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Interest on late payment of contributions by employers

Interest on late payment of contributions by employers

1. From which day is late payment interest calculated on arrear contributions payable by the employer: the 1st of the month, or the 8th of the month?

In terms of the Pension Funds Act and Conduct Standard 1 of 2022, interest is payable by the employer on arrear/late contributions. This interest is calculated from the first day following the expiration of the period contributions were payable for until the fund receives the contributions – at the prime rate plus 2%.

There is confusion about whether the penalty interest starts to run from the 1st day of the next month or the 8th day of the next month. The Office of the Pension Fund Adjudicator (OPFA) and the FSCA hold different views:

FSCA’s view:

OPFA’s view:

The FSCA and OPFA will be meeting to discuss this difference of opinion and the FSCA is considering whether to issue an Interpretation Ruling on the matter. There is currently no consensus, which means that administrators and funds have no clear guidance on this matter.

2. Does the in duplum rule apply to the amount of interest payable by an employer on late contributions?

The in duplum rule

The in duplum rule means that the interest on a debt can’t exceed the unpaid balance of the principal debt.

Example: Margaret lends Joe R200. Margaret charges Joe interest on this debt. When the interest gets to R200 (the same amount as the original debt), the in duplum rule means that the interest cannot grow any higher.

Recent High Court case

In the recent High Court case of Municipal Workers Retirement Fund v Umzimkhulu Local Municipality and Others the High Court found that the in duplum rule does not apply to the interest prescribed in the Pension Funds Act for arrear contributions. Therefore, the employer had to pay the full amount of statutory interest owing to the fund.

The FSCA’s and OPFA’s views

Before the case:

Now - after the case:

This means that the interest on arrear contributions payable by an employer can continue to add up and even exceed the original arrear contribution amount owed by the employer.

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FSCA assessment: Treating Customers Fairly and Regulation 28

FSCA assessment: Treating Customers Fairly and Regulation 28

An FSCA assessment
Exemption of large funds

1. An FSCA assessment: Treating Customers Fairly and regulation 28 principles applicable in contracting services to the fund or its board

In December 2023, the Financial Conduct Services Authority (FSCA) sent a communication to the Principal Officers of many retirement funds requesting information relating to transformation in respect of certain service providers.

Funds were requested to complete the following assessment:

- Treating Customers Fairly [1] (TCF) self-assessment with regards to the implementation of measures to meet the TCF outcomes. This part of the assessment is not new – many funds have completed it already.
- The Regulation 28 principles of self-assessment with regards to the implementation of measures to consider in contracting services to a fund or its board. [1] TCF is an outcomes-based regulatory and supervisory approach of the FSCA designed to ensure that regulated financial institutions (for example, retirement funds) deliver specific, clearly set-out fairness outcomes for financial customers (for example, members). Funds are expected to demonstrate that they have implemented and are delivering the TCF outcomes in the way that they conduct business.

The assessment had to be returned to the FSCA through its online submission portal by 31 January 2024.

[1] TCF is an outcome-based regulatory and supervisory approach of the FSCA designed to ensure that regulated financial institutions (for example, retirement funds) deliver specific, clearly set-out fairness outcomes for financial customers (for example, members). Funds are expected to demonstrate that they have implemented and are delivering the TCF outcomes in the way that they conduct business.

Why has the Regulation 28 assessment been circulated?

The FSCA states that it has set itself supervisory priorities for the current financial year, which includes considering the extent to which Regulation 28 principles are embedded within retirement funds.

Regulation 28 provides that retirement funds have a fiduciary duty to act in the best interest of their members, whose benefits depend on the responsible management of assets. This Regulation requires a fund and its board to consider, in contracting services to the fund or its board, the need to promote broad-based black economic empowerment of those providing services.

Questions set out in the FSCA’s regulation 28 assessment

- Does the fund have a procurement policy in place? If so, furnish us with a copy of the policy. If the fund does not have a procurement policy in place, outline the procurement process of the fund.
- When contracting services to the fund and its board, does the fund consider the need to promote broad-based black economic empowerment of entities providing services? (Please explain in detail how the fund meets this condition in the comments section).
- Does the fund request BBB-EE certification from its service providers when contracting services? If so, please furnish us with copies of such certification.
- Does the fund evaluate whether its existing service providers continue to promote broad-based black economic empowerment?
- Do you have a mechanism in place to deal with an existing service provider who no longer complies with the BBB-EE requirements? (Please explain in detail how the fund deals with such a scenario in the comments section).
- When contracting services to the fund and its board, does the fund consider the need to promote broad-based black economic empowerment of independent trustees providing services if applicable? (Please explain in detail how the fund meets this condition in the comments section and if this is not applicable, please indicate such in the comments).

