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Retirement Fund Contributions

Retirement Fund Contributions

NEW Requirements - FSCA Conduct Standard 1 of 2022

The Financial Sector Conduct Authority (FSCA) has issued new requirements for contributions, contribution statements, and reporting around contributions. It wants to standardise the manner and format of reporting by funds regarding contribution matters.

On 19 August 2022, the FSCA issued Conduct Standard 1 of 2022 which deals with:

- the payment of contributions to retirement funds by employers;
- the information and statements to be made by employers in contribution statements provided by employers to funds;
- reporting of contributions and contribution statement problems (in prescribed formats); and
- the content of attorney-fund agreements where attorneys are recovering contributions from employers for the fund.

Conduct Standards are law.

Effective date

The effective date of the Conduct Standard is six months after the date of publication, i.e. 19 February 2023 [1].

[1] The FSCA may determine different dates for the coming into effect of different provisions in the Conduct Standard.

Duty of the fund - notify employers of their contribution duties

A fund must notify every participating employer before the employer starts participating in the fund, and then every year, of the employer’s duties, obligations, and liability under section 13A of the Pension Fund Act (PFA) and the Conduct Standard. This must be done in the prescribed format.

It appears, from the consultation report, that funds may do this annual notification at any time in the year and not necessarily on the anniversary date of participation.

Contribution statements are to be provided by the employer to the fund.

The employer must provide the following contribution statements to the fund:

The initial contribution statements

The initial contribution statement, which is the first contribution statement provided to a fund by an employer after the employer begins participating in the fund must, at a minimum, include:

the name of the fund;
the fund registration number;
the period in respect of which the contribution is payable;
the name and address of the employer;
where an employer has multiple pay-points, the pay-point which made the deduction;
the contact person responsible at the employer or pay-point dealing with inquiries relating to contribution statements and payment of contributions;
the identity of the person envisaged in section 13A(8) of the Act, as requested from the employer by the fund in terms of section 13A(9)(a) of the Act;
in respect of each member, the following:

- - full name;
  - date of membership;
  - date of birth;
  - South African identity number or passport number;
  - employer pay or industry number;
  - income tax number;
  - contact number, including (where available) cellular phone number;
  - e-mail address (where available);
  - postal address;
  - residential address;
  - annual pensionable emoluments;
  - percentage and amount of contributions;
  - split between member and employer contribution; and
  - details of any additional voluntary contributions paid.

Subsequent contribution statements

A subsequent contribution statement means any contribution statement provided to a fund by an employer subsequent to the initial contribution statement and must, at a minimum, include:

- all the information in the initial contribution statement, (except that the information in subparagraph (g) above need only be provided if the identify of this person has changed as compared to the previous contribution statement);
- the membership number allocated to each member by the fund; and
- an indication of any changes as compared to the contribution statement for the previous period showing any differences in the data, including additions as a result of new members, reductions as a result of membership terminations, adjustments as a result of changes in pensionable emoluments, the payment of additional voluntary contributions, corrections due to error or any other information that may be relevant.

Employers’ obligations and enforcement

The Conduct Standard places the obligation on the employer to ensure that differences in membership data from month to month are provided to the fund. In addition, the employer must provide any other information that may be relevant to the membership data. Examples could include, in our view, information about upcoming changes within the employer that might impact on membership data.

Even where the administrator, on behalf of the fund, is tracking changes in members’ data from one month to the next and reporting on this, the employer retains the obligation to do so.

It is important that the FSCA will be able to use its enforcement powers (in the Act and in the Financial Sector Regulation Act) against the employer to enforce compliance with the Conduct Standard. This is in line with what we are seeing under the draft Conduct of Financial Institutions Bill, where the employer, with respect to contributions, will be a supervised entity and subject to the supervisory and enforcement powers of the FSCA (with respect to contributions).

Furthermore, we should not forget that the FSCA has said that it will ‘name and shame’ employers and funds where contributions are unpaid/short-paid. The FSCA recently announced that it will commence with this initiative in October 2022.

Employer’s declaration

A new requirement is that all information to be provided by the employer in contribution statements must be accompanied by a declaration by the employer that all employees eligible to be members of the fund are accurately reflected in the contribution statement. Again, this places an obligation on the employer to ensure that all eligible employees appear on the contribution statements provided to funds.

