1

PENSION FUNDS AMENDMENT BILL

(2007)

BRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCEBRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCENATIONAL TREASURY AND THE FINANCIAL SERVICES BOARDNATIONAL TREASURY AND THE FINANCIAL SERVICES BOARD

29 May 200729 May 2007

2

STRUCTURE OF PRESENTATION

• BACKGROUND

• OVERVIEW OF MAIN PROPOSED AMENDMENTS

Approach in the presentation will be as follows:

(1) Issue for review

(2) Brief summary of law governing the issue

(3) Problems encountered / motivation for

amendment

(4) Outline of proposed amendment

3

BACKGROUND• Key problems in the regulation of the retirement funding environment:

High costs (administration charges and early termination penalties)

Skimming of investment returns (secret profits, conflicts of interest)

Investment losses (inappropriate exposure to high risk assets)

Misappropriation of funds (misuse of pension fund surplus, fraud, theft)

• Key challenges in the regulation of the retirement funding environment:

Lowering costs through proper disclosure, competition and safety nets

Improved governance of retirement funds (clear duties, codes of

conduct)

Trustee knowledge and training

Appropriate application of surplus legislation

Improving the supervisory abilities and powers of the FSB

Encouraging a culture of compliance

4

BACKGROUND• Key regulatory interventions to date:

Introduction of Office of Pension Funds Adjudicator (1998)

Pension Funds Second Amendment Act, 2001 (minimum pensions,

surplus apportionment)

Statement of Intent (SOI) with life industry to make restitution for poor

early termination values on retirement annuities and other contractual

savings products (December 2005)

National Treasury Discussion Paper on Contractual Savings in the Life

Industry (March 2006). Draft regulations on commission structures

and minimum early termination values.

FSB and PCOF investigation of secret profits of pension fund

administrators arising from practices such as “bulking”

FSB actions against fraud and theft (e.g. “Ghavalas” case)

5

BACKGROUND• Policymaker and regulator currently have a dual focus re. retirement funding:

(1) Short term: immediate concerns with the implementation of current Act, and

(2) Longer term: the social security and retirement fund reform process

• Process (1) is the purpose of current hearings and Bill. Technical and urgent

amendments to the existing Act.

• Process (2) began with issuance of discussion document on retirement fund reform

by National Treasury in 2004. Second broader paper incorporating social security

reform released on 23 February 2007 by Minister of Finance.

– Inter-ministerial Committee and inter-departmental task team established. Some

technical work completed, other research work on-going.

– International links established: SA member of OECD working party (Dec 2006);

workshop with international experts (May 2007)

– Drafting of a new Pension Funds Act likely only to commence in 2008.

6

PROCESSIn respect of current Bill:

• Proposed amendments initially released for stakeholder comment in 2006.

– Comments from unions, industry and related bodies, specific funds and individuals

• Stakeholder comment incorporated where relevant. Revised Bill submitted to Cabinet and

approved in February 2007.

• Introduced into Parliamentary process: Bill reviewed and certified by State Law Advisors in

May 2007.

7

OVERVIEW OF PROPOSED

AMENDMENTS

8

SIGNIFICANT PROPOSED AMENDMENTS

1. Inclusion of Bargaining Council funds (section 2)

2. Specific provisions for pension fund administrators (section 13B)

3. Closing loopholes and clarifying surplus apportionment (section 15B)

4. Jurisdiction & scope of the Pension Funds Adjudicator (section 30C)

5. Increased powers of the registrar (sections 25,26 and 33A)

6. Treatment of divorce orders (section 37D)

7. Retrospectivity (section 40B)

9

BARGAINING COUNCIL FUNDS

Current law:

• Section 2 of Act currently exempts bargaining council funds not registered under the Act. Most

of these funds currently report to Dept. of Labour. Some voluntarily registered under the Act.

• There are approx 1,5 million members in these funds

Problems:

• Not afforded equal protection by being under the Act, and oversight by the Registrar

• No access of such members to the Pension Funds Adjudicator

• Surplus and minimum benefit provisions do not apply

• Supreme Court of Appeal judgment that BC funds are excluded under current formulation of

section 2

Proposed amendment:

• Bring such funds into the regulatory net. This is a first step and in line with the broader pension

reform objective to have all retirement funds governed by the same Act.

• Transition period so that bargaining council funds will have time to adjust. (initial envisioned

date of inclusion: 1 January 2008).

10

ADMINISTRATORS

Current law:• Registrar must grant approval to an administrator to operate (section 13B)• Administrator needs to be “fit and proper”

Problems:• Bulking and “secret profits” highlighted that though law was in place: best to

codify the specific duties of an administrator in the Act.

Proposed amendment:• Codify duties expected: eg. The administrator must have properly trained staff;

well defined compliance procedures; furnish registrar with information timeously when requested; disclose and manage conflicts of interest.

• Provide for remedies when non-compliant: suspend or withdraw approval to operate; direct administrator to take action or refrain from a certain practice; impose administrative penalty etc.

