Treasury has issued the final retirement funds default regulations which will take effect on 01 September 2017. The regulations are the result of prior consultative processes between National Treasury, industry stakeholders and the Financial Services Board (FSB), although speed with which these regulations have now been issued, has caught most people by surprise. The first draft of the regulations was published for public comment on 22 July 2015. This was subsequently revised taking cognisance of comments and the second draft was then published for public comment on 9 December 2016.
The intention of Treasury is to ensure that these regulations “improve the outcomes for members of retirement funds by ensuring that they get good value for their savings and retire comfortably” – we will not discuss whether the regulations achieve this lofty objective but rather, restrict our comments to the implications for our clients.
A summary of the salient points of the regulations are outlined below:
DEFAULT INVESTMENT PORTFOLIO
Regulation – All defined contribution retirement funds must have a default portfolio which is “appropriate, reasonably priced, well communicated to members, and offer good value for money”. Performance fees are permitted for the default portfolio.
Considerations – The regulations state that the Trustees (of the retirement fund) are required to monitor the performance of the default portfolio – we believe that this should already be happening. Combined with the fact that most funds have a default portfolio, this requirement should not present any additional onerous responsibilities to our clients.
DEFAULT PRESERVATION (IN-FUND PRESERVATION)
Regulation – Most fund rules state that where a member resigns from the employer, they must withdraw or transfer their funds. The new regulations state that when the employee leaves service of the employer prior to retirement, these members must be made paid-up until the fund is instructed otherwise in writing. If they elect to withdraw their funds and/or transfer them to another fund, they will have to obtain financial counselling.
Considerations – The new regulations have significant implications for trustees:
- The rules of the vast majority of funds contain the employment condition for membership – the rules must therefore be amended.
- The administration of paid-up members will place a significant and onerous burden on the retirement fund, as they will be required to administer, track and communicate regularly with past employees, for as long as they remain a member of the fund.
- The new regulations have significant implications for administrators of retirement funds. Many administration systems are set up to deduct costs from contributions. Given that ex-employees will no longer be making monthly contributions, administration costs must be deducted from their invested fund value. Administrators will need to make significant system enhancements to be able to recover administration fees from individual fund values.
- Employers with a high staff turnover or poor staff exit procedures need to carefully reconsider their processes when employees leave without providing written instruction on what to do with their benefits. These members can no longer be deemed “unpaid” and eventually “unclaimed” after a period of 2 years any longer.
- Typically, many funds ensure that members are invested in a conservative portfolio as at their date of accrual (exit date) to mitigate the risk of market movements. However, given members are now considered paid-up, unless the fund is instructed otherwise by the member in writing, how will funds treat these members going forward?
- The definition of “retirement benefits counselling” contained in the Regulations means “the disclosure and explanation, in a clear and understandable language, including risks, costs and charges…”. There is little doubt that the employer and/or the fund must provide this counselling to members, at their cost. This may be in the form of a one-on-one meeting with a suitable qualified professional or alternatively, using the vehicle of a thorough and comprehensive document which explains the various options, risk, costs and implications. This is an onerous responsibility to place on an employer who must ensure that the communication prepared by the fund is all encompassing and is provided to every single exiting member, including paid-up members when they decide to withdraw their benefit.
Regulation – Every fund must now have an annuity strategy, which requires members to elect to ‘opt-in’ to the fund strategy (rather than an ‘opt-out’ “default”). Accordingly, the new regulations require the active participation of the member regarding which type of annuity (a Life or Living) should be paid. The regulation makes both in-fund and out-of-fund annuities available as part of the annuity strategy, on condition that the stated principles are complied with.
Aligned with the requirements of the default investment portfolio, the default annuity must also be appropriate, well communicated and offer good value for money. Further, members must be given access to retirement benefits counselling to understand the implications of the choice. The Boards of pension funds, pension preservation funds and retirement annuity funds are required to establish an annuity strategy. Only provident funds whereby the rules enable a member to elect an annuity are required to establish an annuity strategy.
- Please refer to (6) above for comments pertaining to counselling.
- The trustees need to finalise the annuity strategy for their fund, taking into account issues such as level of income, investment, inflation and other financial risks and also need to review the strategy annually.
- What is stipulated in your fund rules if you operate a provident or provident preservation fund?
The Registrar of Pension Funds has provided exemption to all funds registered before
1 March 2018 to comply with these regulations by 1 March 2019.
As experienced and skilled benefit consultants Axiomatic is well-placed to help trustees and participating employers navigate the complexities and implications of these new regulations. We welcome an opportunity to share our insights with you.
Contact the Axiomatic Benefits Team on email@example.com
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