The second draft of the Conduct of Financial Institutions (CoFI) Bill published on 29 September 2020 contains significant proposed amendments to the Pension Funds Act (PFA) which were not foreshadowed in the first draft which was published in December 2018.
National Treasury has given members of the public only until 30 October 2020 to comment on the second draft, including the proposed changes to the PFA, because it wants to finalise the Bill for Cabinet’s approval before submitting it to parliament early next year.
If enacted in its current form, the amendments to the PFA could have a substantial impact on numerous retirement funds, their members and beneficiaries including, in particular, those entitled to ‘unclaimed’ or unpaid benefits. As mentioned in our bulletin of 6 October 2020 Conduct of Financial Institutions Bill: National Treasury publishes second Conduct of Financial Institutions Bill: National Treasury publishes second draft for comment, the National Treasury has published for comment a second draft of the Conduct of Financial Institutions Bill (CoFl Bill).
The first draft of the CoFI Bill was published for comment in December 2018 and closed for public comment in April 2019. The revised draft follows the review of extensive comments and public consultation between key industry players and the National Treasury.
If the CoFI Bill is passed in its current form-
• The name of the PFA will be changed to ‘the Retirement Funds Act’ - which is sensible as it regulates both pension funds and provident funds.
• Members of the boards of retirement funds (‘trustees’), principal officers and deputy principal officers (if applicable) will have to comply with ‘fit and proper’ requirements which the FSCA will prescribe. These will not be limited to training and competency requirements. Principal officers will also have to be independent, will have statutory fiduciary duties towards the funds that they serve and will have substantially increased statutory responsibilities for ensuring the funds’ compliance with the law.
• The FSCA will be entitled to require a fund to terminate the appointment of its auditor if that auditor has served the fund in that capacity for longer than the period to be prescribed by the FSCA, has been convicted of an offence involving dishonesty, is under investigation by the Independent Regulatory Board for Auditors or has failed to disclose those of his or her interests which may indicate an inconsistency between the auditor’s interests and his or her duties to the fund.
• Public sector funds that are currently exempt from compliance with the PFA will be required to be licensed and regulated in terms of the PFA. Their rules and governing legislation will have to be revised to the extent required for consistency with the PFA although the FSCA may be willing to exempt them from compliance with some of its provisions while they adapt to their new circumstances. The funds affected by this will include the following:
• The assets and liabilities of an umbrella fund relating to members employed or formerly employed by specific participating employers will have to be treated separately from those relating to other members. The fund will have to ensure compliance by the fund with the PFA at ‘sub-fund’ level. This will mean that, for example, if a ‘sub-fund’ is under-funded, surplus assets in another sub-fund in the same fund cannot be used to make up the shortfall.
• A new Central Unclaimed Benefits Fund (Central UBF) will be established. It will be subject to regulation in terms of the PFA and will be governed by a board comprising six people appointed by the Financial Sector Conduct Authority (FSCA) after a transparent process of recruitment. The Bill does not say that existing unclaimed benefits funds and other funds with liabilities for the payment of unpaid benefits will have to transfer their liabilities for those benefits, and assets of a corresponding value, to the Central UBF but Olano Makhubela, the FSCA’s Executive Head: Retirement Funds has been quoted in the media as saying that that this will be required in due course. See https://www.businessinsider.co.za/how-to-get-unclaimed-pension-benefit-savings-2020-10.
• Regulatory protection given to current members of occupational retirement funds will be denied to people entitled to unpaid benefits in that-
◦ funds will be able to transfer their assets and liabilities in relation to unpaid or unclaimed benefits without the prior approval of the FSCA in terms of section 14 of the PFA; and
◦ unclaimed benefit funds may be wound up without the prior approval of the FSCA in terms of section 28 of the PFA (as will beneficiary funds and retirement annuity funds).
• On the other hand, the PFA will provide in a new subsection in section 37A that-
‘Unclaimed benefits may not be reduced or utilised for any other purpose by a fund.’
Presumably this means that funds will not be allowed to deduct administration fees, tracing fees and the like from the amounts held by them to provide for unpaid benefits.
• Some of the legal arguments about the powers of the FSCA in relation to funds without properly constituted boards but which may have assets and liabilities (dormant funds) will be addressed; In particular:
- The FSCA will be able to appoint people to exercise the powers of the boards of dormant funds and will have the explicit power to authorise them to dispose of the fund’s assets and liabilities.
- It will also be able to appoint a ‘statutory manager’ to act in the place of the board of a dormant fund for which a properly constituted board has not been or cannot be established and likewise to dispose of its assets and liabilities.
The FSCA will also be given the powers –>
- to cancel a fund’s registration (which will be called its license) on ‘proof’ that the fund has ‘ceased to exist’ and not proof to “its satisfaction” as is now required;
- to suspend a fund’s license if it thinks that this will give the fund the opportunity to rectify problems identified by the FSCA; and
- to reinstate with retrospective effect the registration (license) of a fund which was cancelled when the fund still had assets and/or liabilities - without the transparency and accountability entailed in court application for an order setting aside the cancellation of the fund’s registration.
• Some of the difficulties entailed in fund liquidations will be addressed by empowering the FSCA to remove a problematic liquidator from office and replace him or her, and to replace a liquidator who has died before the liquidation of a fund has been completed.
• The FSCA will be able to prescribe standards ‘on any matter that is appropriate and necessary for achieving the purposes of [the PFA]’, determine the amounts of administrative fees, penalties and interest required to be paid in terms of the PFA and by whom and how they must be paid.
• If a member of a fund dies without first nominating anyone to receive a lump sum benefit that accrues on the member’s death, and the fund has not identified and located any of the deceased member’s dependants within 12 months after his or her death, it may pay the amount of the benefit to an unclaimed benefits fund or the Guardian’s Fund. It is not, however, clear from the draft legislation what either of these funds can or must do with the money.
• If a court orders that a share of a member’s retirement savings, including the capital value of his or her pension or deferred pension, if applicable, must be paid to the member’s spouse on their divorce, the amount of that share must be deducted by the fund from those retirement savings and paid to the ex-spouse, regardless of whether their relationship was formalised in terms of the Marriage Act, the Recognition of Customary Marriages Act, the Civil Union Act or the tenets of a religion. This should address some of the unfair discrimination experienced by spouses whose partnerships have been dissolved other than in terms of the Divorce Act but not those who were party to universal partnerships not subject to the tenets of any religion.
• While retirement savings held in a preservation fund will be deemed to fall within the scope of a member’s ‘pension interest’ on divorce despite the fact that the Divorce Act defines the term with reference to the deemed termination of a member’s employment by a participating employer (there are no participating employers in preservation funds), the same is not true for retirement savings –
- preserved in the member’s occupational retirement fund after he or she has left the employment of a participating employer; or
- held in a retirement annuity fund.
Fasken’s retirement funds law and financial services law specialists are willing and able to assist clients to understand the implications of these proposed changes for them.