PENSION FUNDS

1
PENSION FUNDS AMENDMENT BILL (2007)
BRIEFING TO THE SELECT COMMITTEE ON FINANCE
(NCOP) NATIONAL TREASURY AND THE FINANCIAL
SERVICES BOARD 19 June 2007
2
STRUCTURE OF PRESENTATION

• BACKGROUND
• OVERVIEW OF MAIN PROPOSED AMENDMENTS
• ? Approach in the presentation will be as
  follows
• (1) Issue for review
• (2) Brief summary of law governing the issue
• (3) Problems encountered / motivation for
  amendment
• (4) Outline of proposed amendment
• PUBLIC COMMENTS AND PCOF DELIBERATIONS

3
BACKGROUND

• Key problems in the regulation of the retirement
  funding environment
• ? High costs (administration charges and early
  termination penalties)
• ? Skimming of investment returns (secret
  profits, conflicts of interest)
• ? Investment losses (inappropriate exposure to
  high risk assets)
• ? Misappropriation of funds (misuse of pension
  fund surplus, fraud, theft)
• Key challenges in the regulation of the
  retirement funding environment
• ? Lowering costs through proper disclosure,
  competition and safety nets
• ? Improved governance of retirement funds (clear
  duties, codes of conduct)
• ? Trustee knowledge and training
• ? Appropriate application of surplus legislation
• ? Improving the supervisory abilities and powers
  of the FSB
• ? Encouraging a culture of compliance

4
BACKGROUND

• Key regulatory interventions to date
• ? Introduction of Office of Pension Funds
  Adjudicator (1998)
• ? Pension Funds Second Amendment Act, 2001
  (minimum pensions, surplus apportionment)
• ? Statement of Intent (SOI) with life industry
  to make restitution for poor early termination
  values on retirement annuities and other
  contractual savings products (December 2005)
• ? National Treasury Discussion Paper on
  Contractual Savings in the Life Industry (March
  2006). Draft regulations on commission structures
  and minimum early termination values.
• ? FSB and PCOF investigation of secret profits
  of pension fund administrators arising from
  practices such as bulking
• ? FSB actions against fraud and theft (e.g.
  Ghavalas case)

5
BACKGROUND

• Policymaker and regulator currently have a dual
  focus re. retirement funding
• (1) Short term immediate concerns with the
  implementation of current Act, and
• (2) Longer term the social security and
  retirement fund reform process
• Process (1) is the purpose of current hearings
  and Bill. Technical and urgent amendments to the
  existing Act.
• Process (2) began with issuance of discussion
  document on retirement fund reform by National
  Treasury in 2004. Second broader paper
  incorporating social security reform released on
  23 February 2007 by Minister of Finance.
• Inter-ministerial Committee and
  inter-departmental task team established. Some
  technical work completed, other research work
  on-going.
• International links established SA member of
  OECD working party (Dec 2006) workshop with
  international experts (May 2007)
• Drafting of a new Pension Funds Act likely only
  to commence in 2008.

6
PROCESS

• In respect of current Bill
• Proposed amendments initially released for
  stakeholder comment in 2006.
• Comments from unions, industry and related
  bodies, specific funds and individuals
• Stakeholder comment incorporated where relevant.
  Revised Bill submitted to Cabinet and approved in
  February 2007.
• Introduced into Parliamentary process Bill
  reviewed and certified by State Law Advisors in
  May 2007.