The assessment should create a baseline for the FSCA to supervise and regulate the effect of the Conduct of Financial Institutions and regulatory interventions on the transformation progress of funds.

2. Exemption of large funds from certain prescribed formats for preparing financial statements

The Pension Funds Act (the Act) requires every fund, within six months of the end of every financial year, to provide the prescribed financial statements to the FSCA that have been audited by the auditor of the fund.

From 21 December 2023, the FSCA’s RF Notice 26 of 2023 replaces RF Notice 5 of 2020, (the Exemption of Large Funds from certain prescribed formats for preparing financial statements under section 15 of the Pension Funds Act).

“Large Funds” are defined as funds with total assets exceeding R50 000 000.

The RF Notice has been published because the prescribed format of annual financial statements does not align with the amendments to Regulation 28 of the Act.

To ensure alignment with the amendments to Regulation 28, the FSCA is planning to replace the current BN 77 Notice with a Prudential Standard, which is currently in draft format.

But in the interim, to deal with the issue of BN77 not currently aligning with Regulation 28, the FSCA has published exemptions in relation to infrastructure reporting and certain Schedules.

The exemption of large funds from the provisions of section 15 of the Act provides for three scenarios:

Scenario 1

For the preparation of financial statements in respect of a financial year that ends after 1 March 2018, a Large Fund is exempted from the requirement to complete Schedule D1 when preparing financial statements but must complete the Independent Regulatory Board of Auditors (IRBA) approved illustrative “Auditor’s report template: Audit of the Financial Statements of a Large Retirement Fund (Schedule D)”.

Scenario 2

For the preparation of financial statements in respect of a financial year that ends between 1 March 2018 and 31 December 2022, a Large Fund is exempted from the requirement to complete Schedule IB1, but must complete IRBA’s illustrative “Assurance Report on Compliance with Regulation 28 of the Pension Funds Act” that was approved by IRBA in March 2019; and

Scenario 3

For the preparation of financial statements in respect of a financial year that ends after 31 December 2022, a Large Fund is exempted from the requirement to complete Schedule IB1 but must complete Annexure A to the notice “2023 Assurance Report on Compliance with Regulation 28 of the Pension Funds Act”.

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Regulatory update for retirement funds

Regulatory update for retirement funds

Two-pot system

The Revenue Laws Amendment Bill (“RLAB”) (containing the two-pot system changes to the Income Tax Act) went to the Minister of Finance for a response to the Standing Committee on Finance (“SCOF”). The Minister recommended 1 September 2024 as an implementation date and SCOF accepted this date. The RLAB must now go to the National Assembly and thereafter the National Council of Provinces for concurrence. Both the RLAB and Pension Funds Bill (containing amendments to the Pension Funds Act related to the two-pot system) will be tabled on 8 February 2024 when Parliament re-convenes.

The FSCA intends to publish a Guidance Notice (or other instrument) in December 2023 setting out the principles of what should be in the fund rules to address the two-pot system.

Conduct of Financial Institutions Bill (“COFI”)

COFI contains far-reaching changes for financial institutions, including retirement funds. National Treasury has received the final certificate to request Cabinet to approve the introduction of COFI to Parliament, however, National Treasury has yet to receive the required certification from the State Law Advisor. COFI remains a priority and National Treasury aims to introduce it to Parliament in the first quarter of 2024. The implementation of the COFI requirements will be phased-in and there will not be a big bang approach.

The Omni Conduct of Business Return

As a reminder, The FSCA issued its draft Omni Conduct of Business Return (“Omni CBR”) in June 2022. This was the first phase in a process that was designed to end in June 2026, with many financial institutions, including retirement funds, administrators and Financial Services Providers, submitting online quarterly answers (returns) to the FSCA on an extensive list of questions (risk indicators). This will be the cornerstone of the FSCA’s supervisory approach.

Recently, the FSCA published Communication 33 of 2023 ‘Update on roll-out and implementation of cross-sectoral Conduct of Business Return for financial institutions’, which provides that the FSCA will issue an updated timeline for the roll out of the Omni CBR in 2024 (with updates being provided in July 2024).

