July 30, 2019

3 of 2019

Financial Services Board annual report 2018

The 2018 report is the last annual report of the FSB and covers the last year of its operations, 1 April 2017 to 31 March 2018. The FSB ceased to exist on 31 March 2018 and was replaced by the Financial Sector Conduct Authority on 1 April 2018.

Noteworthy points regarding the retirement funds division:

162 on-site visits were conducted with funds and administrators. Significant matters identified during those visits were:

  • Boards not properly constituted in terms of section 7A of the Act and the fund rules
  • Administrators not adhering to their responsibilities as set out in the administration agreements
  • Failure by boards to monitor compliance with provisions of the Act, specifically section 13A and regulation 33
  • Expenses and remuneration of board members that are very high
  • Funds being managed in terms of unregistered rules
  • Failure by boards to timeously reapply for section 7B exemption prior to the expiration of the exemption
  • Failure by boards to timeously submit annual financial statements and valuation report

As at 31 March 2018, there were 5118 registered retirement funds in South Africa of which 1647 funds are active.

17 new funds were registered.

The number of beneficiaries for whom unclaimed benefits are held by various funds is 4 548 030 and amounts to R42 158 million. Since the implementation of the unclaimed benefits search engine, 7980possible matches have been identified, with an asset value of approximately R1 900 million.

The timely submission of financial statements is important in supporting proactive and pre-emptive supervision. Penalties have been issued for the late or non-submission of annual financial statements. Names of funds that fail to submit annual financial statements, along with their service providers, will be published as of 2018/19.

A high number of section 14 transfer applications had to be queried due to incomplete submissions or the poor quality of applications. Under the new dispensation of the FSCA, engagements with the affected administrators and funds will be continued to raise concerns regarding the applications and to improve the quality of submissions.

The process of revising Directive 6 will continue in order to clarify certain matters regarding section 14 transfers.

One of the objectives for the year ahead is to reduce the number of late, pending, and outstanding valuation submissions. Regular discussions with valuator firms will continue and further administrative penalties will be levied on late or outstanding actuarial valuation reports.


Sustainability of investments and assets in the context of a retirement fund’s investment policy statement

The FSCA (the FSB at the time) issued a draft directive for commentary on 29 March 2018 on sustainability reporting and disclosure requirements. The purpose of the draft directive was to enable the FSCA to monitor compliance with the important principles set out in regulation 28 of the Pension Funds Act and to enable stakeholders to ascertain compliance with it.

The draft directive was never made final and instead, the FSCA took the decision that a guidance notice was the more appropriate instrument in which to incorporate the content as it will enable flexibility. The FSCA, therefore, published a Guidance Notice on 14 June 2019 to assist boards of trustees of retirement funds to comply with regulation 28(2)(b) and regulation 28(2)(c)(ix). The purpose of the note is to provide guidance on how a fund’s investment philosophy and objectives seek to ensure the sustainability of its investments and assets and to set out the FSCA’s expectations regarding disclosure and reporting on issues of sustainability.

Sustainability is defined in the guidance note as the ability of an entity to conduct its business in a manner that primarily meets existing needs without compromising the ability of future generations to meet their needs. The sustainability of an asset implies the sustainability of the entity giving rise to the underlying asset.

The FSCA agreed to continue to refine the regulatory framework in respect of sustainability, which could lead to more detailed requirements being incorporated into prudential and/or conduct standards.

The guidance note suggests that a fund should reflect in its investment policy statement how its general investment philosophy and objectives seek to ensure the sustainability of its assets and must include:

  • When the investment policy statement was approved and by whom
  • How often the investment policy statement will be reviewed
  • How the fund intends to monitor and evaluate the ongoing sustainability of the assets it owns and which it is intending to acquire, including the extent to which environmental, social and governance (ESG) factors have been considered by the fund, and the potential impact thereof on the assets of the fund
  • The fund’s active ownership policy
  • That the sustainability considerations will be reflected in any investment mandate
  • The reason why any limitation of the application of ESG factors, sustainability criteria or the full application of an active ownership policy is to the advantage of both the fund and its membership
  • The remedial action the fund has taken or intends taking to rectify the position or the reasons why no remedial action is being considered or taken

Funds are also encouraged to:

  • Transparently disclose all matters relating to sustainability to stakeholders
  • Make its investment policy statement or an abridged version available on request and free to members and participating employers, If an abridged version is provided it will be acceptable if it only reflects those assets relating to the specific category of members, but the sustainability considerations in relation to those assets should preferably be included
  • Make the investment policy statement and the sustainability considerations available on the website and accessible to any person, whether or not a member
  • Provide a copy of or inform stakeholders on an annual basis that the investment policy statement is available on its website

In order for the FSCA to monitor compliance with regulation 28 and sustainability considerations, boards are encouraged to report the following in their annual financial statements:

  • How the fund’s investment policy statement reflects matters set out in this guidance note
  • Any significant changes in its investment policy statement during the reporting period, specifically including changes relating to sustainability considerations
  • Confirmation that every member who has requested a copy of the investment policy statement has been provided with such a copy
  • Confirmation of any change to the investment policy statement from the previous year, including specifically sustainability considerations
  • Assets held in compliance with this guidance note and the class of such assets as per schedule I of the financial statements
  • The value of the assets held in compliance with this guidance note.


