Imminent default regulations for the Pension Funds Act

Imminent default regulations for the Pension Funds Act
29 Jan 2019

The effective date for the implementation of the default regulations to the Pension Funds Act, 1 March 2019, is around the corner and retirement funds are scrambling to ensure that they will be compliant by that date (and those that aren’t, should be!). It is by now common knowledge that the three key pillars of the regulations are the default investment portfolio, default preservation and portability and an annuity strategy. But what will these changes mean for members of retirement funds?

  1. The default investment portfolio(s) – when a member joins a defined contribution pension or provident fund, their savings will be automatically invested in a default portfolio that is designed to be cost-effective and appropriate, unless and until the member opts out and chooses a different portfolio. Many funds already offer a default investment portfolio or only have one portfolio (and so this change will not affect too many members) however this will now be a legislative requirement for all defined contribution pension and provident funds.
  2. The default preservation and portability – when a member leaves employment before retirement, the fund must automatically preserve the member’s benefit in the fund and convert the member to a “paid-up” member. The benefit will only be paid out to the member or transferred to another fund selected by the member when the fund has been specifically instructed to do so by the member (so the member can still chose to receive payment of their benefit). The purpose of this regulation is to encourage the preservation of the benefits payable to a member on leaving a fund in a cost-effective and tax neutral manner, rather than those benefits being withdrawn (and spent) by the member. Preservation in the fund is designed to be more cost effective than traditional preservation funds have offered. It should be noted that this regulation will not prevent members from accessing their benefits on leaving service prior to retirement if they are adamant that they would like to do so.
  3. The annuity strategy – when a member reaches retirement, he or she will be offered the option to secure an annuity (regular monthly pension income) in terms of the annuity strategy that the board of trustees has determined to be the most cost-effective and appropriate. The choice of annuity (or annuities) remains that of the retiring member. The fund’s annuity strategy is designed to assist members who lack expertise, are unsure what to do with their money on retirement and/or cannot access suitable financial advisors regarding an appropriate retirement savings vehicle.

This sounds easy enough for the board of trustees to implement, right? Wrong! It has become apparent since the promulgation of the default regulations in 25 August 2017 and leading up to the looming implementation date of 1 March 2019 that there are a number of “teething” issues that need to be addressed, some of which remain unresolved, such as:

  • The format of several communication and other requirements in the default regulations are yet to be prescribed. These include: the format of “retirement benefits counselling” to be provided to members when they exit the fund, the format of the communication and costs disclosure to be provided to members in respect of the fund’s default investment portfolio; the format of the paid-up membership certificate to be provided to members upon becoming paid-up members; the manner in which funds are required to request paid-up membership certificates from new members who join the fund (as well as the manner of the request regarding how the member would like those benefits to be handled). In the absence of prescribed detail, funds will need to do their best to put in place measures that they believe comply with what was intended by the regulations.
  • Defined benefit funds are obligated to convert paid-up benefits to defined contribution amounts upon the member becoming paid-up and will require a default investment strategy for such benefits.
  • Funds that seek to be exempted from any provision in the default regulations are required to submit an exemption to the Financial Sector Conduct Authority in terms of the Financial Sector Regulation Act.
  • Whether section 37C of the Pension Funds Act, which imposes an obligation on the board of trustees to perform a detailed investigation and distribution process upon the death of a member, applies in respect of paid-up members.
  • Why it is not possible for members to elect to withdraw a portion of their benefit on exiting the fund and to preserve the balance of the benefit as a paid-up benefit. Such a restrictive approach tends to detract from the primary purpose of the regulation which is to promote savings. This approach also renders pension and provident funds incapable of providing the same options to exiting members as would be available to the members in a preservation fund.

It is clear from the above that boards of trustees are faced with a difficult task to ensure that their funds are 100% ready to implement all aspects of the default regulations by 1 March 2019 and need to consider urgently what still needs to be done.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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