator also touched on the issue of whether risk
benefits should be coupled with retirement fund benefits.
The adjudicator mentioned that it is a policy issue which
each fund must decide upon after considering the needs
of its members. There is no one-size-fits-all solution for
all members.
24
2. Lack of communication with members
In the case of Mr R (the complainant) versus Dynamique SA
Umbrella Provident Fund (the fund) and AON South Africa
(Pty) Ltd (the administrator), the adjudicator considered
whether or not the fund should be held liable for not
providing members with information regarding its rebuild
exercise, and for failing to provide benefit statements to
its members.
Complaint
The complainant was unhappy with the lack of
communication from the fund regarding an administrative
rebuild exercise that the fund had been undergoing since
2010, and that there is no timeline for the completion of
the rebuild exercise. His benefit could not be fully calculated
nor transferred to a new fund due to the rebuild. He also
stated that he had not received a benefit statement for
several years.
Administrator’s response
The administrator confirmed that the trustees cannot
certify members’ fund values due to the rebuild exercise
and it would not be in the best interests of the members
to transfer their benefits out of the fund before their values
could be verified. The administrator also confirmed that a
communication was sent to members on 15 December 2014
providing an update on the fund’s rebuild exercise.
The administrator also stated that benefit statements were
sent to the employer’s broker who was required to forward
these to the members.
Adjudicator’s decision
Section 7D(c) of the Pension Funds Act states that it is the
duty of the board “to ensure that adequate and appropriate
information is communicated to members and beneficiaries
of the fund”.
The adjudicator stated that:
■■ the non-completion of the rebuild exercise, resulting in the
inability to transfer members’ benefits to the new fund, is
not a protection of members’ interests
■■ the fund failed to act in accordance with section 7D(c) of
the Pension Funds Act by not providing information to the
complainant regarding his fund value
■■ using brokers to send benefit statements to members
amounted to an abandonment of duties by the board of
the fund.
HOT TOPICS I OCTOBER 2015
Comment: Trustees need to make sure that the distribution
channel they use for fund communication, for example
through the employer or through the broker, actually
results in members receiving the communication. It is
prudent for trustees to require the employer or broker to
provide confirmation that they have distributed the fund
communication to the members.
3. Unlawful deduction of administration
fees from members’ fund credits
In the case of Capitec Bank Limited and 2 389 others (the
complainants) versus Outsources Solutions Provident Fund
(the fund) and Mcubed Employee Benefits (Pty) Ltd (the
administrator), Capitec made a decision to transfer out of the
fund and stopped contributing to the fund. The administrator
started deducting administration fees from the members’
fund credits. By the time the transfer-out occurred, the
administrator had deducted over R2 million in administration
fees directly from members’ fund credits.
Complaint
Capitec and its employees lodged a complaint against the
administrator and the fund. In their complaint they stated
the following:
■■ The fund rules say that fund expenses must be deducted
from the fund’s reserve account. Deducting fund expenses
from member’s fund credits was not in line with the rules.
■■ An administration agreement existed between the
administrator and Capitec. The administration agreement
said that any increase in administration fees must be
negotiated with Capitec. An increase in administration
fees pending the section 14 approval, decided on by the
administrator alone, was in breach of the administration
agreement.
In contention was the R2 million administration fee
deducted during the section 14 transfer process. Capitec
asked the adjudicator to order the administrator to refund the
deducted administration fees plus interest. They also asked
for the costs they had incurred in lodging the complaint.
The response from the administrator and the fund
■■ Administration fees may be deducted from the reserve
account. The administrator can refund the members’
fund credits and deduct the admin fees from the reserve
account. This would have the same effect as deducting
directly from the members’ fund credits.
The administration fees charged while Capitec was active
in the fund were commercial and therefore negotiated
with Capitec. The increased fees that were later charged
were not commercial. Therefore these fees were agreed
and set out in a service level agreement (SLA) between
the fund and the administrator. The SLA provided that
administration fees would be deducted from the members’
fund credits.
The adjudicator’s decision
The rules of the fund say that fund expenses should
be deducted from the reserve account. Therefore the
administrator acted unlawfully in deducting the fees directly
from the member’s fund credits.
The adjudicator had to decide which agreement, between
the SLA and the administration agreement, was binding
on the fund. She said the SLA between the fund and the
administrator, which among other things deals with the
fees, is binding. This is because Board Notice 24 requires
an SLA between the fund and the administrator. Board
Notice 24 does not require an SLA between a participating
employer and an administrator. Therefore, the administration
agreement between Capitec and the administrator cannot
be upheld, as it is not a requirement according to Board
Notice 24. However, the part of the SLA saying that the
administration fees must be deducted from members’ fund
credits cannot be upheld as it is not in line with the rules
which say that the administration fee must be deducted from
the reserve account.
