FINANCIAL PLANNING INSTITUTE OF SOUTH
AFRICAN
WRITTEN SUBMISSION TO PARLIAMENT ON THE PENSION
FUNDS AMENDMENT BILL
1.
INTRODUCTION
1.1
The
explanatory memorandum to the Pension Funds Amendment Bill (“BILL”) explains
rather blandly that its primary objective is to enhance the protection of the
pension interest of the members of pension funds. In truth, the main reason for the BILL is to
plug holes in legislation (particularly the surplus legislation) that were
exposed to have no effect prior to the Pension Funds Second Amendment Act
passing through Parliament in 2002.
1.2
Over
the intervening period since 2002, other defects in the Pension Funds Act
(“ACT”) have become apparent in not only the sections dealing with surpluses
but in other areas as well.
1.3
The
BILL also seeks to amend references to out of date legislation.
1.4
The Financial
Planning Institute (“FPI”) regrets the unnecessary delays in the retirement
fund reform process: the formal publication of the BILL was expected to have
happened during the third term of 2006.
1.5
The
purpose of this document is to:
1.5.1
Briefly
describe the main changes that are proposed to the ACT, and
1.5.2
To comment
and express an opinion on such changes.
1.6
The
explanatory memorandum to the BILL has been quoted in certain passages in this
commentary.
2.
SUMMARY
2.1
The
main topics that are covered in the BILL are:
2.1.1
Clarification
surrounding surpluses utilised improperly in terms of section 15B of the ACT, as
well as other provisions relating to surplus apportionment;
2.1.2
Extension
of the application of the ACT to retirement funds established through bargaining
council agreements and to bring these funds under the regulatory auspices of
the Registrar of Pension Funds (“REGISTRAR”).
Bargaining council funds not yet registered under the ACT must register
on or before 1 January 2008;
2.1.3
Increasing
the powers of the REGISTRAR to intervene in the affairs of a fund without first
having to obtain a court order; this is intended to increase regulatory
effectiveness;
2.1.4
Providing
for specific duties of pension fund administrators;
2.1.5
Clarifying
the jurisdiction of the Pension Funds Adjudicator (“PFA”) and the appointment
of a deputy and acting adjudicator as well as alignment with the Prescription
Act;
2.1.6
Clarification
on the treatment of divorce and maintenance orders in respect of pension
benefits;
2.1.7
Updating
provisions in the ACT which are no longer aligned to existing legislation.
3.
CONSEQUENTIAL AND
TECHNICAL CHANGES TO THE ACT
The FPI have
noted the consequential and technical changes that are reflected in sections 1,
3, 4, 5, 29, 28(a) and 30 of the BILL.
4.
SECTION 1 –
Definition Clause
4.1
This
section, containing 23 sub-sections, envisages approximately 26 amendments to
the ACT. Many of the proposed amendments
are purely of a technical nature or are incidental to other changes in
legislation. The following amendments
deserve comment:
4.1.1
Section
1(a)-(b): The definition of an actuarial surplus has been
expanded.
4.1.2
Section
1(c): Various new definitions have been introduced
that are used in the BILL. A beneficiary
now includes the nominee of a member or a dependant.
4.1.3
Section
1(l): The definition of a “fund return” is introduced into
the ACT. A wide definition is given to
the term, to include “income (received or accrued) and capital gains and losses
(realised or unrealised) earned on the assets of the fund, net of expenses and
tax charges, associated with the acquisition, holding or disposal of an asset.”
4.1.4
Section
1(m): This section states that in the calculation of the
member surplus account, the board may
elect to smooth the fund return.
4.1.5
Section
1(u): This section aligns the act with the
definition of a “spouse” as contained in various other acts. Although opposite-sex co-habitants will also
be covered under the ACT as dependants (as defined in sub-section (i)(b)(i) of
the BILL), “common law spouses” will not be deemed to be spouses for purposes
of the ACT. Opposite-sex domestic partners may find themselves still “out in
the cold” should a board of trustees resolve that a person who lived together
with a member as a “common law spouse”, does not qualify as a dependant. The position of opposite-sex domestic
partners remains a grey area in South African law, and perhaps even more so in
pension law.
5.
