January 29, 2021

1 of 2021

The Institute of Retirement Funds Africa (“IRFA”) annual conference

The annual conference of the IRFA was held in November 2020 and was focused on investments.

It was pointed out that several papers have been published dealing with infrastructure (real assets such as bridges and roads) and impact investing, namely:

  • National Treasury’s paper on “Economic Transformation, Inclusive Growth and Competitiveness: Towards an Economic Strategy for South Africa”;
  • The ANC’s discussion paper on “Reconstruction, Growth and Transformation: Building a New, Inclusive Economy”;
  • Business for South Africa’s paper on “A New Inclusive Economic Future for South Africa: Delivery an Accelerated Economic Recovery Strategy”; and
  • Government’s “Economic Reconstruction and Recovery Plan”.

There are several retirement funds that want to invest in infrastructure, but the availability of opportunities is lacking.  To resolve this, government can consider:

  • adding infrastructure as a separate asset class,
  • increasing limits on unlisted investments, or
  • encouraging direct investments by retirement funds into infrastructure.

Retirement funds need to adapt to a changing world. Previously, retirement fund investors were only concerned with the risk and return of their investments, but this is changing to risk, return and impact.

Olano Makhubela, Acting Commissioner of the FSCA, remarked that government is still working on the creation of the national social security fund, but due to the size and complexity, an interim solution could be for smaller funds to join commercial umbrella funds, or to consolidate into large stand-alone funds.

He added that debate has moved away from prescribed assets for the time being, to a focus on infrastructure investment via Regulation 28.  Retirement funds have the financial muscle to influence how companies handle the environment, its workers and government structures.

Draft Financial Inclusion Policy

On 28 October 2020, National Treasury published the first draft of the Financial Inclusion Policy Paper on “An Inclusive Financial Sector for All” for public comments. This follows a policy document published in February 2011 entitled “A Safer Financial Sector to Serve South Africa Better”, which set out a new regulatory framework for the financial sector and identified financial inclusion as one of the key policy objectives.

Financial inclusion refers to the delivery of financial services at an affordable cost to the majority of the population who are historically excluded, or under-served by the formal financial sector.

Government acknowledges that the nature and extent of financial exclusion in South Africa poses a significant social and economic challenge and warrants a dedicated policy response.

This policy document focuses on access and usage of financial services by the South African adult population, defined as people who are 16 years old and above and living in South Africa, with an emphasis on lower-income individuals and Small, Medium and Micro Enterprises (SMMEs).

The classes of financial services include the following five product categories that meet South Africa’s basic financial needs:

  • Transactional accounts have become the anchor product for participating fully in the economic and social life of a modern society. It is therefore critical for the banking sector to provide needs-oriented and affordable transactional accounts with full-service capabilities to the financially excluded.
  • Credit is critical for individuals and SMMEs in financing productive capacity and smoothing consumption. The key policy objective is to ensure that there is responsible access to credit to ensure economic development, by ensuring the sustainability and growth of SMMEs and improving the quality of lives of individuals and households.
  • Insurance provides a cushion against costly and unforeseen life events and as a result, is particularly important for low-income and other vulnerable segments of the population.
  • Savings products are important, as they allow a person to spread their income over lean earning periods, as well as for the accumulation of wealth for the future acquisition of services and goods.
  • Remittances, both domestic and cross-border, are crucial mechanisms for channelling funds to low-income and vulnerable households, including immigrants working in South Africa and people in rural areas. It is often the first use of financial services by individuals and the entry point for the use of additional financial services.

Policy pillars for financial inclusion

The policy document assesses the current state of financial inclusion in South Africa, puts forward general principles to guide sustainable improvement in financial inclusion, and embeds those principles in specific pillars.

  1. Pillar One – Deepen financial inclusion for individuals by improving the beneficial use of financial services for the newly included.
  2. Pillar Two – Extend access to financial services for SMMEs.
  3. Pillar Three – Leverage a more diversified provider and distribution base.

Once public comment has been received on the policy paper, a national financial inclusion strategy will be developed during 2021.

