5 OF 2021
Withdrawal of Green Paper on Comprehensive Social Security and Retirement Reform
The Green Paper on Comprehensive Social Security and Retirement Reform published for comments on 18 August 2021 has been withdrawn by Lindiwe Zulu, Minister of Social Development.
The Green Paper included proposals such as the setting up of a National Social Security Fund in which employers will be obliged to auto-enrol employees and which would include mandatory retirement, death and disability insurance for all workers. A basic income grant, which will cost approximately R200 billion and will require a 10-percentage point increase in income taxes, was also proposed, as well as compulsory preservation of retirement savings until the end of a worker’s career, except under clearly specified circumstances such as emergency use.
Financial Ombud System
On 29 July 2021, National Treasury and the FSCA published an invitation for public comments on a diagnostic study, entitled: “South Africa – Financial Ombud System Diagnostic”. The study was commissioned by National Treasury and prepared by the World Bank Group. It aims to provide an independent review of South Africa’s financial ombud system and recommends reforms to enhance customer protection and good-quality outcomes in the financial services sector.
The study proposes the amalgamation of the different ombud schemes for financial services currently operational in the country, which is currently fragmented, complex and costly.
The National Financial Ombud (“NFO”)
Recommendations in the study include the establishment of the NFO, a new non-statutory body, to replace the current ombud schemes, namely the long term and short term insurance ombuds, FAIS ombud, JSE ombud, credit ombud and ombud for banking services, but excluding the office of the Pension Funds Adjudicator. The consolidation of ombud schemes should be managed by the new NFO board, which should be appointed at the earliest possible opportunity, so that it can establish the NFO, oversee the consolidation process, and make any necessary design decisions.
The NFO should be independent from the financial services industry and from government. It would handle all complaints that seek redress from providers of financial services including credit, to enable the National Credit Regulator and the FSCA to focus on dealing with enforcement, systemic sector-wide issues, and broader financial literacy efforts.
The Retirement Funds Ombud
The Pension Funds Adjudicator will become the Retirement Funds Ombud to make its role clearer to consumers. It should continue to have jurisdiction over pension funds, but jurisdiction on complaints about advice/intermediary services concerning retirement funds will be added to its role. These complaints currently resort with the FAIS Ombud.
It is suggested in the study that retaining a separate scheme for retirement funds at this stage will avoid adding further complexity to what will already be a complex transition. The Adjudicator’s position can be reviewed five years after full implementation of the NFO.
Redress
It is recommended that an ombud who upholds a complaint should have power to award any one or more of the following forms of redress:
Compensation for the following:
Loss caused directly by the financial provider’s unfair act/omission
- Consequential loss that would not have arisen but for the provider’s unfair act/omission
- Distress/inconvenience caused to the complainant by the provider’s unfair act/omission
- Interest on compensation in appropriate circumstances
- A direction – which requires the financial provider to put things right by doing, or not doing, something (specified by the ombud) in relation to the particular complainant.
Effect of an ombud decision
It is recommended in the study that if the complainant accepts an ombud decision, the financial provider will be bound by it. The complainant should be bound by the decision they have accepted and will not be free to pursue the same issue against the provider in court.
If the complainant does not accept the ombud’s decision, neither party is bound by it and the complainant can pursue the issue in court.
The Ombud Council
The role of the Ombud Council will be modified to enable it to authorise the new NFO to handle complaints about advice/intermediary services and give the NFO automatic jurisdiction, as well as making binding decisions of recognised ombud schemes enforceable in the same way as a court judgment.
Recommendations
The following is recommended in the study:
- There should be a consistent definition of what constitutes a complaint, which must be used by all ombud schemes, financial providers and regulators.
- The definition should include an oral expression of dissatisfaction and not require a complaint to be in writing.
- It should be made clear that a complaint can be made in any of South Africa’s 11 official languages.
- There should also be explicit adverse consequences (that can be implemented by the Ombud Council or the FSCA) if financial institutions (as defined in the FSRA) fail to
- Join relevant ombud schemes;
- Cooperate with the ombud schemes; or
- Comply with ombud scheme decisions
Draft Notice – Levies on Financial Institutions
The FSCA released the levies on financial institutions for the levy year 1 April 2021 to 31 March 2022.
