July 11, 2022

3 of 2022

 Financial statements

The Financial Sector Conduct Authority (FSCA) issued the following notices regarding financial statements:

Communication 12 of 2022 and FSCA RF Notice 5 of 2022 were issued on 14 April 2022 and deals with the exemption of funds from using certain prescribed formats for preparing financial statements.

The FSCA will replace the current board notice prescribing the format of financial statements with a prudential standard to incorporate the approved reports of the Independent Regulatory Board for Auditors (IRBA). The process of amending and replacing the board notice will however, take a number of months to finalise.

As a result, the FSCA exempts funds from using the prescribed reports on the condition that the IRBA’s revised report formats are used.

The effect of this approach is that any fund which –

  • submitted financial statements in accordance with IRBA’s revised report formats, after the IRBA effective date, can rely on the exemption and is therefore in compliance with the requirements of the current board notice; or
  • did not submit financial statements in accordance with IRBA’s revised report formats, after the IRBA effective date, would still comply with the requirements of the current board notice.

Communication 14 of 2022 was issued on 1 June 2022 and provides clarity on the FSCA’s view on and acceptance of the use of certain prescribed formats for preparing financial statements under section 15 of the Pension Funds Act, notwithstanding the exemption of funds from using certain prescribed formats published on 14 April 2022.

The exemption has exempted funds from using certain prescribed formats when preparing financial statements, on condition that the funds use the report format as approved by the Independent Regulatory Board Reports (IRBA) and this new format applied to all “Agreed-Upon Procedures” engagement letters signed on or after 1 January 2022.

According to the RF Notice 5 of 2022, the FSCA’s exemption applied to all financial year-ends after 1 January 2022. It came to the FSCA’s attention that some funds had completed most of their preparations for the Agreed-Upon Procedures engagement by the time the exemption was granted, and this has led to uncertainty and queries from these funds on whether the preparations will be accepted.

The FSCA will allow deviations from the specified sample selection criteria but will still expect compliance with the International Standard on Related Services 4400 (revised), Agreed-Upon Procedures Engagements.

In instances where funds delayed their preparations pending the revised illustrative Section 15 Retirement Fund Agreed-Upon Procedures reports in respect of the financial year-ends up to and including 31 March 2022, these funds may apply for an extension from the FSCA to submit their reports.

Pension Lawyers Association (PLA) Annual Conference

On 9 and 10 May 2022 the PLA hosted their annual conference. The following was of interest:

The FSCA’s emerging strategy for the retirement fund industry.

The FSCA’s Commissioner highlighted his office’s emerging strategy for the retirement fund industry and their recently published revised Regulatory Strategy which outlines their key priorities for the period December 2021 to March 2025, and allows their office to better fulfil its mandate.

FSCA’s key 5 strategic priorities for the next few years are to:

  • Improve industry practices to achieve fair outcomes for financial customers;
  • Act against misconduct to support confidence and integrity in the financial sector;
  • Promote the development of an innovative, inclusive and sustainable financial sector;
  • Empower households and small businesses to be financially resilient;
  • Accelerate the transformation of the FSCA into a socially responsible, efficient and responsive conduct regulator.

The FSCA provides for both prudential and conduct regulatory responsibilities and it is envisaged that certain prudential functions may be transferred from the FSCA to the Prudential Authority (PA) at the end of the transitional period, being March 2024. The FSCA is refining a strategy for the retirement fund sector.

In a high-level overview on the impact that the Covid-19 pandemic had on the industry, it was highlighted that in 2020 there was an increase in pension fund liquidations, that financial distress resulted in requests for contribution relief by small employers, and funds experienced pressure for access to pension benefits by members. There is also an indication that arrear contributions have increased during the pandemic. The Covid-19 pandemic highlighted the need for emergency savings, pension preservation and some limited access, which led to the proposal of auto-enrolment for all employed and self-employed workers, consolidation of funds to reduce costs, and limited pre-retirement pension withdrawals.

FSCA will prioritise the following key projects:

  • Building stronger market conduct supervision capacity and focus, with special attention on full TCF adoption and board of management accountability;
  • Implementation of conduct of business returns to enhance regulatory data;
  • Collaboration and data exchange with relevant regulators such as Companies and Intellectual Property Commission, PA and SARS;
  • Market enquiry into complaints handling by retirement funds and section 13B administrators;
  • Enhanced guidance to and engagement with industry;
  • A sustainable finance and investment roadmap; and
  • Broader FSCA focus on unclaimed assets in the financial sector.

National Treasury – An update on retirement reform developments.

National Treasury highlighted the following retirement reform topics:

The two-pot system

Key considerations regarding the two-pot system in need of further investigation are:

  • Whether or not to allow for immediate access: the retirement funds industry is not in favour of immediate access as the urgency is over and members have small balances in their funds.
  • Taxation of these withdrawals: National Treasury is still considering the taxation of these benefits.

National Treasury is likely to release a draft Bill on pre-retirement withdrawals by July 2022.

Governance of umbrella funds

National Treasury’s intention is to facilitate the increased consolidation of funds.

Key concerns are:

  • Locking-in of service providers or other parties in fund rules
  • Use of service providers affiliated with the fund
  • Appointment of board members also contracted as service providers to the same fund
  • Over-dependence on product/service providers for advice
  • Lack of member representation on the board of management of umbrella funds
  • Inability of employers to switch between umbrella funds
  • Employers not paying contributions
  • Costs

Coverage of retirement funds

Government intends to address the lack of retirement savings by a high number of South African workers currently not covered by occupational schemes. Government acknowledges challenges with retirement coverage for informal and seasonal workers and is considering the phasing-in of auto-enrolment to retirement funds, starting with formal salaried workers. Alternatively, mandatory retirement provision for all formally employed workers can be introduced. Legislation could be proposed to compel all employers to deduct contributions to an occupational fund or any other approved fund, for all their employees. There will be no requirement for employers to establish new funds.