11

BRIEF OVERVIEW OFSURPLUS

APPORTIONMENT (sections 15A-J)

12

• Pension Funds Second Amendment Act (2001) provided for:- introduction of minimum benefits- procedure for apportioning surplus between stakeholders

• The Act recognised that surplus could be the result of accumulation by a variety of stakeholders including current members, former members, pensioners and the employer.

• It was also recognised that in some instances an employer may have abused the surplus available in a fund in the past (for example: granting benefit improvements to only a select few executives).

• The PFSAA therefore sought to rectify past inequities and to go through the process of equitably dividing the surplus between stakeholders.

BACKGROUND

13

• Support document entitled “Surplus Simplified” provides overview of the surplus apportionment process

• Value of Surplus determined by:

- actuarial valuation at the surplus apportionment date

- less acceptable contingency reserves

- less the costs of the surplus exercise

- plus the misuses in the past (eg. “surplus utilised improperly”)

• Types of scheme:- section 15B “nil” scheme where there is no surplus to distribute- section 15B apportionment scheme where there is surplus

BACKGROUND

14

BACKGROUND

Valuation and surplus scheme date must be seen as a unit:

• Statutory actuarial valuation and surplus scheme inseparable

• Valuation report shows the initial amount of surplus. To this, any surplus utilised improperly in the past is added to determine the distributable surplus on which a surplus apportionment scheme should be based.

• If Registrar not satisfied with valuation report:

– rejects if it does not correctly reflect the financial condition of the fund

– decision may be appealed to FSB Appeal Board

15

First tier split:

Former members who left after 1 January 1980 to receive minimum benefits

Current pensioners to receive minimum increases

• If not enough surplus, the above is reduced proportionately

Second tier split:If there is residual surplus after the first tier split, it must be divided between:

Current members Former members Current pensioners Employer;

based on the financial history of the fund.

CLAIMS ON SURPLUS: FIRST AND SECOND TIER SPLITS

16

• 75% of Trustees must approve the scheme

• Former member representative must approve

• Communicate to all stakeholders and allow 12 weeks for objections

• Consider, resolve and keep a record of all objections

• Submit scheme, objections and actions taken to resolve the objections to Registrar

If the Registrar agrees that the scheme is reasonable and equitable and it recognises the rights and reasonable benefit expectations of all stakeholders, then the scheme is approved — if not the submission will be queried.

SUBMISSION OF THE SCHEME

17

Appointed if:

• A scheme is not submitted

• Requested by Board of Trustees

• Requested by the former member representative

• Registrar not satisfied that scheme is reasonable and equitable, and trustees refuse to change the scheme

• The Tribunal’s decision is binding

• Costs of the tribunal are borne by the fund

AD HOC TRIBUNAL

18

• Legal challenges, for example:

- meaning of “improper use of surplus” and date from which it applies

- whether fund return should apply to improper use

• Registrar of Pension Funds vs Chairman of Sanlam Pensioenfonds (Kantoorpersoneel)

- Court decided given current wording of Act that an investigation of surplus utilised improperly only has to go back to 7 December 2001. Clearly not the intention.

- Though Act became effective then, former members prejudiced (members from fund after 1 Jan 1980)

PROBLEMS IN IMPLEMENTATION

19

• Current reading of the Act:

- If no actuarial surplus, no explicit requirement to do improper use investigation in terms of section 15B(6)

- But such result defeats purpose of trying to account for surplus used improperly

- Registrar has found instances where employer is lax in repaying surplus utilised improperly. This prejudices all other stakeholders.

• Actuarial surplus should therefore include improper uses

- Proposal is to make this explicit in the definition of “actuarial surplus”. Thus after adding back improper uses, the fund must decide if surplus available for distribution

- Other terms in section 15B(6) require clarification / tightening of definition

- Implication: Every fund should do the investigation into improper use and add it back to the actuarial surplus to determine if a distribution is required.

PROBLEMS IN IMPLEMENTATION

20

PROBLEMS IN IMPLEMENTATION

Nil surplus returns:

• Currently the Act does not specifically provide that a return should be submitted if there is no surplus, but then …

• Registrar not aware if funds have no surplus or whether a scheme is merely late

• Registrar therefore requires information to decide whether:– submission late and tribunal should be be appointed

– steps to be taken for late submission

– surplus possibly dissipated / concealed (eg. Contingency reserve based on unrealistic or overly conservative assumptions)

21

PROPOSED AMENDMENTSSection 15B requires clarification:

• Clarify certain aspects of the existing surplus legislation e.g. period from which past improper uses should be considered

• Imperative that investigation period for past improper use be clarified as being at least from 1 January 1980 to synchronise with the period for which former members should be taken into account – else they will be prejudiced

• Clarify which funds are expected to submit surplus schemes to the Registrar

• Any advancement of a fund’s valuation date must be motivated to the Registrar

• Include deferred pensioners explicitly

• Authorise Registrar to set requirements for method and timing of repayment of improper uses

• Surplus benefits should be enhanced by fund return from the surplus apportionment date until date of payment

