1. The ‘Default’ Regulations – An update
Graham Damant
Fiona Rollason
Deirdre Phillips

2. Reg 37: Default Investment Portfolio(s)
PFA Guidance Note 8 of 2018 – FSCA’s guidance on the application of the Default Regulations
What is the status of a “Guidance Note”?
Section 141(1) of the FSRA allows the FSCA to issue “guidance notices”
Guidance notices are for information, and are not binding

3. Reg 37: Default Investment Portfolio(s)
Draft Conduct Standard: Standard determining the criteria for smooth bonus policies in default investment portfolios
What is the status of a “Conduct Standard”
FSRA permits the FSCA to issue a “Conduct Standard” in terms of s106(1)(a)
“regulatory instrument” as defined in the FSRA includes “conduct standards”, and the term “financial sector law” includes “regulatory instruments”
S167 administrative penalties for non compliance with “financial sector law”

4. Reg 37: Default Investment Portfolio(s) – Guidance Note
Participating employer may, fund rules permitting, choose the default
A fund does not have to have more than one default investment portfolio
No grandfathering provisions will apply
Application for extension from complying with Regulation 37 in terms of the FSRA

5. Reg 38: Default preservation and portability – Guidance Note
Template paid-up certificate was published

6. Reg 38: Default preservation and portability
Is there an obligation to certify and verify information?
Whose obligation is it to retain paid-up member certificates?
What if the fund / administrator is not advised that a member has left service, and whose obligation is it to notify the fund?
What happens if a fund is not advised that a member has left service? What date should be used as the date of termination of service?

7. Reg 38: Default preservation and portability – Guidance Note
Retirement benefit counselling can be in person or in a written format
Funds to retain records of the counselling
Counselling should be given 6 months before a members retirement
Deduction of administration fees does not constitute a reduction as contemplated in section 37A of the PFA

8. Reg 38: Default preservation and portability – Guidance Note
Member may elect at any stage to transfer benefit to another fund and no charges may be levied in respect of the transfer, except s14 transfers
FSCA of the view that section 37C of the PFA is applicable to a paid-up member’s benefit in the same manner it would apply to any other death benefits

9. Reg 38: Default preservation and portability – Death benefits
S37C(1)
Definition of “member”
Benefit payable by a fund on the death of a member does not form part of the deceased estate because no right in respect of the benefit accrued to the deceased member before death
Payment to deceased paid-up member’s estate?

10. Reg 38: Default preservation and portability – S37D deductions?
Scenario
S19(5):An employer made good its guarantee in respect of the employee and paid the outstanding amount due to the lender on behalf of the member. The member withdraws from service, however, elects to become a deferred pensioner and deferred payment of his / her benefit until retirement. The employer requests the fund to make a deduction in terms of s37D(1)(b)(i)(bb) of the PFA.

11. Reg 38: Default preservation and portability – S37D deductions?
Purposive interpretation - leans toward an interpretation that a deduction would be permitted in the event that a member deferred benefit
Conservative interpretation – leans toward the fund not being entitled to make deductions and instead would need to wait until deferred pensioner elects to receive benefit

12. Reg 38: Default preservation and portability – S37D deductions?
Scenario
S19(5): An employer made good its guarantee in respect of the employee and paid the outstanding amount due to the lender on behalf of the member. The member leaves service of the employer prior to retirement and does not instruct the fund in writing to pay out or transfer the withdrawal benefit. The member’s benefit is preserved in the fund. The employer requests payment of the amount due to it in terms of s37D(1)(b)(i)(bb).

13. Reg 38: Default preservation and portability – S37D deductions?
No expressed or implied provision in Reg 38 which prohibits a fund from deducting an amount in terms of s37D
Conservative and purposive interpretation

14. Reg 38: Default preservation and portability – Unclaimed Benefits
FSCA’s interpretation of Reg 38(1)(b)(i) is such that benefits of members who leave service before retirement may never become unclaimed and as such cannot be transferred to an unclaimed benefits fund
What is the current position in relation to unclaimed benefits?
What if the rules provide that a paid-up member’s benefit may be transferred to an unclaimed benefit fund?

15. Reg 38: Default preservation and portability – Unclaimed Benefits
Definition of “unclaimed benefit” as defined in the PFA
When does a benefit accrue in law?
When does a benefit accrue from an Income Tax perspective?

16. Reg 38: Default preservation and portability – Fees
FSCA advised in the Guidance Note that administration fees for paid-up members should in the normal course be less than the administration fees for in-service members due to the absence of contributions to administer and schedules to consider every month
Reg 38(1)(c) requires administration fees for paid-up members to be “fair, reasonable and commensurate with the cost of providing the administration service to members still in the service of the participating employer”
Some funds allocate a percentage of salary to fund administration expenses for contributing members

17. Reg 38: Default preservation and portability - other issues
What happens if the rule amendment incorporating the required provisions of the Regulations have not yet been approved by the FSCA?
Can members still elect to preserve in fund from 1 March, and if so, can the benefit structure differ between elected preserved and defaulted preserved members?

18. Reg 38: Default preservation and portability – other issues
What happens if the rule amendment incorporating the required provisions of the Regulations have not yet been approved by the FSCA?

19. Reg 39: Annuity Strategy – Guidance Note
Annuity strategy does not apply to beneficiary funds
Provident funds and provident preservation funds do not have to comply with Reg 39 unless the rules enable a member to elect an annuity strategy
The investment choice in relation to living annuities is limited to a maximum of four investment portfolios

20. Reg 39: Annuity Strategy
Is a fund obliged to have more than one annuity strategy?
“a strategy, as determined by the board, setting out the manner in which a member’s retirement savings may be applied, with the member’s consent, to provide an annuity or annuities by the fund or to purchase an annuity on behalf of the member from an external provider, which annuity or annuities may either be in the name of the member or in the name of the fund and which complies with the requirements of regulation 39 and any conditions that may be prescribed from time to time”

21. Reg 39: Annuity Strategy
Reg 39(3) determines the requirements in respect of living annuities where it is included as part of the annuity strategy
Reg 39(3)(a) requires that the drawdown levels from living annuities be compliant with a prescribed standard.
Draft Conduct Standard: Criteria for living annuities in a default annuity strategy
The purpose of the draft standard was to prescribe the drawdown levels

22. Reg 39: Annuity Strategy
20 February 2019: General exemption from regulation 39(3)(a) until the final standard is issued
FSCA said that “the board of a fund is expected to exercise its fiduciary duty in determining the drawdown levels by taking into account the particular nature of the fund and circumstances of their membership. The drawdown levels cannot, at any time, exceed those prescribed for living annuities in terms of the Income Tax Act, 1962”
Does the board have a fiduciary duty (or any duty) to determine drawdown levels?

23. THANK YOU