Levy on pension funds
The levy is an amount of R1 356.53 per fund plus R16.05 per member and every other person who receives regular periodic payments from such fund (excluding any member, or such person whose benefit in the fund remained unclaimed and beneficiaries), or R3 108 288, whichever total amount is the lesser.
The levies must be paid not later than 31 August of the levy year.
Levy on fund administrators
The levy in respect of an administrator approved in terms of section 13B of the Pension Funds Act is R8 659.42 plus an additional amount of R675.06 per retirement fund under its administration, and an amount of R0.81 per member and in respect of every other person who receives regular periodic payments from the fund, excluding any member or person whose benefit in the fund remained unclaimed, and beneficiaries of death benefits.
Levy for the Pension Funds Adjudicator
An amount of R6.99 per fund member and any other person who receives regular periodic payments from such fund, but excluding any member or such person whose benefit in the fund remained unclaimed.
Levy for funding of the Office of Ombud for Financial Services Providers
A person who is authorised in terms of section 8 of the Financial Advisory and Intermediary Services Act (FAIS) to act as a financial services provider must, on or before 31 October of the levy year, pay a levy which is subject to a maximum of R317 376, and is calculated as follows:
(a) a base amount of R1 172; and
(b) A x R447.
where-
A = the total number of key individuals of the financial services provider approved in terms of the FAIS Act plus the total number of representatives appointed by the financial services provider, less key individuals that are also appointed as representatives, as at 31 August of the levy year.
Multiple authorised financial services providers who form part of the same legal entity are jointly and severally liable for payment of a single levy.
Draft Conduct Standard – Conditions Prescribed in Respect of Pension Fund Benefit Administrators
On 29 July 2021, the FSCA published FSCA Communication 13 of 2021 inviting public comments on the Draft Conduct Standard – Conditions prescribed for Pension Fund Benefit Administrators.
In terms of section 13B(1) of the Pension Funds Act, the FSCA may prescribe conditions for persons who, on behalf of a pension fund, administer the receipt of contributions or the disposition of benefits provided for in the rules of a fund. Currently, the conditions are prescribed in Board Notice 24 of 2002 (BN 24). According to the FSCA, there is a need to strengthen the existing regulatory framework set out in BN 24.
The FSCA’s Statement Supporting the Draft Conduct Standard (the Statement) states that since the publication of BN 24 there have been significant policy and regulatory developments impacting the broader approach to regulating the financial sector. According to the Statement, the regulatory framework governing benefit administrators as set out in BN 24 is one of the frameworks that has, to date, not sufficiently evolved to adapt to the broader developments of Treating Customers Fairly (TCF), the FSB’s (as it then was) 2014 Retail Distribution Review along with the outcomes set out in other financial sector laws supervised by the FSCA.
To this end, the draft Conduct Standard attempts to strengthen the existing framework governing benefit administrators in order to ensure that, amongst other things, specific fundamental conduct areas are addressed. The draft Conduct Standard not only repeats some of the conditions that are currently prescribed in BN 24 but also expands and improves on the conditions.
Some of the conditions that are currently prescribed in BN 24 that are repeated include conditions relating to content and termination of administration agreements, appointment of auditors, maintenance of current assets and liquidity, indemnity and fidelity guarantee insurance and trust accounts.
New conditions that have been added include business principles, culture and governance principles, fit and proper requirements relating to directors, senior managers and head of control functions and more detailed requirements for administration agreements.
The Statement states that the draft Conduct Standard is likely to improve administration services by benefit administrators and would lead to better outcomes for their retirement fund clients, as well as the members of such retirement funds.
Importantly, the FSCA acknowledges that it is inevitable that the additional requirements will have a cost implication on benefit administrators due to additional administrative burden and compliance costs. The FSCA is, however, of the view that the potential additional costs will not be exorbitant and that such costs are justified in the context as the expected outcomes and benefits envisaged as a result of the introduction of the new requirements outweighs the potential cost implications. Commentators are therefore requested to specifically provide input by clearly identifying the risks, benefits and potential impact of the draft Conduct Standard, which will be analysed to further understand the anticipated costs and other impacts of implementing the draft Conduct Standard once it becomes effective.
