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Conduct of Financial Institutions Bill – second draft available and the effect on Pension/Retirement Funds

Following on the Financial Sector Regulation Act, 2017 (“FSR Act“), the Conduct of Financial Institutions Bill (“COFI“) was published by the Minister of Finance in December 2018 for public comment until 1 April 2019.

The second draft of the Conduct of Financial Institutions (CoFI) Bill published on 29 September 2020 contained a significant number of proposed amendments to the Pension Funds Act (PFA) which were not in the first draft published in December 2018.

National Treasury gave members of the public only until 30 October 2020 to comment on the second draft, including the proposed changes to the PFA. It is Treasury’s intention to submit it to parliament early in 2021 and once once promulgated will in all probability have a 3-year transition period.

The Bill is intended to streamline the conduct requirements for financial institutions, which are currently regulated by a number of financial sector laws.

COFI will replace the conduct provisions in existing financial sector laws, which will entail the repeal of various provisions in certain Acts or the repeal of others. This will ensure that all laws are mutually reinforcing and empower the Financial Sector Conduct Authority (“FSCA“) to appropriately use financial sector legislation to meet its market conduct mandate.

The Acts which will be affected include:

The Pension Funds Act, 1956 (“PFA“)
The Long-term Insurance Act, 1998
The Short-term Insurance Act, 1998
The Financial Institutions Act, 2001
The Financial Advisory and Intermediary Services Act, 2002
The Collective Investments Schemes Control Act, 2002 (“CISCA“)
The Financial Sector Regulation Act, 2017
The Insurance Act, 2017

On 1 April 2018, South Africa’s financial regulatory system changed when two new regulators come into operation – the Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA). This implemented a new Twin Peaks model of financial sector regulation in South Africa.

The Twin Peaks framework reforms broaden the FSCA’s jurisdiction over all financial institutions in South Africa and accordingly some financial institutions will have to obtain a direct conduct licence from the FSCA, whilst others may be licensed and supervised by other laws, but will have to comply with the requirements of the COFI Bill.

The aim of the Financial Sector Conduct Authority (the FSCA) is that COFI will create a ‘robust regulatory framework that promotes fair customer treatment’.

When COFI is fully promulgated it will regulate the way in which financial institutions conduct themselves and provide a new legal framework, which will:

a) strengthen consumer protection by making Treating Customers Fairly (TCF) principles law;
b) provide more flexibility and better tools to the Regulators of the financial services industry, including the FSCA;
c) give legal effect to transformation.

The COFI Bill will bring about significant changes to the Pension Funds Act and is the focus of this article.

Financial institutions will have to have a license for each financial activity falling under COFI that it provides to its customers. Schedule 1 to COFI Bill lists the activities of a financial institution that will require licensing. Penalties for conducting a financial activity that falls within the ambit of COFI without a license are severe; up to R15 million fine or 5 years’ imprisonment, or both.

Retirement/Pension Funds

A retirement fund must be licensed under the COFI Bill for the activity of providing benefits to its members and the retirement fund is still required to be registered by the FSCA.

The trustees in their capacity as governing body must ensure that the fund has arrangements in place to give effect to what is required under COFI. The governing body must ensure that it promotes fair treatment of fund members, makes responsible and ethical financial decisions which support the integrity of financial markets, avoids, or appropriately manages conflicts of interest and gives effect to its transformation policy.

The fund must:

a) ensure that its benefit structure is appropriate for the profile of its membership and that its benefits match the members’ expectations;
b) communicate with members in clear, plain, and unambiguous language;
c) ensure there are no unreasonable barriers when members claim their benefit on retirement or withdrawal from service or when a member lodges a complaint.

The participating employer in a retirement fund will now be supervised by the FSCA but only in relation to the employer’s compliance with Section 13A of the Pension Funds Act.

Public Sector funds such as the Government Employees Pension Fund will now have to be licensed under the Pension Funds Act and under COFI and the same principles and requirements will apply but not in a negative manner.

A central fund for unclaimed benefits will be established. The new central unclaimed benefits fund will be regulated under the Pension Funds Act and will be governed by a board comprising 6 trustees, all of whom will be appointed by the FSCA.

Significant proposed changes to the Pension Funds Act

  1. The name of the Act will change to the Retirement Funds Act.
  2. Definition of ‘retirement fund’ will be added which will encompass all funds regulated under the current Pension Funds Act. Each type of retirement fund will be separately defined, but the wording of these definitions will describe what the different funds actually do.
  3. A definition of ‘Occupational Fund’ will be added. This related to the type of fund in which a principal employer and its subsidiaries or associated employers participate, currently known in the industry as a ‘stand-alone’ fund.
  4. A definition of ‘Umbrella Fund’ will be introduced and will apply only to those umbrella funds known as ‘Type A’ umbrella funds i.e umbrella funds which operate in terms of special rules which apply to an individual participating employer.
  5. A definition of ‘sub-fund’ will also be introduced. The sub-fund is a section of the umbrella fund in which a particular employer participates. The general rules of the umbrella fund must be amended to provide that
    the asset, liabilities, rights, and obligations of each sub-fund must be separately maintained. No cross-subsidisation between the sub-funds will be permitted – for example, a surplus in one sub-fund cannot be used to fund another sub-fund which is underfunded.