SECTION 2 – Application of the Act
5.1
This
section makes it clear that all bargaining council funds must be registered in
terms of the ACT and will be subject to the ACT. Some commentators are of the
opinion that despite registration, bargaining council funds will remain subject
only to the provisions of the Labour Relations Act (“LRA”), where regulation
and supervision is practically non-existent.
5.2
In its
comment on the draft bill given in 2006, the FPI highlighted certain issues that
required attention in the opinion of the FPI.
None of the issues drawn to attention of the Financial Services Board
have been addressed in the BILL, with the consequence that this area remains
fraught with difficulty, as two conflicting Acts (the ACT and LRA) will apply to
bargaining council funds.
5.3
While
the inclusion of funds established through bargaining councils is welcomed in
principle, the FPI suggests that more preparation and research must be done
before the full inclusion of bargaining council funds under the provisions of
the ACT. Some of the more immediate
conflicts and problems that come to mind are discussed below.
5.4
With
regard to the election of a pension fund’s board of management, not all members
of a bargaining council fund have a say in the collective agreement, due to the
LRA principle of “majoritarianism”.
Minority unions whose membership does not meet the agreed threshold for
membership of the bargaining council, and members in a closed shop collective agreement
situation, will not be able to participate in the election of the fund’s board
of management.
5.5
The
preceding is due to the fact that sec. 33A of the LRA provides:
“(1) Despite any other
provision in this Act, a bargaining council may monitor and enforce compliance
with its collective agreements in terms of this section or a collective
agreement concluded by the parties to the council.
(2) For the purposes of
this section, a collective agreement is deemed to include:
(a) any basic condition of
employment which in terms of section 49(1) of the Basic Conditions of
Employment Act constitutes a term of employment of any employee covered by the
collective agreement ; and
(b) the rules of any fund
or scheme established by the bargaining council.
(3) A collective agreement
in terms of this section may authorise a designated agent appointed in terms of
section 33 to issue a compliance order requiring any person bound by that
collective agreement to comply with the collective agreement within a specified
period.”
5.6
In
other words, in terms of the LRA, pension fund rules registered with the
REGISTRAR will become part of the collective agreement as established by the
majority trade union and majority employer representative. The collective agreement, and thereby the
fund rules, are extended by the Minister to non parties/minority unions in
terms of section 32 of the LRA. Many such extended agreements relating to
pension funds exist. The LRA principle of
‘majoritarianism’ is therefore being undermined by the proposed change.
5.7
Section
28 (1) (g) of the LRA provides that the powers and functions of a bargaining
council includes the power to establish and administer pension schemes,
provident schemes or funds for the benefit of one or more of the parties to the
bargaining council, or their members. In
practice this has the effect that contributions are paid to the bargaining
council and benefits are paid by the bargaining council. This is in conflict with the ACT.
5.8
In
order to ensure compliance with the provisions of a collective agreement, the
LRA sets out detailed compliance procedures and mechanisms to address non
compliance. These procedures are is
distinctly different to the procedure contained in the ACT.
5.9
Benefits
negotiated at bargaining councils also frequently provide for accident
benefits, disability income benefits and funeral benefits. These are not permitted by the REGISTRAR to
be included in pension fund rules.
5.10
To
change the agreement and get all the participating employers in bargaining
council funds to effect their own assurance arrangements for all members at the
same time is not practical. Some bargaining
council funds have as many as 250 or more participating employers, in addition
to which not all employees of an employer will always participate in the
bargaining council fund, but only those covered by the bargaining sector (for
example, unionised employees). Non-unionised employees are treated differently because of the
bargaining council agreement. Taking
only certain aspects out of
the bargaining council realm is most likely to be very disruptive to collective
bargaining for members, unions, the bargaining council and employers.
5.11
A
further aspect is that of dispute resolution.
Bargaining council collective agreements are required to have their own
dispute resolution mechanisms. These
provisions usually relate to binding arbitration. The rules relating to dispute resolution are
different in the LRA and the ACT. There
is likely to be much uncertainty how dispute resolution mechanisms in fund
rules should be drafted and complied with.