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• OVERVIEW OF PROPOSED AMENDMENTS

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SIGNIFICANT PROPOSED AMENDMENTS

• Inclusion of Bargaining Council funds (section 2)
  
• Specific provisions for pension fund
  administrators (section 13B)
• Closing loopholes and clarifying surplus
  apportionment (section 15B)
• Jurisdiction scope of the Pension Funds
  Adjudicator (section 30C)
• Increased powers of the registrar (sections 25,26
  and 33A)
• Treatment of divorce orders (section 37D)
• Retrospectivity (section 40B)

9
BARGAINING COUNCIL FUNDS

• Current law
• Section 2 of Act currently exempts bargaining
  council funds not registered under the Act. Most
  of these funds currently report to Dept. of
  Labour. Some voluntarily registered under the
  Act.
• There are approx 1,5 million members in these
  funds
• Problems
• Not afforded equal protection by being under the
  Act, and oversight by the Registrar
• No access of such members to the Pension Funds
  Adjudicator
• Surplus and minimum benefit provisions do not
  apply
• Supreme Court of Appeal judgment that BC funds
  are excluded under current formulation of section
  2
• Proposed amendment
• Bring such funds into the regulatory net. This is
  a first step and in line with the broader pension
  reform objective to have all retirement funds
  governed by the same Act.
• Transition period so that bargaining council
  funds will have time to adjust. (initial
  envisioned date of inclusion 1 January 2008).

10
ADMINISTRATORS

• Current law
• Registrar must grant approval to an administrator
  to operate (section 13B)
• Administrator needs to be fit and proper
• Problems
• Bulking and secret profits highlighted that
  though law was in place best to codify the
  specific duties of an administrator in the Act.
• Proposed amendment
• Codify duties expected eg. The administrator
  must have properly trained staff well defined
  compliance procedures furnish registrar with
  information timeously when requested disclose
  and manage conflicts of interest.
• Provide for remedies when non-compliant suspend
  or withdraw approval to operate direct
  administrator to take action or refrain from a
  certain practice impose administrative penalty
  etc.

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BRIEF OVERVIEW OF SURPLUS APPORTIONMENT
(sections 15A-J)
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BACKGROUND

• Pension Funds Second Amendment Act (2001)
  provided for
• - introduction of minimum benefits
• - procedure for apportioning surplus between
  stakeholders
• The Act recognised that surplus could be the
  result of accumulation by a variety of
  stakeholders including current members, former
  members, pensioners and the employer.
• It was also recognised that in some instances
  an employer may have abused the surplus
  available in a fund in the past (for example
  granting benefit improvements to only a select
  few executives).
• The PFSAA therefore sought to rectify past
  inequities and to go through the process of
  equitably dividing the surplus between
  stakeholders.

13
BACKGROUND

• Support document entitled Surplus Simplified
  provides overview of the surplus apportionment
  process
• Value of Surplus determined by
• actuarial valuation at the surplus apportionment
  date
• less acceptable contingency reserves
• less the costs of the surplus exercise
• plus the misuses in the past (eg. surplus
  utilised improperly)
• Types of scheme
• section 15B nil scheme where there is no
  surplus to distribute
• section 15B apportionment scheme where there is
  surplus

14
BACKGROUND

• Valuation and surplus scheme date must be seen as
  a unit
• Statutory actuarial valuation and surplus scheme
  inseparable
• Valuation report shows the initial amount of
  surplus. To this, any surplus utilised improperly
  in the past is added to determine the
  distributable surplus on which a surplus
  apportionment scheme should be based.
• If Registrar not satisfied with valuation report
  
• rejects if it does not correctly reflect the
  financial condition of the fund
• decision may be appealed to FSB Appeal Board

15
CLAIMS ON SURPLUS FIRST AND SECOND TIER SPLITS

• First tier split
• ? Former members who left after 1 January 1980 to
  receive minimum benefits
• ? Current pensioners to receive minimum increases
• If not enough surplus, the above is reduced
  proportionately
• Second tier split
• If there is residual surplus after the first tier
  split, it must be divided between
• ? Current members
• ? Former members
• ? Current pensioners
• Employer
• based on the financial history of the fund.

