Final Default Fund Regulations released
On the 25 August 2017 the Minister of Finance issued the final Default Fund Regulations. The regulations aim to provide retirement fund members with appropriate pre and post retirement solutions that are more cost effective than current solutions. The regulations require every retirement fund in South Africa, where membership is determined by a condition of employment, to have a default investment portfolio and preservation fund.
If a member is unable to elect an investment portfolio then the retirement fund must default the member into a regulated default fund. When a member leaves a participating employer, the member’s benefits are preserved by the fund and the member becomes a “paidup” member. In both scenarios the member is entitled to “opt-out” and either select their own investment portfolio after becoming a member or transfer their benefit after leaving the participating employer.
The third provision that the regulations require is for all retirement funds (including retail funds) to provide their retiring members with a default annuity strategy. The strategy can be made up of a living annuity, traditional (guaranteed) annuity or a combination of the two.
The effective date for the regulations was 1 September 2017. Retirement funds that already have (unregulated) default funds in place were given a grace period of up until 1 March 2019 to comply with the regulations. Retirement Funds without default funds were not however given the same grace period. On the 30 August this year, the FSB issued Practice Note 3 of 17 which exempted all funds registered before 1 March 2018 from complying with the regulations before 1 March 2019.
Another interesting amendment from the second draft of the regulations, is that Section 39(3)(a) of the Pension Funds Act has changed its requirement that a living annuity’s drawdown levels must be compliant with an accepted industry standard to a prescribed standard. This means that a standard needs to be provided to retirement funds in order for trustees to monitor and inform members invested in a default living annuity if their income drawn is deemed to be unsustainable.
Transfer into a Retirement Fund after you retire from employment
In 2014, legislation changes allowed a retirement fund member to retire from employment but postpone retirement from the retirement fund itself. This allowed retirement fund members to keep their retirement fund benefits with the retirement fund after their normal retirement date, thereby only accessing their benefits when they needed them. In order for the member to have this option however funds would need to amend their rules to make provision for this. It is understood that some funds were reluctant to amend their rules to accommodate this as they did not want to deal with the administration of “inactive” members. This reluctance eradicates the benefit for members who want to “preserve” their benefits after they retire from employment.
In the 2017 Taxation Laws Amendment Bill, National Treasury has therefore proposed allowing members to transfer their retirement fund benefits to an RA even after they retire from employment. It was noted that transfers to preservation funds were not accommodated and the assumption was that this was because a preservation fund allows one withdrawal which would simply bypass the annuitisation rule. On the 14 September 2017 Treasury issued the “Draft Response Document on Taxation Laws Amendment Bill, 2017” in which they proposed allowing transfers to preservation funds subject to the amendment of the Income Tax Act, to ensure that transfers made to these funds after the normal retirement date cannot be withdrawn in the same manner as other transfers to preservations funds.
This has the added benefit of allowing a member to consolidate their retirement benefits with their other investments. The proposed date for this change is the 21 March 2018.
Postponement of Annuitisation.
The proposed changes - to force members to annuitise two thirds of their fund benefits at retirement – has once again been postponed until 1 March 2019. This proposal would only apply to contributions made to a provident fund after the implementation date. What’s interesting though is that provident fund members continue to benefit from the tax deduction allowed for pension and retirement annuity funds which was harmonised in 2016.
The reason provided for the postponement is to allow the Minister of Finance to consult with stakeholders such as NEDLAC.
Social Security and Retirement Reform
In a paper released late last year government indicated that it plans on introducing a National Social Security Fund (NSSF). The funds purpose will be to provide a low cost, equitable vehicle for the provision of basic risk and retirement savings benefits. The NSSF aims to protect income earners through the provision of basic retirement, unemployment, death and disability benefits.
Contributions for all workers will be mandatory to the NSSF up to a certain threshold (currently earnings up to around R150 000 per year) at a contribution rate of 12%. Government has indicated that there will be subsidisation for low income earners. Any contributions over and above the threshold can be made to a group or individual retirement fund solution. This tier is pretty much in line with the current employment retirement fund system in South Africa.