The Financial Services Board (FSB) is delaying high-priority retirement fund reforms to ensure that measures to better protect your retirement savings are legally sound.
One of the reforms to be delayed is the conversion to enforceable regulations of a FSB guidance note to retirement fund trustees, known as PF 130. These regulations will require stricter standards of governance in the management of your retirement savings, including avoiding conflicts of interest between trustees and service providers. Avoidable conflicts of interest have been behind nearly every recent retirement fund disaster.
Speaking at a Pension Lawyers Association function in Cape Town, Rosemary Hunter, the newly appointed FSB deputy executive in charge of retirement funds, says that the FSB is doing its best “to stop the rip-offs (of retirement fund member savings) that we see at the moment. The way things have been done in the past have not been sufficient to protect retirement funds.”
But she wants to be absolutely sure that any regulatory measures are rigorous, designed on the basis of a proper understanding of the different risks associated with different kinds of funds and administrators, and that the measures are legally defensible. This could take as long as two years and may require some interim protection measures.
She says it does not build confidence if the regulator is seen to be “flip-flopping” and changing regulation because it was not adequately prepared in the first place. “The stronger the bases for our decisions, the more confidence we and others can have in them,” Hunter says.
She detailed a wide range of areas to which attention is being given by her FSB division and National Treasury to improve the protection of your retirement savings. These include:
* The scaled implementation of the treating customers fairly (TCF) principle-based regulatory regime for retirement funds. Hunter says the six principles of TCF are as applicable to the relationship between retirement funds and their members as they are to financial services providers and their clients. She says the TCF principles will also be built into conditions for the licensing of retirement funds, fund administrators and those who collect contributions payable to funds.
* The drafting of sets of “best practice” rules for retirement funds and beneficiary funds falling within different categories.
* A review of how the voices of members of umbrella funds and their employers can be heard better. Currently umbrella fund members, unlike members of stand-alone funds, do not have the right to elect trustees. This means that the b oards of umbrella funds may be out of touch with the needs of members.
* Improving fit and proper requirements for trustees, with the tightening of minimum qualifications. Hunter says, however, that setting a standard is difficult. A trustee without a matriculation certificate may be a more effective trustee than someone with a degree.
* Providing guidance on the interpretation of regulation 28 of the Pension Funds Act, which sets prudential requirements aimed at limiting investment risks for your retirement savings. The regulation underwent a major overhaul two years ago, but there are still uncertainties and anomalies in it. Hunter says workshops will be held in the new year to sort out the difficulties in interpreting the regulation, which is “more complicated than can be imagined”.
* The establishment of a new panel of curators, and a review of how curators and liquidators are appointed and operate and the fees they charge. This is alongside an ongoing controversy about the high fees paid to curators and liquidators, the way in which they use their own legal and accounting firms without putting the work out to tender, and the high cost of legal action, which is usually paid for by fund members.
Hunter referred to the recent arbitration award in favour of Standard Bank against Tony Mostert, curator of the SA Commercial Catering & Allied Workers Union National Provident Fund, which reportedly could cost the fund members more than R20 million in legal and related costs.
Mostert, who has recovered more than R1 billion for members of various retirement funds that saw their surpluses stripped by employers in the 1990s, has also been involved in a high-profile legal scrap with one of the employers, Simon Nash, in which his fees have been raised as an issue.
* Stricter licensing conditions for retirement fund administrators. Hunter says that conditions for the registration of new administrators is under review, and these could include limiting the number of funds administered by one company until the robustness of systems and services of the company can be proved. In the past, a number of administrators have failed in their services to funds, which have then delayed benefit payouts to members.
* The closure of dormant and cost-ineffective retirement funds. There are some 6 500 retirement funds registered, but a large proportion of these are dormant or not cost-effective. Hunter says the funds cannot be simply closed or merged with other funds, or members transferred to umbrella funds without the FSB knowing exactly what is happening to their assets and whether there are benefits that must be paid. She says that even if a fund’s only liability is a few thousand rand payable to a widow in Malawi, the FSB must do what it can to ensure that the woman gets the money.
She says there are a few thousand small funds, established by employers such as individual schools and churches, which are probably too small to provide value for money. The sustainability of these funds needs to be checked.
But she says care also needs to be taken in transferring members of these funds to umbrella funds. She says there should be further consolidation of funds, but it should come with greater freedom of movement between funds to allow members to “get the best deal”.
* Reviewing “lock-in” rules or practices by retirement funds. Hunter says the FSB receives many complaints about employers agreeing to let employees move to other funds, but their existing funds make it impossible for them to do so.
“It is not the business of trustees to determine conditions of employment for members,” Hunter says. “That is the business of unions and employers. The boards of funds must make sure that they provide value-for-money benefits with the money they have received. And if employers and employees, by agreement, decide that the employees should belong to a different fund, the fund should not stand in their way.”
Board and minister to work together
Much of the reform of retirement funds will be done by notices and directives issued by the Financial Services Board (FSB) rather than amendments to legislation.
Rosemary Hunter, the FSB’s deputy executive in charge of retirement funds, says that in 2008, many of the powers the Minister
of Finance had to prescribe standards for retirement funds and administrators were transferred to the FSB. But the minister has retained some powers. So it is important that her team and the minister’s retirement reform team regularly consult each other to ensure that the reform measures that each might want to adopt are in harmony.
In his recent medium-term budget speech, Finance Minister Pravin Gordhan made a passing reference to retirement reform without spelling out details.
He said financial sector reforms are now in the implementation phase, with the “twin peaks” legislation to establish two new regulatory authorities (the FSB to regulate market conduct and the Reserve Bank to ensure the financial soundness of the sector) to be submitted to cabinet shortly.
“The retirement reform programme is also progressing, with the consultation process on retirement fund costs at its final stage. Draft regulations will soon be released,” Gordhan said.
Other issues
Other major retirement reform issues that still have to be finalised include:
* How retirement funds should ensure compliance with the annuitisation and preservation provisions provided for in the Taxation Laws Amendment Bill. This includes the phasing out of provident funds, which allow members take all the retirement savings as a lump sum at retirement. It also deals with the payment of pensions for life.
* The National Social Security Fund. It was proposed some years ago that every formally employed person should at least be a member of this fund, which would provide minimum required benefits.
* The enforced preservation of retirement savings until retirement.
* Costs. National Treasury is determined to reform the industry in a way that reduces costs, which are, particularly with life assurance products, among the highest in the world.