5.12
Similarly,
the trustees’ right in terms of the ACT to amend rules of the pension fund is
likely be in conflict with the right of the parties to a collective agreement
to change the collective agreement. This
is important, as the collective agreement can vary terms and conditions of
employment, yet when trustees amend the rules of a fund, they are not parties
to the main agreement. At law, a non
party to an agreement cannot vary an agreement entered into between other
parties. The effect of the BILL is an unavoidable
conflict of law.
5.13
The
above areas of concern also need to be considered against the backdrop of
Section 210 of the LRA which reads:
“If any conflict, relating
to the matters dealt with in this Act, arises between this Act and the
provisions of any other law save the Constitution or any Act expressly amending
this Act, the provisions of this Act will prevail.”
The proposed amendments to
the ACT do not expressly amend the LRA, consequently, there is likely be much
conflict and legal uncertainty which in turn will lead to increased costs and disputes. There are other complex matters, the impact
of which need to be addressed, such as work place forums, appeals against
decisions of the REGISTRAR, enforcement of bargaining council collective
agreements in terms of the LRA (as opposed to compliance matters dealt with in
the ACT, for example, the payment of contributions to the fund by an employer)
the unfair provision of benefits and many more. It is suggested that in order
to achieve the desired result of all funds being regulated by the PFA, the LRA
should be amended.
6.
SECTION 6 –
Calculation of Interest
This section puts
a time frame to the payment of interest.
Previously, the ACT only stated that interest was payable but not from
which point in time. It is now clear
that interest accrues from the first day following the expiration of the period
in respect of which such amount was payable:
in most instances this will be from the 7th day after the end
of the month in which contributions became due.
7.
SECTION 7 – The
Duties of Administrators
7.1
A
whole raft of measures designed to regulate the duties of pension fund
administrators are included for the first time in the ACT. Steps that the REGISTRAR may take in the
event of non-compliance are also listed.
7.2
In
summary, administrators are now legally obliged to:
7.2.1
Avoid
conflict between the interests of the administrator and the duties owed to the
fund. Specifically, any conflict
of interest or potential conflict of interest must be managed and disclosed by
the administrator to the board;
7.2.2
Administer
the fund in a responsible manner;
7.2.3
Keep
proper records;
7.2.4
Employ
adequately trained staff and ensure that they are properly supervised;
7.2.5
Have
well-defined compliance procedures;
7.2.6
Maintain
adequate financial resources to meet its commitments and to manage the risks to
which the fund is exposed;
7.2.7
Furnish
the REGISTRAR with such information as is requested.
7.3
In the
event of non compliance by an administrator, the REGISTRAR may:
7.3.8
Direct
the administrator to stop any practice;
7.3.9
Direct
the administrator to withdraw from the administration of a fund. The board must
then appoint another administrator;
7.3.10
Suspend
or withdraw the administrator’s approval to act as an administrator;
7.3.11
Impose
an administrative penalty;
7.4
The
REGISTRAR also has the power to publicise the fact that an administrator is
does not comply with the ACT.
7.5
The
FPI propose that administrators be given an avenue to appeal a REGISTRAR
ruling, before penalties are applied or publication of transgressions is done.
7.6
Clarification
is needed in respect of the appointment of sponsor (administrator) appointed trustees
in the instances of umbrella funds.
8.
SECTION 14 –
Amalgamations and Transfers
8.1
The changes to this section are most welcome as
the section 14 process is the most bureaucratic process prescribed in the
ACT. The main changes are:
8.1.1
Provision
for a section 14 transfer to be submitted to the REGISTRAR within 180 days of
the effective date of the transaction. Currently, there is no time limit and
some processes are very protracted.
8.1.2
The
most positive aspect is that section 14 transfers are no longer required where
affected members were duly informed and at least 75 % of those members agreed
to the transaction, provided that any objection they may have had has been
resolved to the satisfaction of the board of the fund concerned, and both
transferor and transferee funds are valuation exempt. The conditions for this
to happen are :
8.1.2.1
funds are required to keep proper records of all
such transactions;
8.1.2.2
any assets transferred must be augmented with fund
return from the effective date until the date of final settlement.
8.1.3
In
general, all funds involved in a transfer must ensure that assets are
transferred within 180 days.
8.1.4
The
section also authorises the REGISTRAR to impose conditions on the amendment or
withdrawal of a certificate previously issued by the REGISTRAR in respect of
compliance with section 14(1).
