Default Regulations

Guidance for Trustees Workshop DEFAULT REGULATIONS: Regulations 37, 38, 39 and 40 27 May 2019 Naheem Essop Retirement Funds Supervision Division

Default Regulations INTRODUCTION “…are meant to improve the outcomes for members of retirement funds by ensuring that they get good value for their savings and retire comfortably. The regulations require retirement funds’ trustee boards to offer a default in-fund preservation arrangement to members who leave the services of the participating employer before retirement, and also a default investment portfolio to contributing members who do not exercise any choice regarding how their savings should be invested. For retiring members, a fund should have an annuity strategy with annuity options, either in-fund or out-of-fund, and can only “default” retiring members into a particular annuity product after a member has made a choice.” (my emphasis)

• National Treasury: Media Statement 25 August 2017

Default Regulations “Implementation timelines All new default arrangements that come into operation on or after the 1 September 2017 effective date of the regulations must comply with the requirements set out in the regulations. Existing default arrangements will be expected to be fully aligned to the regulations 18 (eighteen) months after the effective date (1 September 2017) of the regulations, i.e. by 1 March 2019.”

• National Treasury: Media Statement 25 August 2017

Default Regulations “Commencement 3. These amendments to the Regulations come into effect on 1 September 2017. All default arrangements in place on the effective date of these amendments to the Regulations must comply with the provisions of these amendments to the Regulations within eighteen (18) months of the effective date.”

• Government Gazette, 25 August 2017 No. 41064

FSB Notice 3 of 2017 “EXEMPTION FROM THE PROVISIONS OF REGULATIONS 37, 38 AND 39 MADE IN TERMS OF SECTION 36 OF THE PENSION FUNDS ACT I, Dube Phineas Tshidi hereby, in terms of regulations 37(3), 38(3) and 39(6), exempt all funds registered before 1 March 2018 from the provisions of regulation 37, 38 and 39 until 1 March 2019.” DUBE TSHIDI REGISTRAR OF PENSION FUNDS 30/08/2017

Default Regulations meaning of DEFAULT “to fail to do something, such as pay a debt, that you legally have to do” “the thing that exists or happens if you do not change it intentionally by performing an action”

• Cambridge Dictionary

Default Regulations Regulation 37 – Default investment portfolios Regulation 38 – Default preservation Regulation 39 – Annuity Strategy Regulation 40 - Application

Default Regulations Which funds do the Default Regulations apply to? 1 In relation to funds with defined contribution categories to which members belong as a condition of employment 2 In relation to funds which members belong as a condition of employment

Default Regulations What can members expect? DEFAULT INVESTMENT PORTFOLIO • Upon joining an employer that offers membership of either a pension fund or provident fund as condition/benefit, the member does not have to apply their mind or seek professional advice as to which investment portfolio their contributions should be invested. • The member should be comforted by the knowledge that the default investment portfolio in which they will be placed by the fund, must by law, meet certain criteria which is designed to be in their best interests.

Default Regulations What can members expect? DEFAULT PRESERVATION • If the member leaves the service of their employer before reaching retirement age, they no longer have to choose immediately between either cashing out or transferring. Before making a decision, the member can expect to be given access to retirement benefits counselling. • Until the member has made a choice, the member remains a member of the fund and is categorised as a “paid-up member”.

Default Regulations What can members expect? DEFAULT PRESERVATION • A paid-up member must be presented with a paid-up membership certificate within 2 months of the fund becoming aware that they have left the service of the participating employer. • No fees as a result of being converted to a paid-up member. • Investment fees will not change. • Administration fees must be fair, reasonable and commensurate – expect to be lesser.

Default Regulations What can members expect? DEFAULT PRESERVATION • If a member joins a new employer and participates in the new employer’s fund then the new fund must accept any amount transferred to fund from another fund, for the defined contribution component and must: – within 4 months request a list of all paid-up membership certificates of that member; – request whether the member would like to transfer savings in respect of each paid-up membership certificate into the new fund; and – arrange for the transfer, without levying a charge for such transfer.

Default Regulations What can members expect? DEFAULT PRESERVATION • If you are a paid-up member: – No new contributions or deductions for risk benefits. – Defined benefit must be converted to defined contribution (General Exemption – See PF Notice No. 2 of 2018). – Death benefits, retirement and early retirement is as per the fund rules.

Default Regulations What can members expect? ANNUITY STRATEGY • Between 3 – 6 months prior to retirement, the member should be given access to retirement benefits counselling. • Included in the retirement benefit counselling should be an explanation of the fund’s annuity strategy, including the terms of the funds annuity strategy.