Changes to Section 37C of the Pension Funds Act

  1. Where a fund has successfully traced a dependant, the benefit must be paid to the dependant within two months of the fund tracing the dependant.
  2. If a pensioner receiving an in-fund living annuity or life annuity dies in the guaranteed period, the balance of his or her benefit must be paid to the nominees. If there are no nominees, it must be paid into the estate of the member. If there is no inventory, then the benefit must be paid to the Guardian’s Fund or unclaimed benefit fund – presumably, the central unclaimed benefit fund.
  3. COFI has specified the age at which minor dependants and minor nominees must be paid the balance of such benefit where they are being paid in instalments. This is the age of majority or any other age agreed between the fund and the beneficiary, but it may not exceed 21 years of age.

Changes to Section 37D of the Pension Funds Act

  1. The wording of the Section will be revised so that deductions which are permissible in terms of Section 37D may take place when the member leaves the service of the employer, instead of when the member ceases to be a member of the fund. Therefore, a deduction permissible in terms of Section 37D could be made from the benefit of a paid-up member.
  2. Interim maintenance orders may be enforced by a fund. Arrear maintenance may be paid by the fund as a lump sum, but future maintenance payment must be made in instalments, either monthly or annually.
  3. The pension interest which may be payable to a non-member spouse may be reduced by a member’s direct or guaranteed housing loan if the housing loan was granted before the divorce order. However, if a fund is aware that a divorce action is pending, it may not grant a housing loan to a member without the consent of the non-member spouse.

Note: that recently promulgated Acts also have an effect on withdrawal of retirement funds upon emigration. In the case of emigration, refer to the Taxation Laws Amendment Act No. 23 of 2020. This information is also provided in a separate article but for the sake of the reader a caption is given below.

From 1 March 2021, taxpayers will no longer be able to access their retirement benefits upon completion of the emigration process through the South African Reserve Bank, commonly referred to as “financial emigration”. After this date, taxpayers will only be able to access their retirement benefits if they can prove they have been non-resident for tax purposes for an uninterrupted period of three years. Importantly, taxpayers can still access their retirement benefits under the old dispensation if they file their financial emigration application on or before 28 February 2021. If you miss this deadline, your retirement benefits will be locked in for a period of at least three years.

Additionally, new tax rules regarding the annuitisation of provident funds will be coming into effect on 1 March 2021.

These rules were first raised in 2013 and formed part of the process to harmonise the tax treatment of the different kinds of retirement funds. In the Explanatory Memorandum that accompanied the Taxation Laws Amendment Bill of 2013, National Treasury (NT) stated that:

‘A strong link exists between insufficient retirement income for retired members of provident funds and the lump sum payouts made by provident funds at retirement. In short, the absence of mandatory annuitisation in provident funds means that many retirees spend their retirement assets too quickly and face the risk of outliving their retirement savings. In view of these concerns, it is Government’s policy to encourage a secure post-retirement income in the form of mandatory annuitisation.’

The tax treatment of contributions to retirement funds has already been aligned. Since 1 March 2016, contributions to pension funds, provident funds and retirement annuity funds (RAs) are subject to the same rules regarding deductibility.

The annuitisation rules

In terms of the annuitisation rules, members of retirement vehicles, irrespective of whether the vehicle in question is a pension fund, provident fund or RA, will be subject to similar rules regarding access to cash on retirement.

With specific exceptions provided in the ‘grandfathering’ provisions, from 1 March 2021, members of all retirement funds will only be able take one-third of the total value of their retirement fund interest by way of a lump sum with the balance being taken as an annuity.

This is further subject to an exception where the total retirement interest does not exceed R247 500, in which case the full amount may be taken in cash.

The grandfathering provisions (‘vested right protection’) exist to ensure that the restriction will only apply to amounts contributed to funds on or after 1 March 2021 and not to members who are close to retirement.

The rules will not apply to:

  1. The credit in the fund as at 1 March 2021 and subsequent fund return on that amount; or
  2. members of provident funds and provident preservations funds aged 55 years and older on 1 March 2021 who will be entitled to take their full benefits on retirement (including the fund return) as well as any contributions made to the provident fund after 1 March 2021.

Impact on provident funds and their administrators

Provident funds and their administrators will need to keep accurate member records indicating the pre-March 2021 contributions and growth, and post-March 2021 contributions and growth and is relevant to the COFI Bill.

The Government Employees Pension Fund (GEPF)

It is important to note that the GEPF is not a government institution but rather a separate juristic entity. It was established in May 1996 when the Government Employees Pension Law came into force (Proclamation/Act No.21 of 1996) and is therefore separate from the Pension Funds Act of 1956 and is not negatively affected by any changes or requirements listed in the proposed COFI Bill.

The single most important characteristic of the GEPF is that it is a defined benefit fund, meaning that the GEPF promises benefits in terms of the rules set out in the Government Employees Pension Law and these benefits are not calculated on the basis of how the fund is invested.

This is important as it means that the pensions and the benefits due to members and pensioners are guaranteed in terms of the law.

The only issues that matter in how members are paid, is the years of service that the members have in the GEPF and their final salary at the time they exit the fund, as these determine the amount of the pension or pay-out if one resigns.

Author Craig Tonkin

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