 Financial Sector Conduct Authority (FSCA) annual report

The retirement funds supervision division of the FSCA is mandated by the Pension Funds Act to license and supervise retirement funds.  The division consists of four departments, namely: conduct supervision (fund rules, onsite inspections and fund governance), prudential supervision (transfers and terminations, investments and fund performance, and financial statements), authorisations and reviews (registration of rules, exemptions and principal officers) and fund governance and trustee conduct.

The FSCA also engages with industry bodies such as the Institute of Retirement Funds Africa, Pension Lawyers Association and Batseta, as well as meeting with trustees, principal officers, auditors, investment managers and benefit administrators, when necessary.

During the review period, the FSCA found the following to be of concern during onsite inspections:

  • Boards of management not being properly constituted;
  • Failure by funds to monitor compliance with section 13A (timeous payment of contributions);
  • Failure to comply with Directive 8 (conflicts of interest);
  • High expenses and remuneration of board members;
  • Funds being managed in terms of unregistered rules;
  • Failure to submit financial statements and valuation reports on time; and
  • Failure by principal officers to execute their duties.


  1. The FSCA will continuously improve the Trustee Toolkit to equip board members with basic knowledge and competencies.
  2. Governance of commercial umbrella funds will continue to be enhanced without creating excessive administration for funds, employers or the regulator.
  3. The appointment of service provider employees as principal officers continues to be an undesirable practice and is not supported by the FSCA.
  4. An Agreed-Upon-Procedure is being finalised with input from the auditing profession and retirement fund industry with regard to the deregistration of funds with no assets or members. Twenty-five funds erroneously deregistered have been reinstated.   As at March 2020, there were 5 124 registered retirement funds of which only 1 452 are active funds.
  5. Total membership of retirement funds in South Africa is at 17 million, of which 11 million are active members and 6 million are pensioners, deferred pensioners, unclaimed benefit members or dependants of deceased members.

Foreign exposure limits for retirement funds remains unchanged

It was announced in the medium-term budget that Government will introduce measures to re-classify as domestic all foreign classified debt, derivatives and exchange traded instruments that are inward listed on South African exchanges and traded and settled in Rand. Following the announcement, Exchange Control Circular 15/2020 was issued by the South African Reserve Bank (SARB).

The FSCA then issued Communication 53 of 2020 on 13 November 2020, explaining that the approval process in respect of inward listing still applies and that Financial Sector Conduct Laws that may be affected will be evaluated. The FSCA advised in the communication that further guidance will be provided, and no presumptions should be formed.

Hereafter, a joint media statement was issued by National Treasury, the SARB and the FSCA, advising that the Circular issued by SARB is suspended with immediate effect and that the Circular will be reviewed. The dispensation as before Circular 15/2020 therefore remains unchanged.

FSCA Information Request 5 of 2020

FSCA Information Request 5 of 2020, issued in November 2020, states that funds and administrators that apply for the cancellation of the registration of a fund which has ceased to exist, should in addition to the application for cancellation, submit a “Report of Factual Findings” by an auditor in accordance with Annexure A of the Information Request. This applies to applications for cancellation submitted from 1 January 2021. Compliance with the request is compulsory and any failure to do so will constitute an offence, with a fine not exceeding R1 000 for each day during which the offence continues.  Any application for the cancellation of a fund submitted to the FSCA before 1 January 2021 will still be considered in accordance with Information Circular PF No. 2 of 2017.

FSCA Guidance Notice 2 of 2020 (release of old section 15B surplus as a result of recent court cases)

On 10 December 2020 the FSCA issued FSCA Guidance Notice 2 of 2020 following the declaration of invalidity of Regulation 35(4) of the Pension Funds Act by the Supreme Court of Appeal (“SCA”) [summarised in the In Perspective 4/2020]. Regulation 35(4) prohibits the release of a portion of assets backing unpaid surplus liabilities, unless it is paid to the former member, unclaimed benefits fund or the Guardian’s fund.