Default Regulations What can members expect? ANNUITY STRATEGY • At retirement, the member should be comforted by the knowledge that the annuity strategy of the fund, must by law, meet certain criteria which is designed to be in their best interests. • Drawdown rates in a living annuity that forms part of the fund’s annuity strategy must be compliant with a prescribed standard. (Not yet prescribed.) • The fund monitors makes members aware if their drawdown rates are deemed to be unsustainable.

Default Regulations What can members expect? To Sum Up: • When joining an employer or a fund in which the member’s employer participates, the member does not have to make a choice and can expect to be placed in a default investment portfolio by the fund which caters for the best interests of the member. • When leaving the employer, prior to retirement date, the member does not have to cash out or transfer. The member can remain in the fund as a paid-up member. • Upon reaching retirement age, the fund must have an annuity strategy which is compliant with the law and designed to be in the member’s best interests. • At each of these stages, members can expect to be given access to retirement benefits counselling.

Default Regulations The board must ensure and be able to demonstrate to the FSCA on request that the default investment portfolio: (a) Is appropriate. (b) Composition and performance is adequately communicated to members. (c) Fees are reasonable and competitive. (d) Fees are disclosed to the board and relevant information communicated to members. (e) Considers both passive and active investment strategies. (f) Does not include loyalty bonuses or complex fee structures. (g) Does not lock members in and members may transfer out at least once every 12 months. (h) Is reviewed on a regular basis by the board.

Default Regulations Paid-Up Membership Certificate Must contain following minimum information in terms of the definition: • Fund name, address, registration number and contact details. • Administrator name, address and contact details. • Member name, address, identity number, tax number, fund membership number and most recent contact details. • Date member became paid-up and certificate issued. • Value of individual account/reserve of member at date of becoming paid-up. See sample in PF Guidance Notice 8 of 2018

Default Regulations Retirement Benefits Counselling Defined in the definition of regulations as: the disclosure and explanation, in a clear and understandable language, including risks, costs and charges, of: • The available investment portfolios; • The terms of the fund’s annuity strategy; • The terms of and process by which a fund, handles preserved benefits in terms of regulation 38; and • any other options available to members. Retirement benefits counselling does not constitute advice in terms of the FAIS Act. Can be done in writing.

Default Regulations Retirement Benefits Counselling • The board of a fund giving access to retirement benefits counselling in person must be satisfied that the person who provides the retirement benefits counselling is suitably qualified and experienced, and is able to properly manage any conflicts of interest. • If tax advice is also provided then the person providing the advice must be registered as a tax practitioner in terms of the Income Tax Act, 1962.

Default Regulations Annuity Strategy In addition to what is stated earlier, the board must ensure and be able to demonstrate to the FSCA on request that: (a) The strategy is appropriate and suitable for the specific classes of members. (b) For living annuities, the asset class composition, performance and change in income communicated to members – clear and understandable language. (c) Fees are reasonable and competitive. (d) Fees and charges, and their impact on members’ benefits, are disclosed to members – clear and understandable language.

Default Regulations Living annuities may form part of an annuity strategy if – • investment choice is limited to 4 investment portfolios; and • these portfolios must be compliant with regulations 28 and 37; and • drawdown levels are compliant with the prescribed standard. In-fund annuities other than living annuities also permissible if rules provide for it. Out of fund annuities, provided by a long-term insurer, other than living annuities may also be provided as part of annuity strategy.

Default Regulations What should trustees ensure? • The fund’s default investment portfolio and annuity strategy must be set out in the fund’s investment policy statement. • The fund’s default preservation arrangements must be set out in the rules of the fund. • Can overlap if it is appropriate to do so. • Apply for exemption or extension if the fund is not yet compliant.

Default Regulations EXEMPTIONS • The Registrar may on written application by a fund or in general, exempt a fund, or categories, types or kinds of funds, from all or any of the provisions of these regulations, subject to conditions that the Registrar may impose. • Template included in PF Guidance Notice 8 of 2018 and applications submitted on-line. • Section 281 of Financial Sector Regulation Act, 2017, consider whether: (a) will be contrary to the public interest; or (b) may prejudice the achievement of the objects of a financial sector law.

Default Regulations ENQUIRIES Any enquiries relating to the application of the Default Regulations may be submitted to: FSCA.defaultregs@fsca.co.za

QUESTIONS?

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