After becoming effective, all benefit administrators will be required to comply with the draft Conduct Standard.
Draft Tax Law Bills
National Treasury released the draft 2021 Taxation Laws Amendment Bill and the draft 2021 Administration Laws Amendment Bill on 28 July 2021 for public comment by 28 August 2021.
The noteworthy proposals are as follows:
Allowing members to acquire more than one annuity on retirement
Background:
The Income Tax Act determines that annuities must be provided, and in some instances may be provided with a member’s benefit in a fund, for instance when a member of a pension fund retires, an annuity or pension must be provided with at least 2/3 of the member’s value of the benefit. In a provident fund, at least 2/3 of the benefit accumulated after 1 March 2021, must also be used to provide a pension.
The established practice is that the fund pays the annuity, or that an annuity be purchased with an insurer. This was set out in SARS’ General Note (GN) 18, which provided that a retirement fund may provide an annuity to a retiring member by means of three methods, i.e.:
- the fund to pay the member directly (an in-fund annuity);
- purchasing the annuity in the name of the fund; or
- purchasing the annuity in the name of the retiring member.
However, in terms of GN18 a member could not choose a combination of an in-fund annuity and an annuity purchased from an insurer.
GN 18 was withdrawn in February 2021, which means that a member may now choose a combination of an annuity provided by the fund and an annuity purchased from an insurer. But it also means that the established practice is not documented or prescribed anywhere.
Proposal:
Clarification will be made in the Income Tax Act that a combination of annuities may be purchased or provided. Members will therefore be able to use their retirement benefit to purchase a combination of living and guaranteed/life annuities. These annuities may be provided by the fund, it may be purchased from an insurer, or through a combination of those methods.
The full remaining value of a living annuity may be paid in a lump sum when the value at any time becomes less than an amount prescribed by the Minister of Finance, which is currently R125 000 (this is known as the de minimus amount). To avoid the splitting of annuities in order to make use of the de minimus rule, it is proposed in the tax law bills that if a person purchases more than one annuity with the retirement benefit, each annuity’s value will have to be at least R165 000 when it is purchased. The proposed effective date of the changes is 1 March 2022.
Transfers between retirement funds by members who are 55 years or older
Background:
Members of retirement funds have the option to delay receipt of their retirement benefits to a date later than their actual retirement from employment. The reason for this is because retirement benefits only accrue for tax purposes when a member elects to start receiving the retirement benefit. Therefore, a member’s retirement benefit may be deferred in his/her fund for as long as allowed in the fund rules.
In 2017 and 2019 the tax laws were amended to allow deferred retirees to transfer their benefits tax-free to a retirement annuity fund, or to a preservation fund after their actual retirement from employment, but before they elected to receive their retirement benefit from the fund.
As a result of those amendments, the tax legislation unfortunately now provides that in the event of a member of a preservation fund who makes a transfer to another preservation fund after the age of 55, the transfer will be subject to taxation.
Proposal:
The tax policy is not to tax those transfers and National Treasury aims to rectify the position by allowing tax-free transfers between preservation funds after members have reached the age of 55. The proposed effective date is 1 March 2022.
Clarifying the calculation of the fringe benefit in relation to employer contribution to a retirement fund
Background:
With effect from 1 March 2016, employer contributions to a retirement fund constitute fringe benefits and are taxed as such in the hands of employees. Members are entitled to a tax deduction on employer and own contributions to a pension, provident and retirement annuity fund of up to 27.5% of the greater of their remuneration or taxable income.
In respect of funds that are pure defined contribution funds, the fringe benefit equals the value of the amount contributed by the employer.
In respect of funds that are not pure defined contribution funds, a formula was created to determine the value with which a member’s benefit has increased during the tax year. That amount is considered to be the member’s fringe benefit. The employer therefore uses a factor which is provided in the contribution certificate by the valuator to calculate the fringe benefit.
In respect of defined contribution funds that have self-insured risk benefits, the wording in the Income Tax Act will classify the contributions made to the fund as a defined benefit category, meaning the prescribed formula has to be used to calculate the fringe benefit.
