Conduct Standard on section 13A (payment of pension fund contributions)
The FSCA issued Communication 2 of 2022 on 15 February 2022 in which it announced that the draft Conduct Standard on requirements related to the payment of pension fund contributions has been submitted to Parliament.
The draft Conduct Standard in summary provides the following:
- Employer establishing or participating in a fund
At commencement of participation and annually thereafter, every employer must be notified by the fund of its duties, obligations, and liability under section 13A of the Pension Funds Act (the Act). The format of the requested information required from the employer as to who will be personally liable for compliance and payment of contributions, will be prescribed by the FSCA.
- Contribution statement
The minimum information which must be furnished to the fund by the employer are listed in the Conduct Standard. In respect of the initial statement, the following new information (in addition to current requirements) must be provided:
- The contact person at the employer or pay-point responsible for dealing with enquiries relating to contribution statements and the payment of contributions;
- The identity of the person envisaged in section 13A(8) of the Act to be personally liable, as requested from the employer by the fund;
- Income tax number of each member;
- Contact number of each member;
- E-mail address of each member;
- Postal address of each member;
- Residential address of each member.
The subsequent statement must include all of the above plus each member’s membership number and any changes from the previous statement.
The employer must provide a declaration that all employees eligible to be members of the fund are accurately reflected in the minimum information.
- The administrator must, within 15 days after the minimum information (the contribution statement) was due, report to the principal officer (PO) or monitoring person regarding compliance with section 13A. The report must include details on previously unresolved matters and where the minimum information and actual contributions do not reconcile (unless the discrepancy is less than 2.5% of total contributions payable).
- The PO or monitoring person must, within 7 days of receipt of the report in (1), report to the board of management regarding compliance with section 13A.
- The board of management must then ensure that any contravention is brought to the personal attention of each affected member, in writing. Where affected members cannot be identified, it must be brought to the attention of all the members of the fund or all members of the specific participating employer within 30 days of the report in (2).
- The board of management must also, within 30 days of the report in (2), report to the FSCA the proposed course of action to remedy the contravention, in the format as prescribed by the FSCA.
- Any material contravention that continues for 90 days, must be reported to the SAPS within 14 days after the 90 day-period, in the format prescribed. This continued contravention must also be brought to the attention of the affected members, in writing, within 14 days after the expiration of the 90 day-period. Where affected members cannot be identified, it must be brought to the attention of all the members of the fund or all members of the specific participating employer.
Compound interest on late or unpaid amounts will be prescribed at prime rate plus 2% and may not exceed the principal debt due in respect of the unpaid amounts, inclusive of all costs in recovering the unpaid amounts. The current prescribed late payment interest rate will be repealed.
Interest shall constitute investment income for the fund and is payable by no later than the end of the second month following the month in respect of which the amount is received, or the value is transferable.
Where the recovery of arrear contributions is outsourced to an attorney, the board must have regard to and avoid possible conflict of interest. Fees must be reasonable and may not impede the delivery of fair outcomes to members and the fund. The board must enter into an agreement to ensure that the recovered amounts must be paid into the fund’s bank account within 7 working days of receipt thereof. The agreement must also include the fee structure, the steps to be taken if the employer fails to pay, anticipated timelines and the frequency of reporting to the fund.
- Effective date
The Conduct Standard will come into operation 6 months after the date of publication of the final Conduct Standard or on a later date as published at the time.
The implementation of the Conduct Standard will repeal the current Regulation 33.
Foreign exposure limit increase for retirement funds
In terms of Regulation 28 of the Pension Funds Act, the total exposure to foreign assets in a retirement fund expressed as a percentage, must not exceed the maximum allowable amount that a fund may invest in foreign assets as determined by the South African Reserve Bank.
The previous maximum limits for retirement funds were set at 30% with an additional 10% allowance in Africa.
Following the announcement of the increased limit for foreign exposure in the Budget, the Reserve Bank prescribed the new foreign exposure limit in Exchange Control Circular No 10/22. The offshore limit for all insurance, retirement and savings funds is harmonised at 45% with no specific Africa limit.
As a result, it is not necessary for Regulation 28 to be amended and the new limits came into effect on 23 February 2022.
Draft FSCA Strategy for Promoting Financial Sector Transformation
In its Budget Review released on 23 February 2022, National Treasury indicated that the FSCA will publish its transformation strategy which will outline the FSCA’s approach to promoting financial sector transformation within its existing policy framework. To this end, the FSCA has released for public comment its draft Strategy for Supporting Financial Sector Transformation.
The document aims to:
- outline the FSCA’s approach to promoting financial sector transformation within the existing policy framework, including the Financial Sector Regulation Act (FSR Act); and
- outline an approach for the FSCA to promote transformation under the proposed Conduct of Financial Institutions (COFI) Act.
According to the document, the promulgation of the COFI Act, together with the consequential amendments to the FSR Act, are expected to provide the FSCA with the enabling framework to set requirements related to transformation on all financial institutions (which includes retirement funds) and to supervise and enforce these requirements. Due to the fact that the development of the legislative framework that will specifically empower the FSCA to promote transformation is still underway, the FSCA is adopting a two-phased approach to promoting transformation. Phase 1 will focus on the role that the FSCA will play within the current legislative framework, that is the FSR Act, B-BBEE Act and the Financial Sector Code. Phase 2 will focus on the role that the FSCA will play within the COFI Act legislative framework. The two phases are summarised as follows in the document:
- Engaging with financial institutions on existing transformation plans and the extent to which targets
- identified in the plan are achieved;
- Improving availability and quality of transformation data, especially in relation to ownership;
- Build strong co-operative relationships with the FSTC and the B-BBEE Commission;
- Coordinate supervisory transformation initiatives with the PA;
- Support initiatives of Nedlac and the FSTC related to financial sector transformation;
- Support small businesses in the financial sector;
- Developing regulatory frameworks that promote transformation of the financial sector;
- Internal readiness for Phase 2.