Timing

The Act provides that contribution statements must be provided either at the time of paying contributions or not later than 15 days after the end of the month in respect of which the contribution payment is made.

Minimum information

Note that it is the minimum information to be provided in contribution statements that are prescribed in the Conduct Standard and the fund may ask the employer for additional information.

Reporting

Although the Conduct Standard does not number the reports, we have done so below to aid understanding.

REPORT 1

Reporting on receipt of contributions and data to the principal officer / monitoring person [2]

[2] Monitoring person: means an authorised person referred to in section 13A(6)(b) of the Act – who is a person authorised by the board of the fund to report on section 13A compliance.

The person who is responsible for checking the receipt of contributions must report not later than fifteen days after the end of the period allowed to make the contributions (not later than seven days after the end of the month) to the principal officer or monitoring person:

- whether any matters previously reported on were not resolved;
- if the contribution statements data was not provided as required;
- where the payment of contributions and the data in the contribution statements cannot be reconciled with each other, except if the discrepancy is less than 2,5% of the total contribution payable for the relevant period (“the allowable discrepancy”); and
- if any contributions have not been received as required by the Act except for the allowable discrepancy.

REPORT 2

Principal officer / monitoring person report to the board of the fund

The principal officer of a fund or monitoring person must, within seven days after the receipt of report one, submit a written report to the board in respect of every relevant employer, if the employer:

- has not provided the contribution statements,
- not provide them on time,
- contributions have not been paid to the correct entity within the required time set out in the Act (see above); or
- if the previous non-compliance is still unresolved (S13A requirements).

Report two must include details of:

- whether any of the matters previously reported on were not resolved; and
- any instance where contribution payments and the contribution statement cannot be reconciled with each other, except for the allowable discrepancy.

REPORTS 3 & 4

Reports by the board of the fund

The board must ensure that any material contravention of, or material failure to comply with S13A requirements is, within 30 days of the board being informed in writing of the failure by the monitoring person:

- REPORT 3: brought to the attention of each affected member, in an appropriate manner. If the affected members cannot be identified, then the board must bring the contravention/ failure to the attention of all the members of the fund or all the members of the fund in respect of that participating employer; and
- REPORT 4: reported to the FSCA, in a format to be prescribed by the FSCA. The report must include the proposed course of action taken by the fund to remedy the contravention/ failure.
- “in writing” or “written” includes any communication by any appropriate electronic medium that is accurately and readily reducible to written or printed form. The communication must be clear, concise, comprehensive, and in a language that is easily understood.

REPORTS 5 & 6

By the board of the fund

Any material contravention of, or material failure to comply with the S13A requirements that continues for a period of 90 days must be reported by the board:

REPORT 5: in sufficient detail to the South African Police Service, in a format prescribed by the FSCA, within 14 days after the expiration of the 90-day period; and

REPORT 6: in writing to affected members or, where the affected members cannot be identified, all the members of the fund or all the members of the fund in respect of that participating employer, within 14 days after the expiration of the 90-day period.

Interest on late payment of contributions

According to the Conduct Standard, interest is payable on late payment of contributions or unpaid contributions, where contributions (or part of contributions) are paid after the prescribed period for payment. This interest is investment income for the fund.

Calculation

Interest is calculated from the first day following the expiration of the period contributions were payable until the fund receives the contributions.

Interest is calculated at the prime rate plus two percent. The fund and the employer may not agree that some other rate of interest will be paid or that no interest will be paid.

When is it payable?

The interest is payable to the fund by no later than the end of the second month following the month in respect of which the amount is payable.

Outsourcing by the fund to an attorney for the recovery of contributions

The Conduct Standard contains requirements for the fund’s board, which decides to outsource the recovery of contributions from an employer to an attorney. These are set out below.

Conflicts of interest

The board must have regard to:

any actual or potential conflict of interest that may exist in the selection and appointment of the collecting attorney; and
any board-approved policies of the fund relating to conflict of interest and outsourcing; and ensure that any conflict of interest is avoided.

Attorneys’ fees

The board must ensure that fees payable to the attorney for collection of arrear contributions are:

reasonable and commensurate to the service provided; and
do not impede the delivery of fair outcomes to members and the fund.

