Retirement Fund Issues- Not just for Old People

Although it is not yet compulsory for an employer to provide a retirement fund to which employees can contribute, many South Africans are fortunate enough to have some exposure to a pension fund, provident fund or retirement annuity fund at some point in their lives – either as a member (enjoying the benefits of these retirement savings on leaving the fund) or as a beneficiary (such as a widow, child or other dependent of a member who passed away).  The laws governing pension, provident and retirement annuity funds are changing fast.  All stakeholders in these funds need to be aware of the changes.  Some of them are highlighted below.

Since 1 March 2016, the tax treatment of contributions to pension funds, provident funds and retirement annuity funds has been standardized.  Before this, only members of pension funds and retirement annuities could claim tax relief when they contributed to the fund.  Provident fund members had to wait until they left the fund before they could get tax relief.  Now the tax relief is available to all immediately and it also includes relief on the employer contributions (subject to certain annual limits).  But there is still one difference between provident funds (on the one hand) and pension and retirement annuity funds (on the other).  Provident fund members can take all their retirement benefit as a lump sum in cash (less applicable tax).  Members retiring from pension funds or retirement annuity funds can only access up to one third of their savings in cash and must use the balance to secure an annuity (regular monthly pension for the rest of their life).  The current proposal is for this to be extended to provident fund members from 1 March 2021.

In an effort to encourage people to keep their retirement savings for their old age (rather than spending it when they change jobs during their working life), all pension and provident funds since 1 March 2019 must offer new members the option to transfer into their new fund any savings from another fund (at no charge to the member).  And when members of a pension or provident fund leave employment, they must be given the option of leaving their savings to continue growing in the fund.  In fact, this must be the default option.  Until a member specifically requests a fund to pay out their fund benefit in cash or transfer it to another fund, that benefit will stay in the fund.  The other new requirement from 1 March 2019 is that members must have been given retirement benefits counselling before they receive their benefit from the fund (before or after retirement from employment).

Last year saw the Financial Sector Regulation Act coming into effect.  This law requires all the different regulators in the financial sector to work together.  This includes the regulators under the Financial Intelligence Centre Act (FICA), the National Credit Act and the Pension Funds Act (which applies to pension funds, provident funds, retirement annuity funds and beneficiary funds, other than State funds such as the Government Employees Pension Fund) together with the South African Reserve Bank.  This new system of regulation aims to promote and maintain financial strength.  There is also particular emphasis placed on promoting the fair treatment of customers (who are mostly members and beneficiaries in the context of retirement funds).  New conduct standards are being introduced and a vast new law (over 800 pages of comments), the Conduct of Financial Institutions Bill, has been proposed.

In addition, retirement funds are being called on to promote broad-based black economic empowerment of those providing services to the fund (such as the actuaries, administrators, auditors, advisers and consultants, insurers, investment managers, lawyers etc.) and to report on the sustainability of the assets in which members’ retirement savings are invested.  This includes considering the environmental and social impacts of these investments and how well they are governed.  Since July 2011, regulation 28 under the Pension Funds Act has required these factors to be taken into account by the boards of trustees who manage retirement funds.  The recent change is the requirement to report on compliance with these obligations and encouraging members to focus on the bigger, longer term picture in making investment decisions rather than the immediate benefit to them.

This is a basic summary that can’t cover all the detail in the proposed laws.  It is best to seek advice from financial and legal experts in this field to ensure you can make fully informed decisions.