Unpacking the developing legal landscape of retirement funds
Speaking on the topic of ‘Legal Changes: Uncovered’ during a webinar hosted by Discovery Employee Benefits and EBnet on 28 February 2023, top product and legal minds at Discovery Employee Benefits unpacked some of the key regulatory updates impacting retirement funds now and some future proposals announced by the Finance Minister Enoch Godongwana’s 2023 National Budget Speech
The panel included the following executives from Discovery Employee Benefits:
- Guy Chennells, Head of product
- Nancy Andrews, Head of Legal and
- Yasheen Modi, Deputy Head of R&D
(Read the article below summarising the findings or watch the full webinar on video)
Key topics discussed were new member safeguards effected through the Financial Sector Conduct Authority (FSCA)’s Conduct Standard relating to the payment of pension fund contributions and some of the profound changes to be expected when Treasury’s proposed ‘two-pot’ retirement system comes into effect.
The insights help provide clarity on the evolving landscape of retirement fund legislation and its impact on the future of retirement funds for employers and members.
Conduct Standard on the requirements relating to pension fund contributions
As per long-standing regulations, employers are required to timeously pay over employees’ retirement fund contributions, to the relevant pension fund.
Section 13A of the Pension Funds Act (PFA) states that failure to pay over contributions within seven days after the end of the month for which a contribution is due, is a criminal offence.
Says Chennells: “The FSCA has moved to further safeguard fund members by specifying the action that a Fund must take when contributions are not paid over in time, and at the same time setting out the requirements on the information to be furnished to a retirement fund by an employer.
The Conduct Standard 1 of 2022: Requirements Related to the Payment of Pension Fund Contributions [1] came into effect on 20 February 2023, replacing regulation 33 made in terms of section 36 of the PFA, which had the same intent, but was deemed to be insufficient by the FSCA.
“What this conduct standard does is it makes explicit what must happen if contributions are not paid over,” said Chennells. “Someone needs to be the key individual who is responsible for those contributions coming across, and the consequences for that person are specified with an increase in responsibility, too, under the conduct standards”.
Firstly, the conduct standards specify the interest rate charged on late payments, at a punitive prime plus 2%, and “it makes an important change that says that you must charge that interest rate from the first of the month at which the payment was due rather than the 7th as is it currently.
Further, the conduct standards specify a chain of reporting that must be performed by pension funds, ultimately leading to the board of trustees being required to alert the regulator and police service, in the event that fund contributions are not paid.
Separately, a notice from the regulator has stated that that they will be “naming and shaming employers who have contravened this regulation”.
Beyond heightening consequences and clarifying processes an “obligation is now placed on administrators to deal directly with members in those instances [where contributions are overdue] so they’re not prejudiced,” explained Discovery Employee Benefits’ Nancy Andrews.
“Historically, the conduit was always the employer to actually get across any kind of information to the employees.”
“From a trustee perspective this is extremely important because they have a fiduciary duty to their members. Without this regulation it is difficult to know when you should bypass your primary client (the participating employer) and notify members directly. Ultimately, the new legislation makes the playing field very clear for everybody. This is what has to happen and will happen if you don’t pay over contributions,” says Chennells. “While some options remain in the event of affordability issues arising in relation to fund contributions, employers need to understand that they cannot use contributions deducted from pay from employees for other things, that’s off the table.”
The Two (or three) Pot System
National Treasury’s proposed ‘two pot’ retirement system looks to strike a compromise between two polar objectives: allowing individuals to access their retirement savings pre-retirement in the event of genuine financial hardship, while preventing individuals from long term financial hardship due to cashing out their retirement savings pre-retirement.
On the one hand, Treasury recognises that financially vulnerable South Africans may need access to their savings, for instance during an emergency or when retrenched but, on the other, that something needs to be done to address the country’s retirement savings crisis.
Presently, the extent of drain from the retirement system due to pre-retirement withdrawals is staggering and the proposed changes, while arduous for industry to implement, represent a key piece of a Treasury’s retirement reform process.
To give effect to these goals, the proposed system will allow individuals to access only a portion – 33% of their savings – pre-retirement while ringfencing the remainder for retirement only.
“It is a compromise that allows Treasury to vastly improve on the preservation strictures while being cognizant of the legitimate concerns that many stakeholder groups in South Africa have around it,” says Chennells.
Updated draft legislation detailing the proposed system, including the new policies announced by Minister in his Budget speech, is expected to be released later this year. However, implementation of the system remains set for 1 March 2024.
Exploring the retirement savings conundrum, and proposed solution.
With South Africa’s shift from a defined benefit to defined contribution retirement system “there has been a growing realisation that much of the defined contribution population are hopelessly underfunded,” says Chennells, “the vast majority of people are retiring into a real, unmitigated financial disaster”.
While fees, insufficient contributions and education all play a role, “it’s always been the case that a lack of preservation – because you’re cashing out your funds along the way to retirement – is the main culprit of people not having decent retirement savings at the end, but that has most certainly been the most difficult problem to solve”.
In essence, the two pot system includes three pots: new contributions from 1 March 2024 will go one third into a savings pot (accessible before retirement) and two thirds into a retirement pot (not accessible before retirement), and then money saved up to that date will still be treated under the old regime.
“Members will be able to access their savings pot once a year, so it is still not accessible without limits,” says Chennells.
Implementing all this is tricky. Watch the ins – and outs – of the proposed solution in our EB Net / Discovery Employee Benefits webinar, including points on what we know of it so far, here.
Budget Updates
Says Nancy Andrews the Minister has confirmed an implementation date of 1 March 2024 for what is now the first phase of the two-pot reforms. The legislation is held up by a few sticking points. One of them is the intention to “seed” the savings pot with money from the old regime savings. This idea needed to be brought into the budget speech so that it could then feed into the proposed legislation.
We may expect a new draft bill that deals with these aspects at or around July, indicated Andrews.
“What has been postponed to the second phase is this whole issue of retrenchments. Treasury is looking at whether or not retrenched members can actually dig into the retirement pot for a short period of time to help people fill the income gap while trying find new employment. And that issue hasn’t been resolved yet,” explained Andrews. “Aside from the issues relating to retrenchment, come 1 March 2024, the rest of it is going ahead. So, we have just got to brace ourselves. The problem we face as an industry is we don’t have the final legislation. And we don’t know how it will actually work so we have to wait and see what comes up.”.
Ultimately, while the details still need to be ironed out, the basic principles of the proposed system have enormous potential.
“Based on our experience today on behaviour in retirement funds most people have taken 100% in cash, as they’ve had the temptation to do so through job changes.
“So forcing a cap on how much people can take, but allowing them to take up to a third at any time – – even if you project on a worst case basis that everyone takes a third all the way through to retirement – the amount of money in retirement pots will still be vastly bigger than it would be under the current behaviour within the existing regime,” explained Chennells.
“The important caveat to that of course is that restriction only applies to new money. So what people have built up to date is still vulnerable to entire cash outs, and that will remain the bulk of what people have in their retirement funds for a long time to come,” concludes Chennells.
ENDS [1] FSCA_Conduct_Standard_1_of_2022_RF_FINAL_1.pdf (jutacomplinews.co.za)