Conduct of Financial Institutions (COFI) Bill

COFI is undergoing the final amendment process, following the consolidation of industry comments, and the Bill is expected to be tabled in Parliament this year. The Pension Funds Act, which will be renamed the Retirement Funds Act, is being amended to align it to the COFI Act.

Regulation 28

Regulation 28 amendments have been finalised and are awaiting review by Parliament.

The final amendments are:

  • Investment in crypto assets for retirement funds is prohibited until the regulation of these assets is formalised.
  • The definition of infrastructure has been clarified and broadened to include both public and private infrastructure. In the first draft of the revised regulation, it was implied that only government infrastructure was included.
  • Limit applicable to the aggregate holding of other debt instruments not listed on an exchange increased to 40%.
  • The housing loans limit will be reduced to 65% in line with Government’s policy stance of not allowing lending through retirement funds. This reduced limit will apply only to new applications.
  • Exposure in respect of investment in infrastructure is 45%, excluding debt instruments issued or guaranteed by the government.
  • Reference to infrastructure investment in respect of Africa will be determined through South African Reserve Bank regulations.
  • The 45% infrastructure investment (in Regulation 28) is separate from the 45% offshore investment limit (SARB Circular 10/2022).

The focus for the Office of the Pension Funds Adjudicator for 2022 and 2023

The Office of the Pension Funds Adjudicator (OPFA) has streamlined a process to allow for immediate resolution of complaints by referring complainants to funds prior to lodging complaints with the OPFA. To allow for the expeditious resolution of complaints, the timeline between when complainants and respondents may refer the complaint to the OPFA has been reduced.

The OPFA is embarking on a web-based registration of complaints process where complainants will be able to lodge complaints electronically. To assist in the expeditious resolution of these complaints, the OPFA will consider adding a functionality where principal officers and their fund(s) will be able to immediately obtain these complaints as they are being lodged by complainants.

The OPFA’S medium term strategic objective will be towards targeted recruitment, internal staff training, stakeholder training and the implementation of the COFI Act.

Roadmap for roll-out and implementation of cross-sectoral Conduct of Business Return (Omni-CBR)

The FSCA, on 8 June 2022 issued Communication 16 of 2022, informing the industry of the purpose and the roadmap for the roll-out and implementation of the Omni-CBR (Omni-CBR Roadmap) and the draft Omni-CBR template for public consultation.

The FSCA is required to monitor the extent to which the financial system is delivering fair outcomes to financial customers, with a focus on the fairness and appropriateness of financial products and financial services and the extent to which they meet the needs and reasonable expectations of financial customers. To monitor whether the financial system is delivering fair outcomes to customers, the FSCA needs access to meaningful, reliable, measurable and comparable information on key conduct indicators across financial institutions. To give effect to this, the FSCA embarked on a multidisciplinary project to facilitate a process for detailed and consistent conduct of business reporting by financial institutions in future.

To date, conduct of business statutory reporting has only been formally implemented in respect of insurers. Building on the extensive work done and insights gained during the roll-out of the insurance conduct of business returns, the FSCA’s supervisory team has more recently been working on the development of a broader Omni-CBR.

The FSCA is embarking on a multi-year consultation and implementation process aimed at reaching a steady state of full and complete conduct of business reporting on a quarterly basis across the financial sector by June 2026. Phase 1, planned for 2022, will consist of webinars to explain the Omni-CBR, followed by industry engagement workshops per sector and written comments.

The FSCA recognises the potential resource, data and system development implications of this type of ongoing reporting for financial institutions as well as for the FSCA itself.

The roadmap provides background on the objectives and intended outcomes of the Omni-CBR for the financial sector and the FSCA; sets out the envisaged engagement and implementation milestones to facilitate an incremental phasing in of harmonised conduct of business reporting across the financial sector; provides a high-level overview of the type of data requested in the Omni-CBR; and confirms the next steps in finalisation of the Omni-CBR.

Levies on financial institutions

On 9 June 2022, the FSCA released a draft notice for the increase of levies on financial institutions. Interested persons are invited to make written submission on or before 22 July 2022. The proposed levies reflect a slight increase from the 2021 levies.

The levy year will run from 1 April 2022 to 31 March 2023. 

Arrear contributions

Employers have seven days after the expiration of the period in respect of which contributions are due, to pay contributions over to the funds. The Pension Funds Act makes the non-payment of contributions a criminal offence with consequences of potential personal liability for the management of the employer.

The FSCA on 9 June 2022 published Communication 17 of 2022, alerting retirement funds and employers of their intent to publish the names of funds and employers with arrear contributions on the FSCA’s website.

Retirement funds are requested to share this communication with participating employers.

The FSCA is currently compiling the list and checking the accuracy of the value of arrear contributions.

FSCA’s once-off request for information on historical information

The FSCA on 22 June 2022 published information request 5 of 2022 and FSCA Communication 18 of 2022 on its website.

All retirement funds and administrators are requested to submit to the FSCA information relating to new paid-up members, including members whose benefits were paid-up (deferred pensioners) before the default regulations came into effect on 30 September 2021 on or before 31 October 2022.

Quarterly submission:

All retirement funds and administrators are requested to provide, at least once every quarter (within 30 days after the last day of the calendar quarter):

  • Original value of the paid-up member’s benefit;
  • The current value or paid-up value of the paid-up benefit;
  • The date on which the paid-up benefit was transferred or paid to the member or beneficiaries.

The information must be submitted electronically through the FSCA’s website.