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SUBMISSION OF THE SCHEME

• 75 of Trustees must approve the scheme
• Former member representative must approve
• Communicate to all stakeholders and allow 12
  weeks for objections
• Consider, resolve and keep a record of all
  objections
• Submit scheme, objections and actions taken to
  resolve the objections to Registrar
• ? If the Registrar agrees that the scheme is
  reasonable and equitable and it recognises the
  rights and reasonable benefit expectations of
  all stakeholders, then the scheme is approved
  if not the submission will be queried.

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AD HOC TRIBUNAL

• Appointed if
• A scheme is not submitted
• Requested by Board of Trustees
• Requested by the former member representative
• Registrar not satisfied that scheme is
  reasonable and equitable, and trustees refuse to
  change the scheme
• The Tribunals decision is binding
• Costs of the tribunal are borne by the fund

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PROBLEMS IN IMPLEMENTATION

• Legal challenges, for example
• - meaning of improper use of surplus and date
  from which it applies
• - whether fund return should apply to improper
  use
• Registrar of Pension Funds vs Chairman of
  Sanlam Pensioenfonds (Kantoorpersoneel)
• - Court decided given current wording of Act
  that an investigation of surplus utilised
  improperly only has to go back to 7 December
  2001. Clearly not the intention.
• - Though Act became effective then, former
  members prejudiced (members from fund after 1
  Jan 1980)

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PROBLEMS IN IMPLEMENTATION

• Current reading of the Act
• - If no actuarial surplus, no explicit
  requirement to do improper use investigation in
  terms of section 15B(6)
• But such result defeats purpose of trying to
  account for surplus used improperly
• Registrar has found instances where employer is
  lax in repaying surplus utilised improperly.
  This prejudices all other stakeholders.
• Actuarial surplus should therefore include
  improper uses
• Proposal is to make this explicit in the
  definition of actuarial surplus. Thus after
  adding back improper uses, the fund must decide
  if surplus available for distribution
• Other terms in section 15B(6) require
  clarification / tightening of definition
• Implication Every fund should do the
  investigation into improper use and add it back
  to the actuarial surplus to determine if a
  distribution is required.

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PROBLEMS IN IMPLEMENTATION

• Nil surplus returns
• Currently the Act does not specifically provide
  that a return should be submitted if there is no
  surplus, but then
• Registrar not aware if funds have no surplus or
  whether a scheme is merely late
• Registrar therefore requires information to
  decide whether
• submission late and tribunal should be be
  appointed
• steps to be taken for late submission
• surplus possibly dissipated / concealed (eg.
  Contingency reserve based on unrealistic or
  overly conservative assumptions)

21
PROPOSED AMENDMENTS

• Section 15B requires clarification
• Clarify certain aspects of the existing surplus
  legislation e.g. period from which past improper
  uses should be considered
• Imperative that investigation period for past
  improper use be clarified as being at least from
  1 January 1980 to synchronise with the period for
  which former members should be taken into account
  else they will be prejudiced
• Clarify which funds are expected to submit
  surplus schemes to the Registrar
• Any advancement of a funds valuation date must
  be motivated to the Registrar
• Include deferred pensioners explicitly
• Authorise Registrar to set requirements for
  method and timing of repayment of improper uses
• Surplus benefits should be enhanced by fund
  return from the surplus apportionment date until
  date of payment

22
PROPOSED AMENDMENTS

• Clarify that reasonable measures must be taken to
  inform stakeholders that the scheme complies with
  section 15B
• Make explicit that the statutory actuarial
  valuation and surplus scheme are inseparable and
  must be considered jointly
• Require funds to submit nil surplus returns if no
  surplus and for Registrar to prescribe additional
  requirements for nil returns
• Enable umbrella funds to apply the requirements
  of surplus apportionment on a participating
  employer level

