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

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

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”

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

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

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?

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

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

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?

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.

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

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).

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

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?

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?

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

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?

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?

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

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”

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

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?

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