8.1.5
It
also provides for the lapsing of a scheme lodged with the REGISTRAR where a
fund failed to provide the REGISTRAR with information requested within a period
of 180 days.
9.
SECTION 9-10 –
Minimum Benefits
9.1
Changes
to this section are mainly technical and designed to clarify wording. The wording of the section can indeed be
described as clear.
9.2
Important
changes are the following:
9.2.1
Section
14A (1): Previously, it was not clear from a legal perspective
that members included pensioners and deferred pensioners. This has now been rectified.
9.2.2
Section 14A (1)(d): It is clear
that minimum pension increases
must be granted.
9.2.3
Section 14B (2)(a)(i)(aa): This change ensures that prospective
increases in the rate of accrual are equitable and appropriate.
9.2.4
Section 14B (2)(a)(i)(cc): This section ensures
that any lump sum benefit, in
addition to a pension payable at retirement, is included when the minimum
individual reserve is determined.
9.2.5
Section 14B (2)(a)(ii): Wording is clarified and aligned with the
definition of “fund return”.
9.2.6
Section 14B (3)(c): This section
deals with funds where the granting of minimum pension increases is
inappropriate, namely:
9.2.6.1
Retirement annuities that are purchased from an
insurer;
9.2.6.2
Pensions where the pensioner has agreed to a fixed
increase;
9.2.6.3
Pensions where the pensioner has accepted a fixed
rate pension.
9.2.7
Section 14B (4)(a): This change
ensures that funds are not forced into providing pension increases when the
fund’s financial soundness would be affected.
9.2.8
Section
14B (6): This change
ensures that contingent pensions are included in the calculation of minimum
individual reserves where the related beneficiaries are still alive.
10.
SECTION 11-14 –
Surplus Apportionment
10.1
The
changes to section 15B are, as mentioned earlier, of importance to funds going
through a surplus apportionment process.
The changes (where they do have impact) do not apply to surplus
apportionment schemes that have been completed and the surplus disbursed.
10.2
The
main changes are:
10.2.1
Section
15B (1)(a): This section clarifies which funds are subject to the
submission of surplus apportionment schemes.
Some funds were initiated prior to surplus apportionment legislation in
2001 but only achieved final registration later. Such funds must submit a
scheme to the REGISTRAR for approval.
10.2.2
Section 15B (1)(b): This section
requires the approval of the REGISTRAR for any change of a fund’s statutory actuarial
valuation date. It is designed to
eliminate the manipulation of a surplus apportionment date, to a period when
there might be a lower surplus available.
10.2.3
Section 15B (5): This change finally makes it clear that deferred pensioners are entitled to have
their pensions topped up by minimum pension increases to the surplus
apportionment date and is in line with the treatment of ordinary pensioners.
10.2.4
Section 15B (5)(d): Improperly used surplus constitutes a debt
payable by the employer in its books.
The REGISTRAR may now set requirements relating to the method for and
timing of the repayment of any surplus utilised improperly.
10.2.5
Section 15B (5)(f): The change in
this section makes it clear that the fund return is payable to stakeholders from the surplus apportionment
date until the date of final settlement.
10.2.6
Section 15B (6): This section makes
it clear that investigations
into the improper use of surpluses must go back to at least 1 January 1980 and thereby
overturns the decision in the Sanlam staff fund case. In this case the court
ordered that such investigations need only go back as far as 7
December 2001.
10.2.7
Section 15B (9)(d): The onus rests
on a fund to demonstrate that reasonable steps have been taken to inform
employers, members and former members of the scheme.
10.2.8
Section 15B (11): A “nil” return must be submitted to the REGISTRAR
where a fund does not have surplus to apportion.
10.2.9
Section 15B (12): This section makes
it clear that individual surplus apportionment schemes are required for
participants in an umbrella fund.
10.2.10
Section
15E & F: These
sections allows for transfers from the employer surplus account to the member
surplus account, while it is also allowed to transfer a credit balance in an
existing reserve account to the employer surplus account.
11.
SECTION 14 – Surplus
Tribunals
11.1
This
section of the BILL gives the REGISTRAR the power to appoint an ad hoc
tribunal to perform the functions of the board as set out in section 15 B of
the ACT.
