On 25 August 2017, the Minister of Finance issued the final retirement funds default regulations (“regulations”) for implementation. This follows an extensive consultative process with the first draft published mid-2015.
The regulations cover three areas:
- Default Preservation and Portability
This regulation requires pension and provident funds (ie. funds that have members enrolled as a condition of employment) to offer a default in-fund preservation arrangement to members who leave the services of the participating employer before retirement. This means that the member must be made a paid-up member of the fund and must be provided with a paid-up member certificate, until instructed by the member to pay out or transfer the benefits which are due to the member. The regulation also deals with how the paid-up member may be charged and stipulates that the fund rules must provide that members are given access to retirement benefits counselling before any withdrawal benefit is paid to them or transferred. The default preservation regulation does not apply to retirement annuity and preservation funds.
- Default Investment Portfolio(s)
All retirement funds with a defined contribution category, to which members belong as a condition of employment, must make provision for a default investment portfolio for contributing members who do not exercise any choice regarding how their savings are invested. Members must, therefore, take an active decision if they do not wish their retirement savings to be placed in any of the default investment options. Currently, the default investment portfolio regulation does not apply to retirement annuity and preservation funds
- Annuity Strategy
In terms of this regulation, members will be required to ‘pre-select’ which type of annuity (ie. life or living) should be paid. This means that members will have to ‘opt-in’ to the type of annuity rather than ‘opting-out’ and therefore indicate which annuity product he/she would prefer being enrolled into. Members should be given access to retirement benefits counselling to assist them in understanding and giving effect to the annuity strategy. Pension funds, pension preservation funds and retirement annuity funds will be required to establish an annuity strategy. Provident and provident preservation funds will only be required to do so if their rules enable a member to elect an annuity.
A common thread through these regulations is appropriateness, clear communication and fair value for members. These principles echo the requirements of Treating Customers Fairly and are meant to result in better outcomes for customers.
The Amendments to the Regulations published in the Government Gazette on 24 August 2017, stated that all new default arrangements that come into effect on or after 1 September 2017 must comply with the requirements. However, subsequent to this the Registrar of Pension Funds granted an exemption (Notice No 3 of 2017) to all funds registered before 1 March 2018 from regulations 37, 38 and 39 until 1 March 2019.
Existing arrangements must align to the regulations within 18 months, i.e. 1 March 2019.
These regulations will impact on retirement advice provided to clients and advisors should ensure that they fully understand the different options available.
Click here for the Media Statement and Amendments to the Regulations issued in terms of Section 35 of the Pension Funds Act, 1956 (Act 24 of 1956)
Click here for the Exemption of the Provisions of Regulations 37, 38 and 39