Andre
Hermans - Shortcomings in the Pension Funds Amendment Bill Bll-2007
From: "Dries Visagie"
To:
Date 29 May 2007: 11 :41 PM
Subject: Shortcomings in the Pension Funds Amendment Bill BII-2007
Dear Mr Hermans,
I am an independent consultant in the retirement funds industry and have of
late spotted a number of serious shortcomings in this bill. Would you please
bring them to the attention of the decision makers as I am convinced that
changes to the bill are necessary in the interests of many pension funds and
their members. And some amendments are required for
the sake of orderly governance of our country and of having neat written laws.
(I was a member of working groups of the LOA and the Institute of Retirement
Funds for many years.)
The shortcomings are the following:
Contingency reserves
1. The proposed definition of "contingency reserve account" is not
merely increasing the regulatory powers of the registrar, but is giving the
registrar legislative powers. The registrar's power to disallow accounts or
impose requirements should be limited by linking it to some objective. To my
mind the registrar's aim with the amendment can be attained by merely giving
the registrar the power to limit the amounts of and the "explicit
contingencies" for which reserves may be kept, if he/she is satisfied that
this is necessary in order to balance the interests of the stakeholders.
Apart from this the proposed amendment can be read as excluding an account
which has been amended in accordance with the requirements of the registrar.
The choice of words seems to he unfortunate.
I would recommend wording like the following:
"'contingency reserve account', in relation to a fund, means an account of
the fund[, which has not been disallowed by the registrar or amended in
accordance with the requirements of the registrar, and] to which shall be
credited or debited such amounts as the board shall determine, on the advice of
the valuator where the fund is not exempt from actuarial valuations, in order
to provide for an explicit contingency[ies], provided that the registrar
is satisfied that the extent of the amounts credited to and to be credited to
the account and the holding of a reserve for the particular contingency
reasonably preserve a balance among the interests of the various stakeholders
in the fund;"
Contribution holiday
2. The proposed definition of "contribution holiday" in relation to a
defined benefit category of a fund is confusing. It seems as if the
contribution payable by members should be ignored, whereas it should only be
taken into account in determining the contribution by the employer. The words
"and the contribution payable by members" had relevance to the
deleted words "the difference between" and should be deleted as well.
Fund return
3. "Fund return" needs to be
expressed as a rate. Within paragraphs (a) and (b) of the
definition of fund return the word "any" should be substituted by
"the rate of'.
It seems possible and advisable to make provision for the smoothing of fund
return only once under its definition, in stead of repeating it several times
within the Act.
In any event, it seems necessary to clarify that it is not the fund return itself
that may be smoothed but the augmentation of the benefits by virtue of the fund
return.
Section 14B(2)(a)(ii)
4. The proposed section 14B(2)(a)(ii) requires a
number of amendments.
Firstly the proposed requirement, that all contributions be augmented by fund
return as from the date that the member joined the fund, would be impossible to
adhere to or at the least would place an enormous administrative burden on many
existing funds of the defined benefit category. Record keeping of fund returns
and of the dates of payment of contributions were never a necessity for most
defined benefit funds. Therefore I would suggest that the proposal be changed
to the effect that the amount under paragraph (ii) (which in any case applies
only if greater than the amount under (i)) is to be equal to:
(a) the existing withdrawal benefit as on the surplus apportionment date
augmented by fund return thereafter; plus
(b) the value of the member's contributions made after the surplus
apportionment date, less such expenses as the board deems appropriate to deduct
from the contributions, augmented by fund return; plus
(c) any amount payable in terms of the rules of the fund on termination of
service in excess of the sum of the amounts referred to in (a) and (b).
Secondly the proposal seems to require that every contribution (notwithstanding
the date of payment) must be augmented with fund interest for the entire period
of membership. This interpretation may be discarded as an absurdity, but the
meaning of the words remains unclear. They may also suggest that a uniform rate
of return should be applied to every contribution. There is no definition of
fund return in relation to a particular contribution from which one can infer
that only the returns generated after payment of that contribution are
envisaged. I would suggest that the words "as from the commencement
date" simply be deleted and not be replaced by "as from the date that
the member joined the fund". Otherwise the words "as from the date that
the member joined the fund" can be replaced by "as from the date of
payment".
Thirdly the addition to the minimum individual reserve of "any amount
payable in terms of the rules of the fund in excess of the member contributions
increased or decreased as from the date that the member joined the fund"
should be changed to clarify that the withdrawal benefit (termination of
service benefit) in excess of the contributions with fund return is envisaged.
The minimum individual reserve applies to all exits out of the fund and should
be the same in every case. Otherwise, in terms of many fund rules, the minimum
individual reserve would be less in the event of transfers of business and
liquidations and in some cases even upon the death or retirement of a member.
The following words are suggested for inclusion immediately after the words
"in terms of the rules of the fund": "at termination of
service".
Section 15F
5. The proposed amendments to section 15F provide for existing
contingency reserves to be transferred to the employer surplus account. This
would obviously not be allowed by the registrar, but the amendments also
provide that existing contingency reserves may no longer be treated as
contingency reserves.
I would recommend that, instead of deleting the word "employer" from
the expression "existing employer reserve account", the section be
amended to refer to a reserve the application of which was under the control of
the employer.
Alternatively subsection (1) should at least provide for the transfer of
existing reserves to contingency reserves as well.
Section 37D(1)(d) and (e) (Court orders)
6. (a) Paragraph (e) needs to be numbered subsection (3). It does not go with
(or match) the introductory words of section 37D(1).
(b) The reference to section 7(8)(a) of the Divorce
Act, 1979 should be a reference to the new paragraph (d) of section 3 7D(l).
This paragraph provides for orders other than divorce orders in terms of
section 7(8)(a) of the Divorce Act, 1979, as well.
(c) In the introductory sentence of paragraph (e) only the amount assigned to
the other party (plus the resulting income tax) should be deemed to accrue to
the member - and not "the pension benefit referred to" which is the
entire benefit.
(d) Sub-paragraph (ii) says that such deduction shall have the effect of reducing
the accrued benefit (presumably of the member) at the date of such deduction. I
gather that this tries to say that, when in future benefits accrue to or in
respect of the member, they will be equal to his reduced accrued benefits on
the date of the deduction with fund return plus benefits accrued thereafter.
But I do not think this goes far enough, because in many cases benefits are not
simply expressed as accrued benefits or as a function of amounts paid into the
fund plus fund return. For example under defined benefit funds the accrued
retirement benefit for prior service is affected by future salary movements. It
is not static, and therefore a provision is required to set out how this
changing accrued benefit is affected by divorce payments.
The Act should say that the fund' may reduce the benefits payable to or in
respect of the member (including the minimum individual reserve) by the amount
of the pension interest assigned to the non-member spouse or other person, plus
the amount of the resulting income tax, plus fund return on these amounts for
the period following the date of the court order. But paragraph (d) should be
worded in line with this, and then subparagraph (ii) can fall away.
Please also note that the reduction should be effective from the date of the
court order (which is the date that the amount assigned accrues 'to the other
party) rather than from the date of receipt of the court order, which date may
be difficult to prove in many cases.
(e) Sub-paragraph (iii) should be extended to include the other person.
(f) The resulting income tax should be worded as the income tax payable by the
member following upon the assignation. The income tax should not be limited to
the income tax payable on the amount assigned, but should include the income
tax payable on the amount to be withdrawn for the payment of the income tax.
Yours sincerely
Dries Visagie