23
PENSION FUNDS ADJUDICATOR

• Current law
• Minister appoints the PFA budget under the FSB
• PFA has power to waive any time limit or period
  under his section
• Decision can be appealed to the High Court
• Problems
• Power to waive time limit goes beyond
  Prescription Act, and therefore inconsistent with
  other legislation.
• A full appeal can frustrate activities of PFA
  since new evidence may be submitted to court that
  was not placed before the PFA
• No provision in the Act for a Deputy or an
  acting Adjudicator impedes operational
  efficiency.
• Proposed amendment
• Bring PFA operations in line with Prescription
  Act (ie. 3 years)
• Build in a provision that specifically permits
  the court to adduce that no new evidence will be
  allowed. This encourages parties to place all
  relevant facts before the Adjudicator.
• Provide for one or more deputy adjudicators to be
  appointed by the Minister of Finance.

24
POWERS OF REGISTRAR

• Current law
• Registrar cannot remove trustees without first
  applying to court (section 26)
• No penalty powers
• Problems
• Court process too lengthy and does not serve the
  interests of members
• Lack of enforcement powers does not encourage a
  culture of compliance
• A need for the regulator to be more proactive and
  enable a risk-based approach to supervision
  bring supervisory powers more into line with
  international standards
• Proposed amendments
• Registrar must be able to intervene in management
  of a fund if members interests compromised
  (access to court not impinged)
• Registrar may, if in the best interest of the
  members of a fund remove the board of a fund,
  where the fund
• is not in a sound financial position
• failed to act where the fund is in an unsound
  financial position
• not managed in terms of the rules of the fund
• has no properly constituted board
• Registrar may replace any board member who is not
  fit and proper
• Streamlined powers of inspection (and on-site
  compliance visits)

25
POWERS OF REGISTRAR

• Proposed amendments
• Allow registrar to issue directives and impose
  administrative penalties for non-compliance by
  funds, administrators and third parties
• Registrar must before imposing a penalty
• Inform such administrator, fund or third party of
  the intention to impose a penalty
• Provide particulars of alleged non-compliance
• Provide details as to the amount of penalty to be
  imposed
• Give an opportunity to be heard to those
  non-compliant
• Administrator, fund or third party may be
  assisted by a legal adviser
• Ability of the registrar to name and shame when
  in the public interest

26
DIVORCE ORDERS

• Current law
• Spouses portion on divorce remains in fund until
  accrual without any return or growth
• Problems
• Inequitable treatment of spouse since money may
  remain in fund for quite some time
• Proposed amendment
• Clean-break principle To provide for the
  payment of benefits to a non-member spouse in
  terms of a divorce order, and permit payment of
  benefit (or remain in fund if the rules so
  provide and attract growth)

27
RETROSPECTIVITY

• It is proposed that amendments are made
  retrospective and deemed to come into operation
  on 7 December 2001 (section 40B)
• Objective to protect members, former members and
  the intention of Parliament in passing the PFSAA
  in 2001
• What will the effect on funds / surplus schemes
  be?
• Schemes already submitted and approved no
  re-submission
• Nil schemes already recorded will be deemed to be
  approved and no re-submissions will be required
• Schemes submitted but not yet approved registrar
  will refer scheme back to the fund where it does
  not comply, so that it can review. Registrar must
  give a reasonable period of time to review and
  resubmit
• Schemes not yet submitted statute as amended
  will apply

28
RETROSPECTIVITY

• If amendments not made retrospective then
• Many funds will not submit surplus schemes and
  registrar will not be in a position to determine
  whether a fund has surplus to apportion.
• If a fund has a deficit based on the actuarial
  valuation but a surplus if surplus utilised
  improperly was to be repaid, it will not be
  required to undergo a surplus scheme thereby
  prejudicing members to the benefit of employers.
• Surplus utilised improperly will only be
  investigated from 7 December 2001 thereby
  significantly weakening this requirement as much
  abuse took place prior to that date.
• Members will be prejudiced if fund return is not
  added to surplus payments from surplus
  apportionment date to date of payment.