11.2
According
to recent media reports more than 75% of funds have not submitted surplus schemes;
clearly, the appointment of a special ad hoc tribunal to perform the
functions in section 15 B seems like an unmanageable task. The question must be asked whether this
section can be successfully implemented.
For example, it is not clear whether the errant funds will carry the
cost of the tribunal or whether public funds will be used for the tribunal.
11.3
It is
proposed that the enforcement of the apportionment process be reviewed. It should perhaps be left in the hands of
members or even the REGISTRAR to pursue errant funds through the office of the
PFA.
12.
SECTION 15-16 –
Powers of the Registrar
12.1.1
The
REGISTRAR is granted the power to direct that an audit or section 16
investigation may be done if the REGISTRAR considers it necessary in the
interest of a fund.
12.1.2
The
costs of such an investigation or audit must be borne by the fund.
12.1.3
The
REGISTRAR may also instruct a person to conduct a compliance visit to a fund or
an administrator. A person conducting
such a visit, has the right to all such documents “as may be reasonably
required”.
13.
SECTION 17 –
Powers of Intervention
13.1
Prior
to the amendment, the REGISTRAR had to approach the court to alter the basis of
management of a fund.
13.2
The
BILL gives the REGISTRAR the power to act on three levels, namely:
13.2.1
The
amendment of the rules of a fund:
13.2.2
The
appointment of an interim board;
13.2.3
The
dismissal of errant trustees:
13.3
Not
only are the powers that are granted to the REGISTRAR wide in its scope, it is
no longer subject to the prior scrutiny of the court. It remains to be seen how these powers will
be used by the REGISTRAR. The section may
lead to litigation and it may even be asked whether the section dealing with
the dismissal of a trustee without the sanction of the court will survive
constitutional scrutiny. It is also not
clear whether this section will be subject to the Promotion of Administrative
Justice Act (“PAJA”).
14.
SECTION 18 –
Voluntary Dissolutions
The REGISTRAR may
exempt a fund from the requirements of section 28 of the ACT. This discretion should be welcomed by smaller
funds where there are only a few members.
It remains to be seen whether the REGISTRAR will publish a directive on
exemption, alternatively whether applications for exemption will be dealt with
on an ad hoc basis.
15.
SECTION 19 –
Power to Condone
The power to
condone non compliance by complainants with procedural time limits is granted
to the Pension Fund Adjudicator (“PFA”).
Similar provisions can be found in other acts, for example, acts regulating
the CCMA, Magistrates Court and similar
tribunals.
16.
SECTION 20 –
Appointment of Adjudicator
16.1
According
to the Annual Report of the Pension Fund Adjudicator 2005-2006, the office of
the PFA received 4901 complaints during the reporting period. Although this number might seem relatively
low, the growth in the number of complaints has been substantial over the past
years.
16.2
The
PFA also strives to achieve a turnaround time of 6 months to resolve
complaints. According to the annual report
this is only achieved in 53% of complaints.
Given the growth in complaints over the past years and the fact that
turnaround times are not met, the power to appointment additional deputy
adjudicators is welcomed.
16.3
The minister’s
power to appoint an acting adjudicator is noted.
17.
SECTION 21 –
Applicability of the Prescription Act
17.1
The
applicability of the Prescription Act 68 of 1969 to complaints is welcomed, as
this will help to bring legal certainty in respect of many complaints.
17.2
Consumerist
groups may be opposed to the application of the Prescription Act to complaints
before the PFA, as some complaints may expire before they can be pursued before
the PFA.
17.3
However,
the applicability of the Prescription Act will in many instances help to protect
minors with complaints since prescription does not run against minors.
17.4
In the
interest of the fund members (many who are quite often uneducated and unaware
of their rights) trustees must ensure that members are aware of the
applicability of the Prescription Act to any complaints that that they may wish
to pursue and that if a complaint is not pursued in time, the compliant may
lapse.
18.
SECTION 22-23 –
Access to Court and Processes
18.1
In
recent months, the role of the High Court in the review of Adjudicator rulings
has been a contentious issue.