The FSCA provided times for certain actions as follows, which times may change depending on when COFI is enacted:

- continuation of industry engagements on the current version of the Omni CBR until 1 April 2024;
- publishing a revised version of the Omni CBR spreadsheet template by 1 July 2024;
- publishing an industry survey on the impact of the revised Omni CBR by 1 July 2024;
- launch of the industry pilot in the second half of 2024.

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Update: Two-pot System

Update: Two-pot System

Are we back to 1 March 2024?

What happened at the Standing Committee on Finance (SCOF) on 21 November?

It was an interesting day at the Standing Committee on Finance (SCOF) on 21 November, with SCOF not accepting Treasury’s proposal to move the two-pot implementation date from 1 March 2024 to 1 March 2025 and retaining the 1 March 2024 date.

Is this decision now final?

This decision is still not final. It will go to the Minister of Finance for 14 days for comment. The Minister of Finance does not have the power to make a different decision. Then the Bill (including the date) will go back to SCOF for a final decision. The Bill will also need to pass through the National Assembly and the National Council of Provinces.

When will the two-pot legislation be finalised?

We still do not know when we will see the final version of the two-pot legislation (Revenue Laws Amendment Bill) and we still do not know when we will see the final version of the Bill which contains the changes to the Pension Fund Act necessary to implement the two-pot system.

Legacy retirement annuity funds can be exempted

All Treasury’s other proposals (barring the date) were accepted by SCOF. We discussed these changes in a previous publication, for example:

- The cap on the 10% seeded amount proposed to be increased from R25 000 to R30 000.
- Provident fund members who were 55 or older on 1 March 2021 (and still in the same fund) proposed to be automatically out of the two-pot system and can decide to opt in.
- Proposed exemptions from the two-pot system for older members (as referred to above), legacy retirement annuity funds (as approved by the Financial Sector Conduct Authority), beneficiary funds, unclaimed benefit funds, and pensioners.

Other discussions at SCOF on 21 November, included:

- The mechanism for the taxation of savings withdrawals (which are taxed at marginal rates), including a fixed nominal rate and a tax directive process; and
- The taxation mechanism for inter and intra fund transfers between pots.

There could still be changes

The 1 March 2024 implementation date decision is not yet final. The Income Tax Act and Pension Funds Act amendments for the two-pot system have not been finalised. Uncertainty still prevails. This makes preparation for administrators, funds, and others fraught with difficulty, uncertainty, and risk. In addition, the very necessary communication required about the two-pot system cannot be finalised.

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Update: Regulatory issues for retirement funds

Update: Regulatory issues for retirement funds

Two-pot system
Conduct of Financial Institutions Bill
Draft Interpretation Ruling
Omni Conduct of Business Return
Quarterly unclaimed benefit returns to the Financial Sector Conduct Authority
Treating Customers Fairly (TCF) Questionnaire

1. Two-pot system update

Treasury has presented its updated proposals on the two-pot system to the Standing Committee on Finance. On 1 November 2023, Treasury released the next version of the Revenue Laws Amendment Bill (RLAB), which is the draft Bill that contains the two-pot system legislation.

The RLAB will go to the Select Committee on Finance on 21 November 2023. It is at this stage that there could be some important decisions made as to whether to accept Treasury’s two-pot proposals. Recently, Treasury stated in an industry meeting that the RLAB would only be gazetted in 2024.

Part of Treasury’s proposals is to move the implementation date of the two-pot system from 1 March 2024 to 1 March 2025 and this date is included throughout the revised RLAB. However, that date is not yet a done deal. It seems extremely unlikely, however, for Government to continue with a 1 March 2024 implementation date if the final legislation is only gazetted next year.

Proposed changes to the two-pot system

The following proposed changes to the two-pot system, among others, have been included in the latest draft of the RLAB:

Seeding

The seeded amount is a once -off event and it is 10% of the vested pot on 28 February 2025, capped at R30 000 (previously R25 000). Treasury stated that it amended the cap as an inflationary adjustment to the R25 000 originally proposed.

It is important for the fund to know whether the seeded amount reduces the compulsory annuitisation non-vested or vested portion of the vested pot. This has been clarified as follows:

For members of provident funds and preservation provident funds under 55 on 1 March 2021:

What is “seeding”?

Seeding is the amount of the vested pot (everything built-up in the fund by a member up to 28 February 2025) that transfers into the savings pot on 1 March 2025 and that a member can immediately access in cash, without leaving employment or the fund.

the seeded amount will come out of the annuitisation vested and non-vested parts of the vested pot proportionately.