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RETROSPECTIVITY

• If amendments not made retrospective then
• Many funds will not submit surplus schemes and
  registrar will not be in a position to determine
  whether a fund has surplus to apportion.
• If a fund has a deficit based on the actuarial
  valuation but a surplus if surplus utilised
  improperly was to be repaid, it will not be
  required to undergo a surplus scheme thereby
  prejudicing members to the benefit of employers.
• Surplus utilised improperly will only be
  investigated from 7 December 2001 thereby
  significantly weakening this requirement as much
  abuse took place prior to that date.
• Members will be prejudiced if fund return is not
  added to surplus payments from surplus
  apportionment date to date of payment.

30
PUBLIC COMMENTS

• PCOF received significant comment on the
  following areas
• Section 2 Bargaining council funds
• Argument that BCs have a variety of benefits the
  Pension Funds Act will not be able to accommodate
  them
• But FSB already supervises about 160 BC funds
  special circumstances have been and can be
  accommodated
• Registrar also has some flexibility to allow
  smooth transition
• Section 14(7) transfers between retirement
  annuity funds employers
• Argument that wording not tight enough to prevent
  churn from underwritten to non-underwritten RAs
• Issue of trail fees and a fee for advice
• Section 15B(6) Surplus utilised improperly
• Argument that surplus utilised improperly need
  only be from 7 Dec 2001 onwards
• But this subverts original intention of
  legislation

31
PUBLIC COMMENTS

• PCOF received significant comment on the
  following areas
• Sections 25, 26 and 37(1) Powers of the
  Registrar
• Power to remove trustees without first going to
  Court conduct on-site visits and inspections,
  and to impose administrative penalties
• Argument was that powers are too wide
• But proposed powers will bring Registrar in line
  with international standards
• Necessary for proper enforcement and protection
  of members
• Section 40B Retrospectivity
• Bill proposes that surplus sections are made
  retrospective to 7 Dec 2001
• Argument was that retrospectivity is
  unconstitutional and unfair
• Unless explicitly retrospective Court will not
  interpret as being retrospective, hence problem
  with surplus utlised improperly
• Needs to be made retrospective to give effect to
  legislatures intention in 2001, else former
  members will be severely prejudiced

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AMENDMENTS TO BILL

• The Bill has been amended as follows in the light
  of comments and PCOF deliberations
• Tightening of definitions and wording (eg.
  Definition of non-member spouse and employer
  for purposes of surplus utilised improperly
  removal of reference to an illegitimate child).
• Enhancement of section 14(7) to eliminate the
  possibility of churning by intermediaries from
  underwritten to non-underwritten RAs.
• Only those fees permissible in original RA fund
  can be charged on the balance transferred to the
  new type of RA
• Tightening and broadening of clause 40B on
  retrospectivity to include the submission of a
  nil return
• This provides that the registrar may revisit a
  previously recorded nil return if he / she
  believes that the return does not truly reflect
  the surplus position of a fund
• New clause 40C Scrutiny of regulations
• Before regulations are promulgated, the Minister
  must publish for comment in the Gazette and
  submit to Parliament for scrutiny while in
  session

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END OF PRESENTATION

• CONTACT DETAILS
• National Treasury
• Jonathan Dixon, Jo-Ann Ferreira
• Chief Director Financial Sector Policy
  Unit Chief Director Public Entities Governance
  Unit
• Jonathan.Dixon_at_treasury.gov.za
  Jo-Ann.Ferreira_at_treasury.gov.za
• [phone] [phone]
• Baron Furstenburg Motlatsi Gabaocwe
• Director Financial Markets Senior Economist
  Financial Markets
• Baron.Furstenburg_at_treasury.gov.za Motlatsi.Gabaoc
  we_at_treasury.gov.za
• [phone] [phone]
• Financial Services Board
• Jurgen Boyd Marius du Toit
• Deputy Executive Officer Pensions Chief Actuary
• JurgenB_at_fsb.co.za Mariusdt_at_fsb.co.za