Minimum skills and training requirements for board members of retirement funds.

The FSCA published the draft Conduct Standard on 22 May 2019 for comments.

Section 7A(3)(a) of the Pension Funds Act requires that board members of retirement funds must attain such levels of skills and training within six months after the board member’s appointment, as may be prescribed by the FSCA. Section 7A(3)(b) further determines that board members must maintain their skills and training throughout their term of appointment.

The draft Conduct Standard proposes that with effect from 1 January 2020 the certification of the Trustee Toolkit as provided by the FSCA on the website www.trusteetoolkit.co.za, be prescribed as the minimum skills and training requirement as envisaged in section 7A(3)(a) of the Act.

Board members will have to complete the final assessment under the supervision of the principal officer or the chairperson of the fund to ensure that the board member completes it without assistance.

The draft Conduct Standard proposes that it become effective on 1 January 2020. Board members appointed before 1 January 2020 will be required to complete the toolkit before 30 June 2020. Board members who completed it before 1 January 2020 will not be required to complete the certification again.

It is further proposed that board members who already attained the certification will be required to complete additional modules as and when such additional modules are added to the Toolkit by the FSCA.

The assessments can be done anywhere, therefore there will be no cost involved.


Draft Taxation Laws Amendment Bill

On 10 June 2019, National Treasury published an initial batch of the 2019 draft Taxation Laws Amendment Bill (TLAB). The complete 2019 draft TLAB will be published in mid July 2019 for public comment. In this initial batch of the draft TLAB the effective date of tax neutral transfers between retirement funds is aligned with the effective date of retirement reforms.

The Taxation Laws Amendment Act, 2018 postponed the effective date for the annuitisation requirements for provident funds from 1 March 2019 to 1 March 2021. In making changes to the effective dates, several consequential amendments were required, but one was inadvertently left out in paragraph 6(1)(a) of the Second Schedule to the Income Tax Act which makes provision for tax neutral transfers between retirement funds. In order to correct this, it is proposed that urgent changes be made to the Income Tax Act to align the effective date of the tax neutral transfers from pension to provident or provident preservation funds with the effective date of the retirement reform amendments, which is 1 March 2021.

PFA Exemption Notice No. 4 of 2019

The FSCA has published PFA Exemption Notice no. 4 of 2019 on 14 June 2019, which exempts certain funds in relation to specific participating employers under umbrella funds from the liquidation requirements of section 28 of the Pension Funds Act.

The specific participating employers are listed in Annexure A of the Notice, together with the relevant effective dates of the exemption.

PFA Exemption Notice No. 5 of 2019

The FSCA published PFA Exemption Notice No. 5 of 2019 on 4 July 2019, in terms of which certain funds are exempted from the requirements of section 9A and 16 of the Pension Funds Act. Section 9A deals with the appointment of a valuator and 16(1) with the statutory valuation requirements.

The exempted funds with the relevant effective dates and duration of the exemption are listed in Annexure A to the Exemption Notice.

Retirement Fund Standard – Effective annual cost (EAC) for individual fund members

The Association for Savings and Investment South Africa (ASISA) announced that members of umbrella retirement funds will as from October 2020 be able to assess the total impact of charges on their individual retirement benefits, when members of ASISA implement a new Retirement Fund Standard: Effective Annual Cost (EAC) for Individual Fund Members.

ASISA said that the significance of the new EAC Standard is that individual umbrella fund members will be able to review and compare charges on retirement fund products and then assess the impact on investment returns.

In terms of the new Standard, ASISA member companies administering umbrella retirement funds will have to communicate with fund members at least once a year, reminding them that they are entitled to request an EAC calculation.


Artificial withdrawals

Q: May a fund allow payment of a fund benefit to a member who resigned from employment only to be immediately re-employed again in order to enable the member to receive his/her fund benefit?

A: A transaction where a member of a pension or provident fund is allowed by the participating employer to artificially resign from employment with the express purpose of accessing his/her withdrawal benefit, whereafter his/her employment is immediately reinstated by the employer, could have very serious implications for the fund, because SARS views this type of transaction as a serious violation of the provisions of the Income Tax Act.

Allowing it could result in the withdrawal of the income tax approval of the fund. If SARS becomes aware of a questionable termination of employment and subsequent re-employment, it is likely to base its findings on the real intention underlying the transaction and not the way in which it is structured to circumvent the provisions of the Income Tax Act.