4 of 2019
CONDUCT STANDARD: SECTION 14 TRANSFERS
On 5 August 2019, the Financial Services Conduct Authority (“FSCA”) issued Conduct Standard 1/2019 dealing with the conditions for amalgamations and transfers in terms of section 14 of the Pension Funds Act. Conduct Standard 1/2019 replaced Directive PF no. 6 with immediate effect, but the FSCA subsequently published FSRA Compliance Extension Notice 1 of 2019 to extend the date to 31 January 2020. This means that section 14(1) applications submitted before 31 January 2020, and based on the conditions and forms contained in Directive PF No. 6, will still be considered by the FSCA.
The main differences between Directive PF no. 6 and Conduct Standard 1/2019 are the following:
Certain transfers that were exempt from section 14(1) are no longer exempt:
- Transfers of unclaimed benefits from a fund to an unclaimed benefits fund;
- Transfers between unclaimed benefits funds;
- Transfers between retirement annuity funds;
- Transfers between preservation
Section 14(8), where there is no need to submit the forms to the FSCA, still applies where:
- Both funds are valuation exempt;
- Both funds are beneficiary funds;
- One fund is not registered or required to register and the other fund is valuation
Transfers outside the ambit of section 14 are:
- The transfer of the pension interest awarded to a non- member spouse;
- A member leaving the service of the employer who transfers to another fund including a preservation fund;
- The purchase of an annuity upon the retirement of a member;
- The purchase of an annuity by a beneficiary upon a member’s
Stricter member communication requirements:
The Conduct Standard introduces the following additional requirements:
- Members must be provided with a comparison between the costs and benefits of the transferor and transferee This does not apply to members with unclaimed benefits;
- Any risks relating to the transfer must be explained to members;
- How members’ past service benefits will be impacted by the transfer must be clear;
- Whether there will be any prejudice to members upon transfer should be pointed
Surplus and reserve accounts
| • | The FSCA requires information about actuarial surplus to determine if the proposed transfer is reasonable and equitable; |
| • | The impact of any unapportion actuarial surplus included or excluded from the transfer must be indicated; |
| • | It must be certified that members received their portion of the credit balance in a reserve account if applicable. |
Certifications
The boards and the valuators of both funds must express opinions in the certifications on whether the transfer is reasonable and equitable and will not render the fund unable to meet its requirements.
Objections and concerns
| • | Member objections must be included in the transfer application where the objection has not been resolved together with the fund’s response and comments; |
| • | Should a board member have a concern with a transfer, the concern must be raised with the FSCA in a separate document. |
Transfers to or from an entity not registered by the FSCA
In the case of a transfer to or from a foreign fund or entity, the following must be provided to the FSCA in support of the application for approval of the transfer:
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stand-alone funds and the effect of costs and therefore encourages further consolidation of funds.
Errors and adjustments to section 14(1) applications
Where a fund requests the FSCA to amend or withdraw an approval certificate, a letter signed by the principal officer or authorised board members detailing the request must be submitted.
Benefits payable in the period between the effective date and the final date of settlement
In the event of benefits payable as a result of death, disability or any other form of withdrawal before the transfer is approved, the FSCA will consider as best practice that both the transferor fund and transferee fund pay the relevant benefit in their fund. Where benefits must be paid after the approval of the section 14 application by the FSCA, benefits should be paid by the transferee fund.
Income tax
Funds must ensure compliance with the Income Tax Act and that members are not prejudiced if the fund or administrator fails to comply with the Income Tax Act.
FSCA RETIREMENT FUNDS CONFERENCE 2019
The Financial Sector Conduct Authority (“FSCA”) held its first retirement funds conference in Pretoria during September 2019. The implication of costs and transformation in the retirement funds industry were placed in the spotlight.
Some of the noteworthy remarks made by FSCA speakers were:
Retirement fund costs
The FSCA urged funds to drive down costs that “eat” into fund members’ retirement savings. The FSCA will look more closely at funds’ financial statements to compare the costs relating to different funds. Those funds whose costs deviate significantly from the industry benchmark will have to explain and motivate those costs.