The adjudicator said that her office would not make an order
of costs against the administrator because Capitec would not
suffer substantial injustice if no costs order is made.
Comment: Where there are no ongoing contributions (as
happens with unclaimed benefits, deferred retirement
and preservation funds), an administrator may only make
a deduction from a member’s fund value if the rules
specifically provide for this. Service level agreements that
are not in line with the rules of a fund cannot override the
fund rules.
The adjudicator also indicated that where a complainant
can prove their costs and show that they will suffer
substantial injustice if the order is not made, the adjudicator
will consider making an order of costs. This is a risk which
funds need to be aware of.
25
ALEXANDER FORBES
QUESTION 6
26
HOT TOPICS I OCTOBER 2015
What other proposed regulatory changes should trustees
and management committees be aware of?
Trustee training and qualifications
National Treasury and the FSB concerns on retirement fund
trustees’ lack of a qualification
National Treasury and the FSB are concerned that many
retirement fund trustees lack the competence and necessary
skills to make investment and management decisions which
are correct and appropriate for their funds and beneficiaries.
In the retirement reform document released by National
Treasury together with the 2013 National Budget documents,
mandatory training for trustees was mentioned as a way to
improve the governance of funds. Accordingly as part of
the broader retirement reform initiatives, section 7A of the
Pension Funds Act was amended to require that trustees
should, within six months of their appointment, have the
skills and training as set out by the FSB.
FSB proposals for trustee training and qualifications
The FSB has now set out the proposals for trustee training
and qualifications in a draft information circular.
The draft circular provides for the following:
■■ Measurement of trustees’ capabilities will be an objective
measure through an occupational qualification accredited
by the South African Qualifications Authority (SAQA)1.
■■ The FSB will consult with industry bodies before the new
qualification can be proposed to SAQA.
■■ Draft knowledge, practical skills and work experience
and training modules have been prepared for submission
to SAQA.
■■ The Registrar of Pension Funds (the registrar) will
prescribe the standards regarding the knowledge, skills
and training which the trustees need to undergo once
SAQA has approved the proposed qualification.
■■ The registrar has delayed setting the standards that must
be fulfilled, until there is an objective measure against
which the trustees’ knowledge and skill may be assessed.
Proposed trustee qualification (as per documents prepared
by the FSB to date for submission to SAQA)
It is proposed that:
■■ The qualification falls under Inseta, be industry driven
and pegged at National Qualifications Framework (NQF)
level 5 as an entry level which is a higher certificate and
advanced national (vocational) certificate.
■■ As an occupational qualification it will be a qualification
associated with a trade, occupation or profession, resulting
from a combination of work-based learning and academic
learning consisting of knowledge unit standards, practical
unit standards and work experience unit standards.
Modules to be covered include:
■■ governance, strategic direction and control
■■ legal requirements and common law (statutes, regulations,
directives, notices and circulars)
■■ rules and operations of a retirement fund
■■ performance of fund assets
■■ financial requirements of a retirement fund
■■ risk management.
Trustee toolkit
For now trustees are encouraged to use the FSB free online
trustee toolkit (TTK) to help board members to acquire
knowledge of sound fund governance. The TTK which
is based on Pension Fund Circular 130 is a free online,
e-learning programme for trustees of retirement funds. It
can be accessed at www.trusteetoolkit.co.za. The TTK will
be elevated into a basic, independent, compulsory training
toolkit once accredited.
It is important to note that according to the FSB the purpose
of requiring trustees to acquire a qualification is:
■■ that fund trustees must have relevant skills and knowledge
in order for them to run a fund
■■ to enable funds’ board members to perform the functions
of trustees in a retirement fund within the legal framework
to give effect to the purpose of the fund
■■ to improve the governance of funds and not to replace
appointed and elected trustees with professional trustees
■■ not that all of the trustees must have the same knowledge
and skills, but that the trustees should not have less than
the minimum level of knowledge and skills to enable them
to engage proficiently in discussions on fund matters
before the board makes a decision.
Transfer of unclaimed benefits to an
unclaimed benefits fund
What is an unclaimed benefit?
The Pension Funds Act defines what constitutes an
unclaimed benefit and says how funds must deal with
unclaimed benefits. Regulation 30 of the Pension Funds
Act requires fund rules to say how unclaimed benefits will
be treated. Before 2007 retirement funds could insert
provisions in their rules that allowed for unclaimed benefits
that remained unclaimed to revert back to the fund.
