South Africa’s retirement funds industry is not operating at optimal levels. This and other worrying findings are revealed in the South African Reserve Bank (SARB) working paper Characteristics of the South African Retirement Fund Industry 2022. The paper examined fund design across the retirement funds industry and the industry’s efficiency by analysing administrative data processed by the FSCA over the period 1996 – 2018. With the exception of preservation funds and retirement annuities, the high administrative costs across all the benefit structures means members will ultimately not have sufficient income to enjoy later in retirement. South Africa’s economic activities have not recovered to pre-Covid levels, GDP growth is slow, and unemployment is high. And with the power crisis and escalating interest rates contributing to today’s costs of living, retirement savings become less of a priority for most households. The threats to the South Africa’s asset management and retirement industry are as numerous as they are intertwined. The question is, how can the industry navigate its way past such treacherous, complex terrains, if at all?
The FSCA’s Retirement Funds Conference
The FSCA recently hosted a Retirement Funds Conference in order for fund administrators, principal officers, employers, trustees and other industry role players to reflect over the current state of retirement funds. The FSCA also used this opportunity to share global trends, discuss new developments within the legislative and regulatory framework, and to explore new opportunities and other topics of significance for the future of the industry.
Changes in the Legislative Framework
Chief among the new developments within the legislative and regulatory framework relates to Reg 28 of the Pensions Fund Act which limits the extent to which retirements funds may invest in an asset or category of assets. Following extensive public consultations and industry’s inputs regarding the nature and purpose of the proposed amendments to Reg 28, the FSCA used the outcomes of those consultations as the basis for the proposals put forward for gazetting.
Firstly, the amendments to Reg 28 are meant to broaden the definitions of infrastructure assets across the retirement funds industry beyond what previously entailed or implied just public infrastructure. The clarity sought previously sought by industry was whether the narrow ambit of the Infrastructure Development Act 23 of 2014 could potentially also include private infrastructure (as is the likelihood for investments into alternative energy); or whether, by definition, the Act limited such infrastructure to “installations, structures, facilities, systems or processes which are part of national infrastructure plan”. The need to classify various infrastructure with consistency in order to broaden the scope for other potential investments while preventing excessive concentration of risk will encourage longer term infrastructure investments and separate the higher allocation to private equity which can enhance infrastructure asset investments beyond the confining definitions found in the Infrastructure Development Act. The discretion of where a fund’s assets should be invested remains with the fund’s capable board of trustees. “Afterall, the board of trustees is the accountable seat of fund governance, in line with section 13A provisions of the Pensions Fund Act 24 of 1956 (PFA)”, explained Ms Wilma Mokupo, head of Prudential Supervision at the FSCA.
However, this progressive and enabling move is not to be misconstrued as a free-for-all when it comes to where retirement funds may be invested. Investing retirement funds in crypto assets remains prohibited, and there remains an overall limit (25%) to which retirement fund investments across all asset classes may be exposed to a single entity (excluding government debts and loans). With these changes a reduction in housing loan allocations becomes necessary (from 95% to 65% in respect of new loans), and mandatory quarterly reporting now also extends to compliant CISs, insurance policies and CISCA approved hedge funds.
Regulation 33 of the Pensions Fund Act (PFA) has also been repealed as of January 2023, with the FSCA instead issuing a Conduct Standard 1 of 2022 in its place. This to address shortcomings identified by the FSCA, such as reaffirming the board’s duties to ensure timeous payments of pension fund contributions by participating employers; placing a duty on employers to report any contraventions to section 13A of the PFA to either the FSCA or other law enforcement agencies, and which templates or process to follow when doing so. Another significant change will come from the much-anticipated COFI bill which defines employers as supervised entities, thus reigning them into the regulator’s jurisdictional orbit. Expected to be tabled in parliament later this year, the COFI bill will empower the FSCA to enforce governance requirements on recalcitrant employers.
Fund Misconduct, Arrear Contributions and Fraud
To address the vexed scourge of arrear contributions by delinquent employers, the FSCA acknowledges the financial challenges faced by some employers especially since the Covid-19 pandemic. However, accountability is non-negotiable. FSCA Commissioner Unathi Kamlana explains: “What we do not accept is employers deducting contributions from workers’ salaries and not paying them over into a fund, or them skipping their own contributions,” explained the Commissioner. “These are breaches to employment contracts and also criminal offences in terms of the Pension Funds Act. Trustees must therefore rise to their fiduciary responsibilities to recover these arrear contributions and, preferably, to identify them earlier before they become a major problem.”
Consistent, quality and transparent communication of the fund with its members and employers regarding all affairs of the fund remains a critical value-adding requirement according to the PFA. This means the prudent employer experiencing genuine financial distress should engage the fund and employees as early as possible to negotiate how to navigate any interim solutions. Or face the consequences which could entail the errant fund or employer being outed on the regulator’s website in future, should the FSCA find any misconduct. To counter the risk of fraud in retirement funds, the FSCA will issue new requirements to report cash-flow which will enable the regulator to detect unusual or suspicious transactions, as well as pre-empt any financial challenges experienced by a fund before the situation worsens.
The Two-Pot System
Perhaps the most remarkable highlight is the introduction of the two-pot system by the National Treasury. which will allow members to access some of their retirement savings (pension, provident or RA) from the “one pot" before reaching retirement age and without having to retire/resign, and then later earn income upon retirement in the form of annuities out of the “second pot”, so to speak. The system came into effect on the 1st of March 2023, as announced in the Budget Speech by Finance Minister Enoch Godongwana, and will be a game-changer for South Africa in assisting members to cope with escalating living costs. Members will now have full access to current savings accumulated before new regime but will not be able to access 100% of future accumulated funds in cash upon retirement.
Reflecting on this development, FSCA Commissioner Unathi Kamlana enthused, “It is very true that retirement savings are and should only be used in retirement, but there is a reality out there, even in other countries, that people are not always good at saving for emergencies or short-term goals like a deposit for a house.”
Other exciting considerations for the future is the concept of auto-enrollment in order to increase coverage especially for workers in the lower income and informal economies. Global trends indicate that in countries such as the UK, New Zealand, Chile and Turkey amongst others, auto-enrolment increased coverage of the workforce from 15% on average to over 75%. Amongst other progressive reforms being pondered, this remains an attractive option for South Africa.
Next Steps
As the FSCA now finalises the publication of the prudential standard into law, it has extended a further invitation for the industry to continue to submit comments by the 30th September 2023. Responses to the comment’s matrices, the final version of the Reg 28 Quarterly Report and the Consultative Paper on Issues will be published on www.fsca.co.za under the Regulatory Frameworks tab. The FSCA Retirement Funds conference enabled the regulator to engage meaningfully with the industry in a proactive, consultative and responsive approach, and to lay the ground for a new era for the future of retirement funds in South Africa. |