- Subject to the final approved framework for transformation in financial sector laws, undertake regulatory and supervisory actions to promote transformation, including requiring transformation plans that target specified minimum B=BBEE levels;
- Regular engagement with the FSTC and B-BBEE Commission;
- Continual evaluation of the effectiveness of legislative frameworks and their application.
Key proposals in the 2020 draft COFI Bill that relate to transformation include:
- promoting transformation is made an explicit function of the FSCA in the FSR Act and standard setting powers in relation to transformation are given;
- the COFI Bill requires entities to promote transformation in a manner reasonably consistent with its transformation plan, which plan should be aligned to the achievement of tangible targets informed by the targets in the Financial Sector Code; and
- the revised draft also allows for the FSCA to issue directives in relation to transformation plans and clarifies that the FSCA may use its supervisory and enforcement powers to ensure that a financial institution’s governance frameworks – including in relation to transformation – are adequate and adhered to.
Once the COFI Act is implemented, the FSCA will be empowered to set direct requirements on financial institutions relating to transformation and supervise compliance with these.
Transformation plans of financial institutions should demonstrate how the entity will ultimately meet the targets set out in the Financial Sector Code. Given the levels of transformation of the financial sector currently, it is envisaged that all financial institutions with an annual revenue of over R10 million should reflect a B-BBEE Level 4 score or have in place a transformation plan that demonstrates how they will reach this level within five years.
Where entities are already at B-BBEE Level 4 or above, the FSCA will engage with financial institutions on an individual basis to determine their achievement of the various elements of the scorecard.
Where transformation plans are deemed to be inadequate, the FSCA can engage with financial institutions to consider how plans can be improved.
Actions that can be considered where financial institutions fail to meet the targets identified in their transformation plans could include:
- meeting with the board of the institution and engaging on the importance of transformation as a national imperative;
- requesting a remedial plan to address the shortcomings, which can take the form of an enforceable undertaking;
- issuing a directive for non-compliance with an enforceable undertaking; and
- issuing an administrative penalty for non-compliance with the COFI Act transformation requirements, an enforceable undertaking or directive.
It is important to note that the FSCA mandate would be limited to enforcing financial sector laws only, and not the B-BBEE Act or the Financial Sector Code, which are the responsibility of the B-BBEE Commission and Financial Sector Transformation Council respectively.
In line with the FSCA’s proportionate approach to regulation, the action taken will depend on the nature and severity of the transgression.
This draft FSCA strategy is released to invite comments from interested stakeholders by no later than 29 April 2022.
The National Treasury and FSCA Retirement Fund Economies of Scale report
Nedlac has commissioned a report to assist with the discussions on social security and retirement reforms. The Economies of Scale report on the Retirement Fund Industry of South Africa, has been published by the FSCA and National Treasury.
The report follows the 2011 report by Touna Mama et al. The first investigation considered the period 1996-2006, with the latest investigation spanning the period 2007-2018. It was found that the two periods have significant differences in terms of the total number of funds and average fund size, and it is clear that there was a consolidation of funds, which resulted in an improvement in the economies of scale of retirement funds.
The research, which is meant to assist Nedlac with its discussions on social security and retirement reforms, uses a dataset on retirement funds up to 2018 to study the relationship between their size and costs. Data used includes detailed information on administrative expenses, membership, assets, fund type, fund class, fund status, benefit structure, member contributions, and benefits paid.
The findings of the report show:
- A general decrease in the number of funds;
- An increase in the average fund size ;
- An increase in administrative expenses as a percentage of total assets for all fund sizes except for the largest funds, where this value has fallen;
- The optimal size of funds is 300 000 members and most funds in SA are below this optimal size, while only 0.4% are above this figure.
Additionally, the report also found that preservation funds are the most efficient funds, followed by umbrella funds with ordinary funds being the least efficient. Hybrid funds are the most efficient, followed by defined contribution funds, and defined benefit funds are the least efficient.
OPFA Communication 1 of 2022
On 29 March the Office of the Pension Funds Adjudicator (OPFA) issued OPFA Communication 1 of 2022 dealing with the reduction of the timeframe where the internal dispute resolution procedure has not been followed. This process allows a fund a period of 30 days to reach an amicable solution with a potential complainant, before the OPFA may investigate a complaint.
Where the dispute cannot be resolved using the refer-to-fund process, in the past the OPFA’s practice was to afford the respondents a period of 30 days to provide a formal response and if no response was received, a further period of 14 days. With effect from 1 April 2022, the OPFA has reduced this period for filing responses to 20 days and should a response not be issued, a further 10 days will be given.
What can a member do if the Adjudicator ordered the fund/employer to take a certain action or pay an amount to the member and they do not comply?
A: In terms of section 30E of the Pension Funds Act, the Adjudicator is empowered to make an order which any court of law may make. Section 30O in turn reads: Enforceability of determination (1) Any determination of the Adjudicator shall be deemed to be a civil judgment of any court of law had the matter in question been heard by such court and shall be so noted by the clerk or the registrar of the court, as the case may be. (2) A writ or warrant of execution may be issued by the clerk or the registrar of the court in question and executed by the sheriff of such court after expiration of a period of six weeks after the date of the determination, on condition that no application contemplated in section 30P has been lodged.
The member can therefore obtain a warrant of execution and send the sheriff to the employer to enforce the order.