The SCA held that Regulation 35(4) has a negative effect on the board’s discretion, by compelling the board of management to place a surplus enhancement benefit of an untraceable former member into a contingency reserve account specific for that purpose in perpetuity.

The FSCA and National Treasury have reached a joint decision not to appeal the decision of the SCA.

FSCA’s position on the judgment

The FSCA remains of the view that retirement funds have an established obligation to former members to whom surplus has been allocated and that the monies ought to not be released from the contingency reserve account. The FSCA accepts the SCA’s judgment but holds the view that should part of the assets underlying the surplus obligations be released, it should be done in a prudent manner that does not affect the future solvency of a fund.

FSCA’s guidance and expectation

In the Notice, the FSCA sets out what would constitute ethical, prudent and responsible practices by a fund when they consider releasing a portion of the assets backing unpaid surplus liabilities.

Boards are reminded of their fiduciary duties as set out in section 7C and in particular section 7C(2)(f) of the Pension Funds Act and in addition are required to observe the utmost good faith and exercise proper care and diligence with regard to the assets of their funds, as set out in section 2 of the Financial Institutions (Protection of Funds) Act of 2001.

The FSCA, with consideration of the SCA judgment, considers the guideline as a necessary safeguard to ensure that boards act in a manner that does not prejudice former members.

Should the fund consider releasing a proportion of the assets backing the unpaid surplus liabilities, the board would need to consider the risks to the fund and the practical implications.  Funds must carefully consider the release of such assets to meet these obligations into a former member surplus apportionment account.

It would be prudent for management boards to only take decisions to release any assets having regard to the following:

  1. the board must be able to illustrate the steps taken to identify and trace unclaimed former members within a reasonable period prior to the release of the assets. Reliance on historic and outdated tracing exercises will be considered by the FSCA as insufficient. Boards would have to rely on more modern methods to trace members;
  2. boards should be able to motivate the assumptions used in determining the assets to be held in respect of the unpaid surplus allocations;
  3. as the full obligation will remain, but the assets will be reduced, there is a risk that the retained assets will be insufficient to cover the claims of possible members coming forward in the future. Boards should therefore provide for the way the liability will be met, which should be reflected in the rules; and
  4. in the event that the fund might need to transfer the obligation and assets to an unclaimed benefit fund (for instance when the central unclaimed benefits fund is established as proposed in the Conduct Of Financial Institutions Bill), the unclaimed benefit fund may not be prepared to accept the transfer where the value of the assets is less than the full value of the unclaimed assets. The board should then indicate its plan of action when submitting its valuation report to the FSCA.


Q: When does a board member’s relationship with a service provider create a conflict of interest?

A: FSCA PF Circular 130 and the King IV Report on Corporate Governance for South Africa warn board members that conflicts of interest exist in circumstances where the interest of the board member will place them in conflict with the interest of the fund. Such conflicts must be avoided or identified and declared by board members in order to fulfil their duties as set out in Section 7C of the Pension Funds Act.

Examples of where conflicts of interest could exist include:

  1. A board member earns undeclared income or benefits as a result of his/her position as board member.
  2. The wife/husband or close relative of a board member has a contract for providing commercial services to the fund, or is appointed as service provider to the fund.
  3. A board member accepts gifts or benefits personally from the hospitality provided by service providers to the fund, such as invitations to restaurants, tickets to sporting events, business class flights etc.

Avoiding conflict of interest

The board member should excuse themselves from all deliberation and decisions regarding the issue from which the conflict of interest arose, for instance the appointment of a service provider.

Managing conflict of interest

If a board member is uncertain whether a circumstance constitutes a conflict of interest, the board member should declare the potential conflict of interest in writing to the chairperson of the fund.  The board member should explain the nature, reasons and likely impact of the conflict.

A schedule of conflicts, per board member, should be maintained by the fund and regularly updated and distributed to the board of management. Where necessary, it could also help to discuss identified circumstances of potential conflict with the fund’s legal counsel.


If the conflict of interest cannot be avoided or managed, the board member should resign from office.

Where conflicts are not declared by a board member, the board member could face being removed from their position, or litigation in court.