For members of provident funds 55 and over on 1 March 2021 (and still members of the same provident fund): these members only have vested amounts in their vested pot, so seeded amounts come out of their vested amounts.

Opt in or opt out?

Members of provident funds who were 55 and older on 1 March 2021 (and still members of the same provident fund) [1] will now be able to opt into the two-pot system as opposed to opting out of the two-pot system. So, the default is that these members are out of the two-pot system. This is a reversal of the previous position.

Opting in appears to be a once-off option, but the option does not need to be made by these members on or before 1 March 2025. It could be made at any time. If a decision is made to opt in after 1 March 2025, the seeded amount is still calculated as of 1 March 2025.

[1] There is inconsistency in the wording of the Bill across provisions about including the requirement for such older members to still be members of the same provident fund. This may be a drafting issue.

Who could be exempted from the two-pot system?

The following entities or persons may be exempted from the two-pot system: a “legacy retirement annuity policy’’ (in a Retirement Annuity Fund) approved for exemption by the Financial Sector Conduct Authority (FSCA), a beneficiary fund, an unclaimed benefit fund and a fund pensioner.

The tax mechanism for savings withdrawals from the savings pot

The RLAB now contains provisions for the South African Revenue Service (SARS) to issue the fund’s administrator with a fixed rate to tax the savings withdrawal. SARS will need to provide more information to the industry as to how this will work in practice.

Savings withdrawals from the savings pot are taxable at the member’s marginal rate. This has not changed.

More flexibility for defined benefit funds

More flexibility has been drafted into the RLAB for calculating the one-third/ two third split when contributions are paid into a defined benefit fund. If a defined benefit fund can’t do the split based on pensionable service, the RLAB allows for the fund to allocate contributions utilising a reasonable method of allocation, as approved by the FSCA.

How does the two-pot system apply on death?

Treasury’s intention is to maintain the status quo in relation to death benefits. So, after the two-pot system is implemented, beneficiaries would still be able to decide to take their whole death benefit allocation either as an annuity or as a cash lump sum.

Section 37D deductions

Deductions related to housing loans/ guarantees, maintenance orders, divorce orders and theft/fraud/dishonesty against the employer can now be made proportionately from all three pots, including the savings pot (previously deductions were only permissible from the retirement pot and vested pot).

A non-member spouse’s pension interest

When a non-member spouse decides to transfer their pension interest to another fund (after a divorce), it is transferred from the same pot in the transferring fund to the same pot in the receiving fund, or from the vested or savings pot in the transferring fund to the retirement pot in the receiving fund (as decided by the non-member spouse).

2. Conduct of Financial Institutions Bill (COFI)

The State Law Advisors have substantive queries on COFI, necessitating further work. Thus, COFI will not be tabled in 2023.

3. Draft Interpretation Ruling

As dealt with in a previous edition, the FSCA issued FSCA Communication 20 OF 2023 (RF) and a draft Interpretation Ruling intended to replace the current Interpretation Ruling 1 of 2020. This current Interpretation Ruling, which took effect on 25 March 2020, is an interpretation of section 37C of the Act affecting paid-up members, unclaimed benefit members and deferred retirees. The FSCA believes that it made an error in its interpretation of section 37C about unclaimed benefits and wants to replace the existing Interpretation Ruling with a revised version.

The FSCA is currently reviewing the submissions received from the industry. The FSCA mentioned that the existing Interpretation Ruling might be withdrawn and replaced in the first half of December 2023.

4. Omni Conduct of Business Return

The Omni CBR has been delayed and timelines for implementation will be extended.

The FSCA is considering whether to have a different version of the Omni Conduct of Business Return for retirement funds and benefit administrators, as compared to other types of financial institutions.

5. Quarterly unclaimed benefit returns to the FSCA

The FSCA:

- Encourages all funds to ensure they submit their quarterly unclaimed benefits information on time, every time, and accurately;
- Is considering issuing penalties against funds that do not do so; and
- Reminds funds to ensure they update the quarterly return for claims that have been paid.

6. Treating Customers Fairly (TCF) Questionnaire

Many funds have received, from the FSCA, a TCF questionnaire to complete, sometimes as part of a desktop review. The FSCA has stated that it will forward a TCF Questionnaire to all funds that have not yet completed one. It will issue a general communication on the results in March/April 2024.

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