22

PROPOSED AMENDMENTS

• Clarify that reasonable measures must be taken to inform stakeholders that the scheme complies with section 15B

• Make explicit that the statutory actuarial valuation and surplus scheme are inseparable and must be considered jointly

• Require funds to submit nil surplus returns if no surplus and for Registrar to prescribe additional requirements for “nil returns”

• Enable umbrella funds to apply the requirements of surplus apportionment on a participating employer level

23

PENSION FUNDS ADJUDICATORCurrent law:• Minister appoints the PFA; budget under the FSB• PFA has power to waive any time limit or period under his section• Decision can be appealed to the High Court

Problems:• Power to waive time limit goes beyond Prescription Act, and therefore inconsistent with

other legislation.• A full appeal can frustrate activities of PFA since new evidence may be submitted to court

that was not placed before the PFA• No provision in the Act for a Deputy or an “acting” Adjudicator impedes operational

efficiency.

Proposed amendment:• Bring PFA operations in line with Prescription Act (ie. 3 years)• Build in a provision that specifically permits the court to adduce that no new evidence will

be allowed. This encourages parties to place all relevant facts before the Adjudicator.• Provide for one or more deputy adjudicators to be appointed by the Minister of Finance.

24

POWERS OF REGISTRARCurrent law:• Registrar cannot remove trustees without first applying to court (section 26)• No penalty powers

Problems:• Court process too lengthy and does not serve the interests of members• Lack of enforcement powers does not encourage a culture of compliance• A need for the regulator to be more proactive and enable a risk-based approach to

supervision; bring supervisory powers more into line with international standards

Proposed amendments:• Registrar must be able to intervene in management of a fund if member’s interests

compromised (access to court not impinged)• Registrar may, if in the best interest of the members of a fund remove the board of a

fund, where the fund –– is not in a sound financial position– failed to act where the fund is in an unsound financial position– not managed in terms of the rules of the fund– has no properly constituted board

• Registrar may replace any board member who is not “fit and proper”• Streamlined powers of inspection (and on-site compliance visits)

25

POWERS OF REGISTRAR

Proposed amendments:

• Allow registrar to issue directives and impose administrative penalties for non-compliance by funds, administrators and third parties

• Registrar must before imposing a penalty:

– Inform such administrator, fund or third party of the intention to impose a penalty

– Provide particulars of alleged non-compliance

– Provide details as to the amount of penalty to be imposed

– Give an opportunity to be heard to those non-compliant

– Administrator, fund or third party may be assisted by a legal adviser

• Ability of the registrar to “name and shame” when in the public interest

26

DIVORCE ORDERS

Current law:• Spouse’s portion on divorce remains in fund until accrual without any

return or growth

Problems:• Inequitable treatment of spouse since money may remain in fund for

quite some time

Proposed amendment:

• “Clean-break” principle: To provide for the payment of benefits to a

non-member spouse in terms of a divorce order, and permit payment

of benefit (or remain in fund if the rules so provide and attract growth)

27

RETROSPECTIVITY

• It is proposed that amendments are made retrospective and deemed to come into operation on 7 December 2001 (section 40B)

• Objective: to protect members, former members and the intention of Parliament in passing the PFSAA in 2001

What will the effect on funds / surplus schemes be?

• Schemes already submitted and approved: no re-submission

• Nil schemes already recorded will be deemed to be approved and no re-submissions will be required

• Schemes submitted but not yet approved: registrar will refer scheme back to the fund where it does not comply, so that it can review. Registrar must give a reasonable period of time to review and resubmit

• Schemes not yet submitted: statute as amended will apply

28

RETROSPECTIVITYIf amendments not made retrospective then:

• Many funds will not submit surplus schemes and registrar will not be in a position to determine whether a fund has surplus to apportion.

• If a fund has a deficit based on the actuarial valuation but a surplus if surplus utilised improperly was to be repaid, it will not be required to undergo a surplus scheme thereby prejudicing members to the benefit of employers.

• Surplus utilised improperly will only be investigated from 7 December 2001 thereby significantly weakening this requirement as much abuse took place prior to that date.

• Members will be prejudiced if fund return is not added to surplus payments from surplus apportionment date to date of payment.

29

END OF PRESENTATION

CONTACT DETAILS:

National Treasury:

Jonathan Dixon, Jo-Ann FerreiraChief Director: Financial Sector Policy Unit Chief Director: Public Entities Governance Unit Jonathan.Dixon@treasury.gov.za Jo-Ann.Ferreira@treasury.gov.za(012) 315 5808 (012) 315 5263

Baron Furstenburg Motlatsi GabaocweDirector: Financial Markets Senior Economist: Financial MarketsBaron.Furstenburg@treasury.gov.za Motlatsi.Gabaocwe@treasury.gov.za(012) 315 5953 (012) 315 5384

Financial Services Board:

Jurgen Boyd Marius du ToitDeputy Executive Officer: Pensions Chief ActuaryJurgenB@fsb.co.za Mariusdt@fsb.co.za(012) 428 8099 (012) 428 8160