The retirement industry has seen a number of important shifts over the past few decades, with the shift from DB pension funds to DC provident funds most probably having the biggest impact. The current shift is a shift to commercial umbrella funds. The Financial Sector Conduct Authority (FSCA) is committed to the consolidation of retirement funds and the majority of small, medium and increasingly large employers have transferred to, or are in the process of transferring to, commercial umbrella funds (for all the right reasons). However, there is currently no clear supportive umbrella fund legislation, nor is there industry consensus on the most appropriate and desirable management structures for umbrella funds.
Many market commentators who looked at the Conduct of Financial Institutions (COFI) Bill for guidance and direction were disappointed to find that it contained no clear reference to these funds. On closer investigation however, I am optimistic about the possibilities offered by the current wording of the Bill.
The COFI Bill, once promulgated, will deal with the conduct related requirements of a wide range of financial institutions, such as asset managers and financial service providers as well as retirement funds. When it comes to retirement funds the following provisions of COFI are important.
Retirement funds will constitute financial institutions and will be defined as product providers. The benefits provided by retirement funds will therefore constitute financial products subject to the approval of the FSCA. This means that although a fund will be registered and approved and fully compliant with the Pension Funds Act, it will at some point in the future have to register in terms of the COFI Act as well. When it does, its benefits will have to comply with a range of new requirements designed to ensure adherence with the fair treatment of customers and the other conduct related principles.
It appears to be the intention of the legislator to create a new breed of independent trustees for commercial funds. They will be required to be properly qualified, be independent of the sponsor and may even have to be licenced in terms of COFI. The trustees nominated by the employer and the members will not be required to register but the FSCA may prescribe conduct standards regulating and imposing requirements on all board members and sponsors of pension funds.
Sponsors are defined in COFI as “the entity that establishes a pension fund for the benefit of the members of the pension fund”. This definition can be used to distinguish between various types of pension funds such as those established by the state, an employer, an industry (union/bargaining council) and commercial sponsors.
The definition of “pension fund” in the COFI Bill specifically includes state funds and - but for technicalities - should also incorporate the following retirement funds: Umbrella (pension and provident) funds, preservation (pension and provident and unclaimed benefit) funds, beneficiary funds and retirement annuity funds. It is therefore possible that retirement funds can be identified and regulated in the following broad categories.
Categorising retirement funds as set out in this diagram makes it much easier to see the new requirements that may apply to them in terms of COFI. Employer sponsored funds for example are unlikely to be affected by the new requirements relating to “marketing, distribution and post-sale barriers” because they do not perform those activities. Commercial funds however do and will have to comply with the new requirements. New requirements issued relating to “financial products, reporting and communications” on the other hand may require all funds to adjust their practices and comply in one or another way.
There may be other ways to identify and regulate the various types of retirement funds. One of them is to consider their activities. The guiding principles of COFI allows the following approaches -
Activity-based rather than institution-based.
Principles-based rather than narrow rules.
Risk based and proportionate.
The massive shift to commercial umbrella funds is coinciding with the introduction of the Twin Peaks regulatory approach. The latter was kick-started with the promulgation of the Financial Sector Regulation Act in 2018. The extent of all these new measures will only be clear once the conduct standards have been published in terms of the Conduct of Financial Institutions (COFI) Act, in the next three years or so.
Much is expected to change. We should for the first time see more dedicated legislation in respect of commercial funds such as commercial umbrella funds. We should also see dedicated requirements for union and bargaining council umbrella funds. These requirements should recognise the commercial or other relationships between the sponsor and the board on the one hand, and the sponsor and the members on the other hand. It will also lay down new requirements relating to the use and application of the latest technology, the protection of data and the way in which funds contact and communicate with members.