Proposal:
Treasury proposes that self-insured risk benefits are classified as defined contribution benefits, meaning the fringe benefit will be based on the actual contribution made to a fund. The proposed effective date is 1 March 2022.
Tax treatment of pensions where remuneration is paid from more than one employer
Background:
Changes were introduced in the 2019 tax law amendments to ensure that in a case where a pensioner receives two or more sources of employment income, provided that one of those sources is a retirement fund or an insurer paying a pension, the tax rebates applicable to the income from a retirement fund or insurer are not taken into account when employees’ tax (PAYE) in respect a specific year of assessment is determined.
This means that the rebate which taxpayers are entitled to, will only be applied once during the tax year and not on both income streams, which in the past resulted in the pensioner having a tax liability in excess of the PAYE withheld by the employer and the retirement fund or insurer during the year of assessment. The tax liability may also exist as a result of the aggregation of all income streams which pushes the taxpayer into a higher tax bracket.
The initial effective date of this change has been extended to 1 March 2022.
Various concerns and uncertainties still existed regarding this proposal, one being that administrators will not know which pensioners/annuitants have more than one source of income subject to PAYE withholding and that it will create an administrative burden to establish that from pensioners.
Proposal:
It is now proposed that SARS will consider all the affected taxpayers and provide the tax rate, which will be a fixed percentage. SARS will then issue tax directives before the end of the tax year to the entity paying the pensions (the administrator of the fund or the insurer), instructing the tax rate at which PAYE must be calculated. This provision will also apply to all living annuities and guaranteed annuities provided by insurers.
Applying tax on retirement fund interest when an individual ceases to be a tax resident
Background:
When a member of a retirement fund ceases to be a South African tax resident before he/she retires and becomes a tax resident of another country, the member’s benefit may be subject to tax in another country due to the provisions of certain double tax agreements. The application of a tax treaty between SA and the new tax resident country may in some instances result in SA forfeiting its taxing rights.
Proposal:
It is proposed that when a member of a retirement fund ceases to be a SA tax resident, it will be deemed that the member has withdrawn from the fund on the day before he/she ceases to be a SA tax resident as defined. Those benefits will therefore be subject to tax in SA at the prevailing withdrawal or retirement tax rates and the value of the benefit will be determined on the day before SA tax residency is ceased. The onus of ensuring a valuation from the fund on that date, as well as notifying SARS that they have ceased being a SA tax resident, will rest with the member.
Therefore, the tax will be calculated as if the member had withdrawn from the fund the day before ceasing to be a tax resident and will be based on the prevailing retirement fund lump sum tax tables. The payment of the tax will however be deferred until the lump sum payments are made by the fund and will then be deducted from the lump sum payable to the member. Late payment interest is proposed to apply to the tax payable, from the date before tax residency is ceased until payment of the benefit is made to the member.
Early access to retirement savings
This proposal was not included in the draft tax law bills, but it was mentioned in the media releases when the tax law bills were released. The Minister of Finance said that National Treasury is still in discussions with NEDLAC on allowing early access to retirement savings and is drafting the framework.
The current discussions pertain to the following:
- Government is considering a two-bucket system, one bucket consisting of 1/3rd of a member’s benefit and the other bucket of 2/3rds of the member’s benefit. The 1/3rd bucket will allow for pre-retirement access during emergencies and the 2/3rd bucket will have to be preserved until retirement. Access to the 1/3 bucket will only be allowed under very specific and limited circumstances and will work similar to a savings account, where members will be allowed to withdraw from, but by discouraging members from withdrawing by applying the cumulative effect of tax on those withdrawals. In other words, the more a member withdraws, the more tax he/she will pay on it.
- Compulsory preservation of the 2/3rd bucket even on leaving of employment before retirement is being considered.
Therefore, the implementation of P-day is re-introduced, which is a long-term strategy of Treasury, with the early access provisions as a carrot and stick approach.
- Pension funds, provident funds and retirement annuity funds are currently under discussion, and Treasury said that they are not at the moment considering allowing early access in the Government Employees Pension Fund.
The framework to allow for early access will be finalised by the end of 2021 and it will be effective by the earliest in 2022. The implementation of these proposals will take time because of prior consultation that must take place, legislation that will have to be amended, rule amendments that will have to be implemented and changes made to administration systems.