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Retirement fund default regulations


Introduction


During 2017 the Minister of Finance issued the final retirement fund default regulations (commonly referred to as “Default Regulations”) made in terms of section 36 of the Pension Funds Act, 1956. These Default Regulations, published in Notice 863 of Government Gazette No. 41064, were the outcome of an extensive consultative process between Treasury and the FSCA (the first draft was published back in July 2015) and intend to improve the outcomes for members of retirement funds by ensuring that they get good value for their savings and retire comfortably.


In this edition we will discuss these new default regulations in more detail.


Default Regulations


The final default regulations amended existing regulations published back in 1962 and, in essence, introduce three sets of requirements:


  1. They require the board of trustees of retirement funds to offer a default investment portfolio to contributing members who do not exercise any choice regarding how their savings should be invested (Regulation 37);

  2. They also require the fund to offer a default in-fund preservation arrangement to members who leave the services of the participating employer before retirement (Regulation 38); and

  3. for retiring members, a fund must have an annuity strategy with annuity options, either in-fund or out-of-fund, and can only “default” retiring members into a particular annuity product after a member has made a choice.


The above listed defaults must be relatively simple, cost-effective and transparent and require the board of trustees to assist members during the accumulation and retirement phases.


Default Regulations Regulation 37: Default investment portfolios


All retirement funds with a defined contribution category are required to have a default investment portfolio(s). The investment portfolio(s) that members are defaulted into should be appropriate, reasonably priced, well communicated to members, and offer good value for money. Trustees are required to monitor investment portfolios regularly to ensure continued compliance with these principles and rules. Performance fees will be allowed but subject to a standard to be issued by the FSCA and a regulatory or policy review. Loyalty bonuses are not permitted.


For now, Regulation 37 does not apply to retirement annuity and preservation funds.


Regulation 38: Default Preservation and Portability


Funds that have members enrolled into them as a condition of employment (i.e. pension and provident funds), will have to change their rules to allow for default preservation, as some of them currently do not allow resigning workers to leave their accumulated retirement savings in the fund. The employee, however, will have the right and option to withdraw, upon request, the accumulated savings or to transfer them to any other fund, thereby achieving portability. Employees will also be required to first seek retirement benefits counselling before they make a decision.


Regulation 38 does not apply to retirement annuity and preservation funds.


Regulation 39: Annuity Strategy


The boards of all pension, pension preservation and retirement annuity funds must establish an “annuity strategy”. Provident funds and provident preservation funds must only establish an annuity strategy if the fund enables the member to elect an annuity.

The regulations define an “annuity strategy” as follows: