DEFAULT REGULATIONS TO THE PENSION FUNDS ACT Speaker: Carlyle Field

Purpose Improve outcomes for members by ensuring that they get good value for their savings and retire comfortably. Three pillars: 1. Default in-fund preservation on withdrawal Default investment portfolio Default annuity strategy (opt-in) Emphasis on simplicity, cost-effectiveness and transparency.

Background First draft – July 2015. Second draft – December 2016. Final version – August 2017. Effective dates: For new default arrangements that come into effect after 1 September 2017, immediate (in media statement). For existing default arrangements, by 1 March 2019 (in regulation and media statement). Final clarity - for all funds registered before 1 March 2018, by 1 March 2019 (FSB Notice 3 of 2017).

International trends Themes are receiving major attention in other jurisdictions, however South Africa is well advanced (largely due to a more developed financial services industry, particularly our annuity market). IORP II (EU Directive) – directive, not binding, emphasis on cost disclosure. USA – Department of Labour audits funds regarding costs, issued directive in June 2017, subject of extensive litigation. UK and Europe making great strides in auto-enrolment (we fall short) but then fall short because of annuitisation flexibility.

DEFAULT INVESTMENT PORTFOLIO REGULATION 37 DEFAULT INVESTMENT PORTFOLIO

Overview Responsibility of the Board to establish an investment policy statement which provides for a default investment portfolio, only applicable to a fund with a defined contribution category. May differ in composition from member to member depending on age, value of savings or contributions or any other factor considered by the board to be appropriate (new). At least two options: one lifestage-type portfolio. members placed in one of two (or more) different portfolios based on these factors.

Overview (continued) “The Board…must be able to demonstrate to the Registrar on request that”: Design is “appropriate” for members taking into consideration “objectives…asset allocation…fees and charges…expected risks and returns”. Asset allocation and fund return must be communicated to members (format to be prescribed).

Overview (continued) All fees and charges (implicit and explicit) to be disclosed to the board and relevant (new) information to be disclosed to members. Passive and active investment considered. No loyalty bonuses or complex fee structures (fees cannot be dependant on length of membership or number of contribution made)

Overview (continued) Members may transfer to any other offering at least once every 12 month. Portfolio must be reviewed on a regular basis to ensure compliance.

Implementation Minimal difficulties anticipated – most funds with a DC section already offer member investment choice. Many funds will rely on the advice of investment and asset consultants and simply adopt a “tick-box” approach to ensuring that member investment choice (in particular the default option) complies with the regulation.

DEFAULT PRESERVATION AND PORTABILITY REGULATION 38 DEFAULT PRESERVATION AND PORTABILITY

Overview “The rules of that fund must provide…” Members must automatically be made paid-up members on termination of service. Until Fund is instructed to pay out or transfer benefit. Fund must provide paid-up membership certificate within 2 months of becoming aware that member has left service.

Overview (Fees) Investment fees may not differ based on whether member is paid-up or still in-service. Administration fees must be fair, reasonable and “commensurate” (new) to fees for in-service members. No “initial once-off” (new) charges to be levied as direct consequence of becoming paid-up.

Overview (Transfers In) Fund rules must allow transfers in of any benefit with a defined contribution component. Must “request” (new) all paid-up membership certificates within 4 months of member joining Fund. Must request member to advise which amounts must be transferred in. No charges to be levied for transfers in.

Overview (Paid-up conditions) No new contributions. No deductions for risk benefits. Defined benefit amounts must be converted to defined contribution on preservation. Eligibility for “death” (new), retirement and early retirement benefits must be stipulated in fund rules.

Overview (Paid-up conditions) Members must be given access to retirement benefits counselling, defined as: “disclosure and explanation, in clear and understandable language, including risks, costs and charges, of: the available investment portfolios; the terms of the fund’s annuity strategy; the terms and process by which a fund (*) handles preserved benefits in terms of regulation 38; and any other options available to members.” new – deleted “including a member’s new fund” (this is practical – surely current fund cannot give advice regarding the new fund)

Implementation Concerns: Essentially creates “flexible deferred” option – if member makes no election, they become a paid-up member and can choose to receive benefit at any later stage. But if a fund has a deferred option (with no option to exit before retirement), and a member elects that option, then they are “locked in” to that option – clearly unfair. Further to previous point, what does the fund do with existing deferred members – allow them to now claim early payment or simply close deferred section?

Implementation (continued) Concerns: If a person comes back after years to claim a benefit, must they be given retirement benefit counselling then? More practical to provide in rules that it will be given at effective date of exit. Does not allow partial preservation, which does not encourage preservation (notwithstanding any tax issues regarding two accruals – that can be addressed). A member is effectively not allowed the same options as someone who transfers to preservation fund and takes one withdrawal.

Implementation (continued) Concerns: How does deduction of administration fees for paid-up members not constitute a reduction of a benefit – is an amendment to section 37A or 37D necessary? What if administration fees completely erode the benefit – must the fund still keep a record? It could be argued that paid-up members cannot be transferred in terms of section 14 without their consent (argument previously made in respect of unclaimed benefit beneficiaries) so safer to specify in rules that this will be done without their consent.

Implementation (continued) Concerns: Paid-up requirements should not apply to closed funds (goes against objective of winding down pensioner only funds/funds with no in-service members) but only funds “in liquidation” are exempt? What is the format for exemption?

Implementation (continued) Concerns regarding death benefits: Until PF Act is amended, 37C probably applies to any paid-up benefit that is due as a lump sum. If 37C is amended, then the fund’s rule can specify to whom the benefit will be paid (this could be the reference to “eligibility for death benefits” since deductions for risk benefits are expressly prohibited). Recommendation is to make no reference to 37C in the rules (don’t impose 37C investigation duty unnecessarily) and specify that benefit will be paid either to the estate or according to nomination form.

REGULATION 39 ANNUITY STRATEGY

Overview “The Board…must be able to demonstrate to the Registrar on request that”: It has designed an annuity strategy (new – does not have to be in the rules) and in doing so has considered: The level of income the annuity will be paying to members Investment, inflation and other risks of income to be paid to members Level of income protection afforded to beneficiaries of annuitant on death of annuitant.

Overview (continued) Objective, asset class composition and performance of living annuity (new) are communicated to members regularly. All fees and charges for the annuity are reasonable and competitive. All fees and charges (implicit and explicit) to be disclosed to the board and relevant (new) information to be disclosed to members.

Overview (continued) Members are given access to retirement benefit counselling not less than 3 months before retirement. Strategy reviewed annually. Living annuities can be paid from the fund or external provider or in terms of fund owned policy. Investment choice limited to 4 portfolios, compliant with regulation 28 (new) and drawdown levels must be compliant with “a prescribed” (new) standard (previously “industry accepted”).

Overview (continued) Funds must monitor sustainability of income drawn down for in-fund and fund-owned living annuities and must make member aware (then what?). Strategy can also offer annuities other than living annuities (either in-fund or external) as part of the strategy. Strategy must be implemented by all funds that offer or provide annuities to members on retirement (including preservation and retirement annuity funds).

Implementation There is debate whether 37C (death benefits) applies to in-fund living annuitants. Our view is that it does not because it is a pension (not lump sum) benefit. Recommendation is to specify in the rules what will happen to the benefit on the death of the principal pensioner i.e. continue to be paid as a pension to a specified beneficiary or will lump sum be distributed (either in terms of section 37C or as per nomination form).

THANK YOU