18.3
Notwithstanding
what was stated in clause 18.2, the process that is followed by the PFA to reach a
ruling is very much an inquisitorial process, as opposed to the accusatorial
process that is a distinguishing characteristic of the South African legal landscape. The consequence of this is that when a ruling
by the PFA - a decision that was reached during an inquisitorial process that
is geared towards a low cost solution - is appealed, it is met by an
accusatorial process that takes no or little cognisance of prohibitive legal
costs.
18.4
The
National Treasury is therefore faced with the challenge to create the processes
and procedures to be applied to the PFA that will ensure that the PFA remains
accessible, but that, at the same time, the process that is followed by the PFA
is in harmony with the South African legal paradigm.
18.5
In
this regard the, the power to prescribe processes and procedures that is
granted in section 23 is welcomed. It
should be a priority of the National Treasury to formulate a law of procedure
for the PFA. Such a process should
remain accessible and cheap.
19.
SECTION 24 –
Directives
19.1
The
FPI have noted the REGISTRAR’S powers to issue binding directives. This new section should bring certainty with
regards to the status of Circulars that are issued by the REGISTRAR.
19.2
The
FPI welcomes the fact that the directives issued by the REGISTRAR will be
subject to the Promotion of Administrative Justice Act.
19.3
In the
interest of ensuring that directives are adequately publicised, all directives
that are issued to “ensure the protection of the members and the public” must
be published in the Gazette, in order for the directive to become effective.
20.
SECTION 25 –
Regulations
The deletion of 36
(1) (b) is noted. It is assumed that the
powers to prescribe the form of any document will now formally settle in the REGISTRAR
and that forms will now be issued in the form of Directives, as has been the de facto situation for a number of years.
21.
SECTION 26 –
Administrative Penalties
The new section
37 is noted. The publication by the
minister of the proposed penalties is awaited.
22.
SECTION 27 –
Death Benefits
This section
brings clarity with regard to pensions that are payable to the dependants of a
member, on the death of such a member.
According to the section, such pensions will be subject to the rules of
the fund, and not to the ACT. Fund rules
will have to provide for these circumstances.
23.
SECTION 28 –
Treatment of Divorce Orders
23.1
The
uncertainties that prevail in so many divorce proceedings with regard to the
division of a member’s pension interest will hopefully be clarified by the
introduction of section 37 D (1).
23.2
However,
the fact that “any amount assigned from his pension interest to a non-member
spouse or any other person…” may be deducted, creates ambiguity. It is unclear what is meant by “any other
person” and in light of the objects of the BILL, the word “person” should be
replaced with the word “dependant” as defined in the ACT.
23.3
The
election that is granted to a non-member spouse to elect that the “assigned
amount” be paid out to the non-member is also against the objects of the
BILL. It is proposed that the non-member
spouse is only allowed to elect for payment in the event that the amount falls
within the recently suggested framework for early withdrawal. In all other instances the non-member spouse
must be obliged to transfer the divorce payment to an approved fund.
23.4
The
tax dispensation applicable to such withdrawals will have to be clarified by
SARS.
24.
SECTION 29 –
Delegation and Authorisation
The powers of
delegation granted to the Minister should streamline the process of regulation.
25.
CONCLUSION
25.1
It is
clear that the delegated power of the REGISTRAR has been extended in many
areas. Although many administrative acts
are subject to the rules of administrative justice and PAJA, “over-regulation”
must be avoided. Litigation between
funds and the registrar may become more prevalent, due to the REGISTRAR’S
comprehensive powers.
25.2
Additional
regulation usually brings additional costs.
The costs of regulation will ultimately be carried by the members of
funds, thereby reducing their benefits.
25.3
The
formal law that applies to the PFA must be expanded to provide for a
comprehensive process. Many of the
rulings of the PFA have a far reaching effect, and the time has come to
formalise the processes of the PFA. The
challenge will be to ensure that the PFA remains accessible to the blue collar
fund member who does not have the educational background to follow the
complicated legal processes nor the funds to engage the services of a lawyer.
25.4
The
reform of pension legislation does not take place in a legislative vacuum. As many of the above comments show, related
legislation will have to be amended. The
LRA is one example where a holistic approach to reform, and not merely the
amendment of one act, is required.
Hannes
Esterhuyse
Johannesburg
March
2007