The FSCA is of the view that there is an information gap between boards and service providers and that boards do not know how to negotiate fees because they do not understand the services provided. It was emphasised that transparency of costs will rarely be enough, boards will have to upskill themselves to better understand fees.
The FSCA is still concerned about the number of small
Transformation
The FSCA considers transformation a priority. A guidance note on transformation and possible future reporting requirements will be issued soon. Funds are advised to include B-BBEE rating requirements into their procurement policies and have a warranty in their service agreements that the B-BBEE rating will be maintained throughout the service delivery period. The FSCA will in future use its powers to issue administrative penalties and take the necessary steps to remove boards that do not comply with transformation requirements.
Directive 8 and conflict of interest
The retirement funds industry are encouraged to whistle blow on any possible contravention of Directive 8 and the FSCA provided assurance that it monitors and investigates all whistle blowing reports.
Responsible investing
Guidance Note 1 of 2019 on sustainability of investments and assets in the fund’s investment policy statement aims to help boards to comply with regulation 28 of the Pension Funds Act and protects boards. The FSCA remarked that boards should not merely consider it to be a guidance note and therefore not binding on funds.
Prescribed assets
The FSCA is not convinced that it is necessary to have further prescribed assets.
Unclaimed benefits
The FSCA is considering standardising the fee that can be charged by a retirement fund for the administration of unclaimed benefits, or to consolidate all unclaimed benefits into a state fund. It is working on an unclaimed benefits policy, which includes its view on unclaimed benefits where beneficiaries are truly untraceable.
NEW FSCA LEVIES
The FSCA levies for the period 1 April 2019 to 31 March 2020 are as follows:
Levy on pension funds
| (i) | R1 278.66 (was R1 206.28), plus an additional amount of R15.13 (was R14.27) per member and in respect of any other person who receives regular periodic payments from a fund (excluding any member/person whose benefit in the fund remained unclaimed and beneficiaries); or |
| (ii) | R2 929 859 (was R2 764 018), whichever total amount is lesser. |
Levy for Pension Funds Adjudicator
R6.59 (was R6.05) per member and in respect of any other person who receives regular periodic payments from the fund but excluding any member/person whose benefit remained unclaimed in the fund.
Levy on retirement annuity funds
| (i) | R1 278.66 (R1 206.28), plus |
| (ii) | An additional amount equal to 0.0097% of value of assets of the fund. |
Funds could apply for exemption at least one month before the due date.
The levy had to be paid no later than 31 August 2019. Failure to pay on time will result in interest being charged at 10.25%, i.e. prime interest rate.
GENERAL
PFA Exemption Notice No. 6 of 2019
The FSCA published PFA Exemption Notice no. 6 of 2019 on 6 August 2019, which exempts certain funds from the requirements of section 7A(1) of the Pension Funds Act that deals with the right of members of a fund to elect at least 50% of the board members.
The exempted funds with the relevant effective dates and duration of the exemption, are listed in the Exemption Notice.
PFA Exemption Notice No. 7 and 8 of 2019
The FSCA published PFA Exemption Notices no. 7 and 8 of 2019 on 14 August 2019 and 12 September respectively, exempting certain funds from the provisions of sections 9A and 16 of the Pension Funds Act that deals with the requirements to appoint a valuator and submit valuation reports.
The exempted funds with the relevant effective dates and duration of the exemption are listed in Annexure A to the Exemption Notices.
FSCA Communication 2 of 2019 (PFA): Exemption relating to hybrid annuities forming part of a fund’s annuity strategy
On 1 August 2019 the FSCA issued the Communication, stating that it will consider applications for exemption from the provisions of regulation 37(2)(g) in respect of hybrid annuities that are offered by any retirement fund as part of its annuity strategy. A hybrid annuity is a living annuity which has a life annuity portfolio as one of its investment portfolios, providing longevity protection within a living annuity. Living annuities must comply with the default investment portfolio provisions and regulation 37(2)(g) specifically requires that members be allowed, at least once every twelve months, to transfer their retirement savings from their default investment portfolio into any other investment portfolio offered in terms of the fund’s investment policy statement.
