Unpacking Default Regulation 38 – Default Preservation strategy

All retirement funds will, from 1 March 2019, need to allow for all members who withdraw from the fund (i.e. resign, are dismissed or get retrenched) to leave their retirement benefit in the fund. Such a member will become a paid-up member.

All pension funds need to be compliant with the new Default Regulations, issued in terms of section 36 of the Pension Funds Act 1956, by 1 March 2019.

The main goal of the Default Regulations is to increase the value of members’ retirement savings through amongst others, lower charges and to ensure members retire comfortably.

There are three Default Regulations:

  • Regulation 37, which deals with default investment portfolios;
  • Regulation 38, which deals with default preservation and portability; and
  • Regulation 39, which deals with annuity strategy.

In this communication, we will unpack Regulation 38.

Default Preservation strategy

All retirement funds will, from 1 March 2019, need to allow for all members who withdraw from the fund (i.e. resign, are dismissed or get retrenched) to leave their retirement benefit in the fund. Such a member will become a paid-up member.

When you (the member) leave the fund and no instruction to transfer or pay out your retirement benefit is given to the employer, you will automatically become a paid-up member until an instruction is received.

You can, however, elect to leave your retirement benefit in the fund when completing the withdrawal form.

Importantly, when you become a paid-up member, you are no longer able to contribute to the fund and will no longer be covered for risk benefits i.e. life cover via the fund.

You will receive a paid-up certificate within two months of becoming a paid-up member.

Four months after joining a new fund, the fund will need to request a list of paid-up certificates in respect of any retirement benefits you may have and provide you with the option to transfer all your retirement benefits into the new fund.

You will at any time be able to transfer or withdraw your retirement benefit upon instruction.

Members will be given access to retirement benefits counselling to assist with your decision-making process.

What are the benefits of becoming a paid-up member?

  • Lower administration and investment fees
  • No additional costs to the member
  • Retirement benefit is easily transferable in and out of the fund.

Why should I preserve?

  • No tax implications if you preserve your retirement benefit
  • Improves the quality of your retirement outcome i.e. what standard of living you could experience in retirement.