Unclaimed benefits can no longer be forfeited. The Pension
Funds Act was amended to provide that an unclaimed benefit
is any lump sum or ongoing pension benefit that is due to
a fund member (or the beneficiaries of such member) that
has remained unclaimed for a period of 24 months from the
date of the benefit becoming due and payable. PF Circular
126 states that fund rules may not provide that benefits
unclaimed for a period will “revert back to the fund”.
SAQA is a statutory body mandated to oversee the development and implementation of South Africa’s national qualifications framework in terms of
the National Qualifications Framework Act 67 of 2008.
1
27
ALEXANDER FORBES
An unclaimed benefit can either be kept in the fund of origin
or transferred to an unclaimed benefit fund. Trustees must
ensure that their rules provide for the deduction of tracing
and ongoing administration costs for unclaimed benefits as
well as the transfer of unclaimed benefits to other funds.
There is renewed focus on unclaimed benefits by the FSB.
From mid-August 2015 the FSB has embarked on a media
drive to educate the public about unclaimed benefits in
South African retirement funds. As part of the education
drive, the FSB is encouraging former fund members to take
steps to ascertain if they are owed any unpaid benefits. The
FSB is concerned that the amount of unclaimed benefits
in retirement funds keeps growing, that trustees and fund
administrators are not doing enough to trace members and to
obtain and keep updated member records to enable payment
of unclaimed benefits sitting in funds.
Section 14(1) exemption for transfers of unclaimed benefits
From January 2012 there has been an exemption from
section 14(1) supervision for transfers of unclaimed benefits
from a registered fund to an unclaimed benefit fund. This
is now set to change. The registrar, as the guardian of the
interests of members, is of the view that his duties will not
be properly fulfilled if the registrar does not approve the
transfer of members’ unclaimed benefits to another fund.
In accordance with a draft circular issued by the FSB on
governance, winding up and cancellation of the registration
of shell or dormant funds and transfer of unclaimed benefits
to an unclaimed benefit fund must now take place through
a section 14(1) transfer on application to the registrar. The
FSB will advise the date of removal of the section 14(1)
exemption for unclaimed benefit transfers. Going forward, all
transfers of unclaimed benefits to an unclaimed benefit fund
must follow the full section 14(1) process.
Draft requirements for unclaimed benefits section 14(1)
transfer
According to the draft circular, the registrar will require the
following information before approving the section 14(1)
transfer:
■■ Authority of person making the application
■■ Relevant rule permitting the transfer
■■ An affidavit by the chair of the board or curator
confirming:
• how the benefits became unclaimed and why they were
not paid
• details of the members
• what steps were taken to trace the members
• the value of the benefits
• why the specific unclaimed benefit fund was chosen
• why the board believes it is more cost effective to
transfer the assets to an unclaimed benefit fund
• whether the board intends to apply to cancel the fund’s
registration following the transfer of unclaimed benefits.
If the fund is not going to be closed within the next
12 months, it is likely that the registrar may decline
or query the transfer-out of unclaimed benefits.
28
Fiduciary duty of trustees to pay benefits
The purpose of a retirement fund is to pay benefits. Trustees
must take all reasonable steps to trace members and their
beneficiaries and pay fund benefits. Trustees must remember
that regardless of how the unclaimed benefits arose or
what the legislative provisions are on unclaimed benefits or
whatever rules trustees put in place regarding the tracing or
transfer of unclaimed benefits, trustees have a fiduciary duty
to do everything in their power to trace beneficiaries and/or
dependants and pay them their benefits. Trustees must be
able to show the actual practical measures that they have
taken to pay members their benefits to demonstrate that they
have complied with their fiduciary duty.
Commencement and participation in
umbrella arrangements
What is an umbrella fund?
An umbrella fund is a retirement fund which can be a
pension or provident fund set up to provide retirement, death
and other benefits to members. It is an umbrella scheme as
it allows several participating employers to join and allow
their employees to become members. Umbrella funds are
used by bargaining councils, unions, municipalities and
group companies. They are normally sponsored by bargaining
councils, unions, insurers and fund administrators. National
Treasury as part of retirement reform wants to see more
individual free-standing and particularly smaller funds join
umbrella funds as they believe that it is more cost effective
and that more of members’ contributions will go towards
retirement funding instead of fund expenses. National
Treasury has proposed that the Pension Funds Act must give
special attention to umbrella funds and the accompanying
difficulties attached to the management of those funds.
