By Kobus Hanekom – Head: Strategy, Governance and Compliance
The second draft of the proposed retirement funds default regulations was gazetted by National Treasury on 23 December 2016. “Final” public comment is invited by 28 February 2017. Indications are that, the regulations may be implemented as early as 2018.
These regulations follow on the 2011 National Treasury paper, Charges in South African Retirement Funds. The first draft was published on 22 July 2015 and a process of engagement with key stakeholders followed.
The regulations seek to ensure that retirement savings of South Africans are invested in a prudent and cost-effective manner, that members enjoy value for their money and will be able to retire more comfortably.
It re-emphasises that retirement fund boards, have the responsibility to protect the interests and investments of pension fund members during and post the accumulation stage.
Significant changes introduced
To their great credit, National Treasury implemented many of the industry comments and proposals. The revised draft regulations are much less restrictive, more principle based than rule based and will therefore be easier to implement.
Some of the more significant changes include:
- The prohibition on guaranteed funds and performance fees were abandoned.
- Passive and active investment strategies to be assessed equally.
- Appointment of a counselor replaced with the requirement to provide counselling services.
- The automatic ‘pot-follows member’ requirement on withdrawal has been abandoned. The members will have to decide if they want to transfer their paid-up benefits to their new employer’s fund.
- Automatic default annuity has been abandoned in favour of an “opt-in”, annuity strategy.
- Both in-fund and out-of-fund annuities are eligible as part of the annuity strategy, provided that prescribed principles are complied with.
- Default regulations are significantly reduced and simplified.
The proposed defaults
1. Default investment portfolio
Pension and provident funds (in respect of any DC component) will have to amend their rules to provide for a default investment portfolio (DIP).
The DIP may differ for the members in different membership categories. The composition of the portfolio for members in one membership category (e.g. those who are invested in a life stage strategy) may differ from member to member based on the following factors, i.e. the age or likely retirement date of the member, the value of the retirement savings of the member in that fund, and the actual or expected retirement funding contributions of the member.
Regulation 28, compliant portfolios will qualify in principle. Special requirements are envisaged in respect of guarantees and performance fees.
The duties of the board include the duty to ensure, and be able to demonstrate to the Registrar on request, that any default investment portfolio is appropriate for the members who will be automatically enrolled into that portfolio. The design of a DIP, (high-level objective; underlying asset allocation; fees and charges; and the expected risks and returns) must, as far as is reasonable, take account of the likely characteristics and needs of that category of fund members.
In addition, the board have to ensure; proper communication, cost efficiency, the impact of all fees and charges on members’ actual and prospective benefits are disclosed, no loyalty bonuses or other complex fee structures and a regular review.
2. Default preservation and portability
The rules of pension and provident funds will have to be amended to provide for members who terminate service before retirement to become paid-up in the fund, until the fund is instructed by the member to pay out or transfer the benefits.
Such members must be presented with a paid-up membership certificate within two (2) calendar months. Investment fees and charges must remain the same and the administration fees for paid-up members must remain substantially similar. No fees may be charged as a direct consequence of a member becoming a paid-up member.
The fund rules should specify that in respect of paid-up members, no new contributions to the fund are permitted, no deductions may be made in respect of risk benefits, and members must be given access to retirement benefits counselling before any withdrawal benefit is paid to them or any transfer is made on their behalf to another retirement fund.
Portability: The rules of the fund must allow for transfers to the fund from another fund. The fund must within four (4) months of a member joining the fund, obtain a list of all paid-up membership certificates in respect of any retirement savings of that member, request whether the member wishes these benefits to be transferred into the fund; and if the member so elects, arrange the transfer of all such retirement savings into the fund without levying a charge on such amounts in respect of the transfer
DB fund rules will also require an amendment to the effect that on preservation, a defined benefit amount of a member who withdrew from service may be converted to a defined contribution component and be preserved as such.
3. Annuity strategy
The rules of pension, provident, retirement annuity and preservation funds must provide for the board to establish an annuity strategy. Members will be able to take guidance from the strategy and can opt–in should they wish.
Boards must ensure, and be able to demonstrate to the Registrar on request, that a proposed annuity that forms part of the fund’s annuity strategy, is appropriate and suitable for the members who will be enrolled into it.
As far as is reasonably ascertainable the Board must consider: 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 the death of a member enrolled into the proposed annuity.
The Board will have to ensure that the proposed annuity is communicated to members, that the fees and charges are reasonable and competitive and that their impact on members’ benefits are disclosed. Members must be given access to retirement benefits counselling not less than three (3) months before their normal or selected retirement.
- Living Annuities: Living annuities can be paid from the fund or through a fund owned policy provided that in each case, the investment choice is limited to four (4) investment portfolios and drawdown levels are compliant with the accepted industry standard. The funds must monitor the sustainability of the income drawn by retirees and make such members aware if their incomes are deemed not to be sustainable.
- In-fund pensions: An in-fund pension can be non-guaranteed.
- Out of fund annuities: Guaranteed annuities provided by a long-term insurer may be provided as a proposed annuity, subject to such conditions that the Registrar may prescribe.
We have embraced the default benefit strategies and have incorporated them into our benefit structure approach over the past decade. Many of our clients have already adopted the strategies with very positive results.
National Treasury has gone out of their way to rework the default regulations in order to remove obstacles and facilitate implementation in a cost effective way. We will work with them to address the remaining concerns.
Having said that, this development constitutes something of a watershed moment for many funds. It will require funds to expand their benefit structure to include retail type benefits in respect of former members with whom they have no further contact. Many stand-alone funds are understandably concerned about the additional risks and responsibilities they are required to deal with.
In contrast, top umbrella funds such as the Sanlam Umbrella Fund implemented such defaults within months of the changes to paragraph 4 of the Second Schedule of the Income Tax Act in March 2015. For umbrella funds it is a business imperative to offer their clients the most attractive, convenient and cost effective benefits – not just while they are employed by a participating employer, but at any stage thereafter. The more attractive the fund’s benefit structure is, the greater the opportunity to grow and offer benefits of scale.
The world of work is changing along with advances in technology and the changing needs and behaviours that flows from interconnectedness. Retirement fund benefit structures need to adjust and adapt.
We are developing strategies to make sure that our umbrella fund clients, as well as our stand-alone clients will not only be able to comply with the new default regulations but implement the defaults in a way that will enhance the value of their fund membership and give them even more assistance and support in achieving good retirement outcomes for their members.