Treasury releases draft regulation for retirement reforms
The draft proposals have been released for public comment.
“These proposals form part of the broader retirement and savings reforms initiated in 2011, outlined in the document 2014 Budget update on retirement reforms, released on 14 March 2014. The improvements in market conduct for the retirement industry are also in line with the Treating Customers Fairly initiative and the Retail Distribution Review (RDR) currently underway, led by the Financial Services Board (FSB),” said Treasury.
Past papers released by Treasury highlighted that the retirement industry in South Africa is “characterised by complex and opaque products, with high charges. These factors make it impossible for consumers and employers to exercise choices in a way that leads to best outcomes for members of retirement funds.
Low rates of preservation and participation in the retirement system, particularly by lower paid workers, exacerbate the problem, leading to higher than necessary costs and charges,” explained Treasury.
According to Treasury, these draft regulations to section 36(1)(c) of the Pension Funds Act “will require all retirement funds to operate a set of default policies that are in the long-term interests of members rather than of service providers. The regulations will also prescribe the conditions that such default policies are required to meet.”
In addition to the reforms in the Pension Funds Act, the Tax Laws Amendment Bills (which have also been published for public comment) “also contain proposals to close loopholes to ensure that no retirement funds are inadvertently excluded from reform measures already enacted,” highlighted Treasury.
Under current legislation, there is no requirement for service providers or investors to offer default options to members who do not wish to exercise their choices when making decisions. Where these defaults are in place, Treasury noted that they are often in favour of the service provider’s interests, and not necessarily the member’s.
The draft regulation aims to address this issue of bad default options for members. Treasury said: “Ensuring that defaults are appropriate, that they serve the members’ best interests and provide good value for money is therefore of paramount importance.”
The regulations therefore require “funds to have default investment portfolios for the investment of retirement savings, default annuity strategies for members upon their retirement, and default preservation rules for members on termination of membership before retirement.
“The aim of the default strategies is to reduce complexity by requiring retirement funds to develop cost-effective, standardised and easily accessible products during the accumulation phase, when members withdraw from funds before they retire, and when members convert their retirement savings into an income upon retirement.
“The default regulations will provide guidance to trustees in ensuring that retirement funds serve members’ best interests, even when members are not fully engaged with their retirement funds,” added Treasury.
Default investment strategy
New legislation will require all contribution retirement funds to have simple, cost-effective and transparent default investment strategies (portfolios), where investments for members who do not make investment decisions can be invested. In addition, the fees for these portfolios must be reasonable and regularly disclosed to members.
Furthermore, “performance fees, loyalty bonuses or similar charge structures are not permitted for default investment portfolios. Members should not be locked into a default investment portfolio, but should be able to transfer from one portfolio to another. Default investment strategies may not contain any insurance element, but must be purely for investment purposes, and pay-outs cannot depend in any way on the reason for a member’s exit,” explained Treasury.
Default annuity strategy
There is currently no protection for members when they retire or leave a fund, leaving them vulnerable.
“All retirement funds should have a responsibility to assist exiting members, many of whom are at their most vulnerable when they retire, with no financial advice provided. All defined contribution retirement funds, including retirement annuity funds, will therefore be required to have in place a default annuity strategy,” said Treasury.
Under the new regulations, “various products can form part of the default annuity strategy. For example, in-fund guaranteed pensions, in-fund living annuities, in-fund with-profits pensions, and certain out of fund life annuities guaranteed by a life office are all permitted. Trustees may also mix different products as part of the strategy. Members can however opt out and move into other annuity products of their choice if they wish. Funds must also make retirement benefit counsellors available to members on retirement to assist them in understanding the default annuity strategy,” added Treasury.
Default preservation strategy
All retirement funds are required to have a default preservation strategy, according to Treasury, the aim of which is to ensure “that members’ retirement savings will follow them automatically from job to job as they change employment throughout their careers.”
Retirement funds are required to make provisions for ‘paid-up members’ (those no longer employed and therefore no longer making contributions), as well as for new members wishing to transfer retirement savings into a fund from another fund.
To ensure that paid-up members are looked after, the new regulations state that “recurring charges may not differ between active and paid-up members, and initial charges may not be levied when members become paid-up. No further contributions will be allowed if a member opts to preserve within a fund of a former employer.”
To read the full draft regulations, click here.
The public has until 30 September 2015 to submit comment on the new draft regulations. It can be submitted via fax ((012) 315 5206), email (email@example.com), or post at:
Ms Alvinah Thela
Director: Retirement Funds
Private Bag X115