Since a life annuity has no viable surrender value, it would not be in the interest of members to be allowed once every twelve months to transfer their retirement savings out of the life annuity portfolio. Consequently, the FSCA advised that it would consider applications for exemption from regulation 37(2)(g) insofar as it relates to any hybrid annuity offered by a fund as part of its annuity strategy.
Applications must be submitted in the format as set out in Annexure B to the Communication and the fund will have to confirm that the following conditions will be met:
| • | The nature of the hybrid annuity will be clearly communicated to the member when he/she receives retirement benefits counselling; |
| • | The retirement benefits counselling will be done in person, and the fund will retain a record of such counselling; |
| • | The retirement benefits counselling will specifically draw attention to the fact that the member will not be in a position to transfer to another insurer in respect of the life annuity portfolio. If the member elects the hybrid annuity, then he/she must expressly indicate his/her acceptance of such restriction in writing; and |
| • | The fund will permit a member who chooses the hybrid annuity the option to transfer it to another service provider that will accept the hybrid annuity, with the associated life annuity portfolio, at least once every twelve months. |
Amendment of notice of commencement of certain parts of the Financial Sector Regulation Act 9 of 2017
The Financial Sector Regulation Act 9 of 2017 (“the FSRA”) repeals the entire Financial Services Ombud Schemes Act 37 of 2004. This repeal’s effective date has been postponed from 1 September 2019 to 1 October
2020.
Chapter 14 of the FSRA deals with financial services ombuds and was supposed to come into effect on 1 September 2019. The implementation date of this chapter has been postponed to 1 April 2020. The FSRA establishes an Ombud Council as a full-time statutory body, tasked with ensuring that customers are able to access effective, independent, fair and affordable dispute resolution processes.
The Ombud Council will set processes and rules for the ombud schemes to follow, to drive consistent approaches and adherence to minimum best standards.
The FSRA also requires that all financial institutions belong to an ombud scheme if a suitable one exists.
The Ombud Council will monitor the performance of ombud schemes and specific financial sector laws.
The Office of the Pension Funds Adjudicator falls within the ombud schemes jurisdiction and therefore will report to the Ombud Council.
Q:
In terms of section 13A(3)(a)(i) of the Pension Funds Act, any contribution to a fund in terms of the rules must be transmitted directly into the fund’s bank account not later than 7 days after the end of the month for which such contribution is payable. When does an employer fulfil its obligation under section 13A?
A:
The contributions must be cleared in the fund’s bank account within the 7 day-period. Therefore, in the case of an electronic fund transfer (EFT), the employer must ensure that the EFT is effected in advance so that the funds are cleared in the fund’s bank account by the 7th day.
Q:
In terms of section 13A(7)(a) interest on late payments of contributions and unpaid contributions is payable if payment of the contributions has not been received by the fund within 7 days after the end of the month for which the contribution was payable. From when will the prescribed interest rate be changed and on which amount will it be calculated?
A:
The interest is payable in respect of the full amount of any unpaid or underpaid balance of the required contribution amount and is calculated from the 1st day of the month immediately following the month in respect of which the contribution was payable until the date of payment of the unpaid or underpaid balance of such contribution amount. This means that the interest is payable from the 1st day of the month if it was not paid within 7 days after the month-end as the 7 days is a grace period for payment only and cannot be excluded in the calculation of the interest. Interest must be compounded daily and unpaid interest attracts further interest until the day it is paid. If, for example, contributions are paid on the 10th and interest from the 1st until the 10th is R1000, the R1000 will attract further interest from the 11th until the date it is paid
Q:
Regulation 33(2)(i)(cc) deems a discrepancy of less than 2.5% between the amount of contributions received by a fund relative to the expected contributions in terms of the minimum information not to constitute a contravention of the regulation.
(i) Does this mean that the contravening employer does not have to pay the section 13A interest to the fund?
(ii) For purposes of calculating the 2.5%, does one consider the overall or average short-payment per fund?
A:
| (i) | It means that there is no reporting requirement and members do not have to be informed of the shortfall in contribution payments. The interest is still payable by the employer in terms of section 13A(7) on the amount not transmitted into the fund’s bank account by the 7th of the following month. |
| (ii) | Circular PF No. 110 makes it clear that it must be calculated per pay point or participating employer. |