The Pension Funds Act does not define an umbrella fund nor
does it distinguish between types of umbrella funds. It also
does not provide guidance on how employers must join and
exit umbrella funds.
Participation and termination of participation on
umbrella funds
The registrar has issued a draft information circular on
umbrella funds (the circular). The circular gives guidance to
trustees of umbrella funds on the requirements for when an
employer joins and leaves an umbrella fund.
The circular recognises two types of umbrella funds: type A
and type B. Type A umbrella funds have both general rules
and special rules. The general rules apply to all participants
in the fund and typically deal with issues such as governance
and investments. The special rules set out the contribution
rates and benefit structure for each participating employer.
Type B umbrella funds are funds with general rules only
which are applicable to all members and their employers
who participate in the fund. Most large corporate standalone or multinational companies and bargaining council,
sectoral and municipal funds are type B umbrella funds.
Although there may be different and separate employers in a
type B umbrella fund, no special rules are required for each
participating employer as the benefits and contribution rates
are uniform across all of the members.
HOT TOPICS I OCTOBER 2015
How will an employer join a type B umbrella fund?
An employer commences participation in a type B
umbrella fund when it complies with the requirements for
participation set out in the fund’s general rules and with
effect from the date contemplated in the general rules. In a
type B umbrella fund, the general rules must allow for the
participation of the various employers.
How will an employer terminate its participation in a type B
umbrella fund?
Termination of participation must follow the partial
liquidation provisions in the fund rules as required in section
28 of the Pension Funds Act, unless the fund is exempt
from the liquidation provisions. If the rules are not clear, the
rules must be amended to clarify the liquidation or partial
liquidation process to be followed. It is not clear from the
draft circular whether all employers exiting a fund must go
through a section 28 partial liquidation, even if they exited
through a full section 14 transfer-out. It is hoped that the
final circular will clarify this.
Future terminations (applicable to both type A and type B
umbrella funds)
Future terminations will occur once the final circular
is issued. The fund must in 180 days of termination of
participation by the employer advise the registrar that
termination has occurred. An affidavit from the fund’s
chairperson must be submitted providing:
■■ detailed information on the date the employer’s
participation terminated
■■ any contributions that remained unpaid by that employer
■■ steps taken or to be taken by the fund to recover the
unpaid contributions.
Once the registrar has received this and is satisfied that
the terminated employer has met its rights and obligations
with respect to its members, the registrar will approve rule
amendments and alter its participating employer records.
When a fund is liquidated and it is not valuation-exempt and
it is underfunded, the participating employer may be liable
to pay to the fund the amount of any shortfall.
According to the draft circular, the registrar will now be
requesting each registered umbrella fund to furnish the
registrar with information on each participating employer
at commencement and termination of the employers’
participation:
■■ For existing employers the information must be at the
umbrella fund’s most recent financial year-end and must
be provided within 60 days of the registrar’s request.
■■ For new participations, the information must be provided
within 60 days of the employer commencing participation.
■■ For all terminations, the information must be provided
within 60 days of the date of the employer ceasing
participation in the fund.
The information required by the registrar in respect of each
participating employer is through an affidavit deposed to by
the chairperson of the fund and must include (among other
things):
■■ The employer’s registered and trading name
■■ Registered address of the employer
■■ Date when participation commenced and/or terminated
■■ Whether participation is in accordance with the rules
■■ The number of members employed by that employer.
If the required information is provided at termination,
the chairperson must advise the registrar if at date of
termination:
■■ any contributions remained unpaid
■■ the amount of the unpaid contributions
■■ steps if any taken or to be taken to recover the arrear
contributions
■■ whether the fund’s liabilities for that employer are fully
funded
■■ if there is a shortfall, what steps are to be taken to address
the funding shortfall.
For terminated participation, the registrar will only alter
its records to reflect the correct and current status of
any participating employer if satisfied that there is no
prejudice to affected members due to the employer ceasing
participation on the fund.
Information to be submitted to the registrar for
umbrella funds
The registrar keeps a database of participating employers in
umbrella funds for regulatory and administrative purposes.
On commencement of participation, the registrar records the
name and other details of the employer. A unique reference
number is allocated to each employer participating in the
umbrella fund. Boards and their administrators should
confirm from time to time the details of the employers
participating in their funds on the official FSB website to
make sure that the registrar’s records accurately reflect the
details of each umbrella fund’s participating employers.
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ALEXANDER FORBES
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HOT TOPICS I OCTOBER 2015
NOTES:
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ALEXANDER FORBES
Alexander Forbes Communications. Photos: Gallo Images
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