Retirement fund default regulations
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.
The final default regulations amended existing regulations published back in 1962 and, in essence, introduce three sets of requirements:
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);
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
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:
“annuity strategy” means a strategy, as determined by a board, setting out the manner in which a member’s retirement savings may be applied, with the member’s consent, to provide an annuity or annuities by the fund or to purchase an annuity on behalf of the member from an external provider, which annuity or annuities may either be in the name of the member or in the name of the fund and which complies with the requirements of regulation 39 and any conditions that may be prescribed from time to time”; (my emphasis)
In determining the fund’s annuity strategy, the board must consider (as far as it can reasonably ascertain):
the level of income that will be payable to retiring members;
the investment, inflation and other risks inherent in the income received by retiring members; and
the level of income protection granted to beneficiaries in the event of death of a member enrolled into the proposed annuity.
The proposed annuity or annuities – which can be a life annuity or a living annuity (and can be either member owned or in-fund) - must be appropriate and suitable for the specific class of members who will be enrolled into them, must be well communicated and offer good value for money.
Members will be entitled to opt into this annuity strategy by selecting the annuity product in which they wish to enrol (i.e. the member must indicate which annuity product he/she would prefer by opting in instead of opting-out). Members should also be given access to retirement benefit counselling to assist them in understanding and giving effect to the annuity strategy.
With respect to a living annuity, the fund must communicate to members (on a regular basis) the asset class composition of investments, their performance and changes in the income in respect of the annuity. In addition, funds will need to ensure that all fees charged in respect of the proposed annuity are reasonable and competitive considering the benefits provided to members.
The fund must review its annuity strategy at least annually to ensure that the proposed annuity continues to comply with the regulations and is appropriate for members.
The new concept of “retirement benefits counselling”: what does it entail?
The concept of “retirement benefits counselling” is defined in the regulations as “the disclosure and explanation, in a clear and understandable language, including risks, costs and charges…”.
Regulation 39 states that members must be given access to retirement benefit counselling not less than three months prior to their normal retirement age as determined in the rules of the fund (and as may be prescribed). It however offers little guidance as to what exactly this service must entail.
The FSCA subsequently published a guidance note providing more clarity on (inter alia) the concept of retirement benefit counselling. PFA Guidance Note No.8 of 2018 states that retirement benefit counselling may be provided either in person or in writing. In either event, the fund must retain a record thereof. The person providing counselling (as appointed by the fund) does not need to be a registered FSP or financial advisor in terms of FAIS, but the board must be satisfied that the person who provides the retirement benefit counselling is suitably qualified and experienced and able to properly manage any conflicts of interest.
Retirement benefit counselling does not include advice, even on tax matters, and members should be expressly informed of this fact. If advice is also provided, then the person providing the advice must be a registered financial adviser or tax practitioner, as the case may be.
It is recommended that retirement benefits counselling should be provided no longer than 6 months prior to a member’s retirement from the fund and the board should make every effort to ensure that the information provided is still relevant and appropriate at retirement age.
When members are given access to retirement benefit counselling, a disclosure and explanation must be provided in clear and understandable language, including fees, risks, costs and charges of the available investment portfolios, the fund’s annuity strategy and any other options made available to members.
As of 01 March 2019 all default arrangements in respect of a fund must be fully compliant. Funds must therefore ensure that their rules and investment policy statements are properly aligned to ensure compliance with the new default regulations.