Agreements with attorneys

Where an attorney is appointed to recover contributions for a fund, the fund’s board must enter into an agreement with the attorney. The agreement must provide for at least the following:

that any amount recovered by an attorney in respect of contributions must be transmitted into the fund’s bank account within seven business days of receipt of the amount;
the fee structure;
specific instructions relating to the steps the attorney must take if the employer fails to pay the arrear contributions on demand;
anticipated timelines for recovering all arrear contributions by the attorney; and
frequency of reporting by the attorney to the fund about payments made by the employer.

Preparation

During the six-month phase-in period, administrators and funds will need to decide which processes, communication, and documentation they need to amend as well as consider their current systems and policies.

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Two-pot System: draft legislation

Two-pot System: draft legislation

On 29 July 2022, National Treasury issued the Revenue Laws Amendment Bill 2022 (“draft legislation”), which includes the draft legislation for the “two pot retirement system”. The legislation is complex and still in draft form. National Treasury describes the draft legislation as “technically complex” and intends to consult further on the draft legislation as well as hold public hearings.

The industry’s understanding of Treasury’s intentions will evolve as this process and analysis unfold. The information discussed in this publication may change.

Proposed Implementation Date: 1 March 2023

One of the controversial aspects of the draft legislation is the proposed implementation date of 1 March 2023, which the Treasury calls “optimistic”. Many have described this start date as impossible, given the changes that need to be made to administration systems, fund rules, processes, forms, training, and communication (among other requirements), and be tested, before this date. There is a push to allow members to access their retirement fund benefits as soon as possible. However, the implementation can only really begin once the draft legislation is finalised.

We have drafted this publication as if the implementation date of 1 March 2023 will proceed.

Terminology - The Pots

Vested pot

This is the member’s existing value in a retirement fund before 1 March 2023.

Savings pot

This is the part of the member’s value in the fund that they will be able to withdraw / access without their employment being terminated or leaving the fund. A withdrawal from this pot is called a “savings withdrawal”.

Retirement pot

This is part of the member’s value in the fund that may only be paid on retirement (even if the member’s employment is terminated). A withdrawal from this pot on retirement is called a “retirement withdrawal”.

Important Design Choices

Treasury has made some important design choices for the two-pot system.

There is no “seeding” of the savings pot. That is, the savings pot is only built up from contributions made after 1 March 2023 and not from any amounts contributed to the fund before then.

There is no access to the retirement pot before retirement. Like the savings pot, the retirement pot is only built up from contributions into the fund after 1 March 2023.

Members may contribute up to 3% of contributions to the savings pot.

The basic workings of the two-pot system in diagrammatic format

These design choices are discussed further below:

Summary of the fundamentals of the two-pot system

Three pots will be set up in the registered rules of a fund on 1 March 2023: vested pot, savings pot, and retirement pot.

The savings pot and the retirement pot are built up only from contributions to the fund after 1 March 2023.

The savings pot is the part of the fund that members will be able to take some money out of, without their employment being terminated and without leaving the fund.

The retirement pot is the part of the fund that members will only be able to access on retirement, even if their employment is terminated and they leave the fund.

The vested pot holds everything built up in the fund before 1 March 2023. No contributions are made to this pot after 1 March 2023 (except for a narrow category of members we discuss under the compulsory annuitisation heading below).

We believe that Treasury’s intention is to layer the compulsory annuitisation vesting and non-vesting amounts into the three pots and ensure that the same compulsory annuitisation rules apply going forward, as they do now, for existing members.

Contributions

All contributions made to a fund before 1 March 2023 will be in the vested pot.

All contributions after 1 March 2023 (apart from a narrow exception discussed under the compulsory annuitisation heading below) will be split between the savings pot and the retirement pot. These two pots start with R0 on 1 March 2023 and are built up from there.

Contributions made to a retirement fund are usually tax-deductible. There is a limit on how much may be contributed to a fund and still be tax-deductible. Summarised, this limit is higher than 27.5% of a member’s gross remuneration or R350 000 per tax year.

Up to 33.3% (one-third) of tax-deductible contributions may be contributed to the savings pot. The member, subject to the rules of the fund and the limit, may decide how much is contributed to the savings pot. Presumably, the member may change their decision from time-to-time, although this is not addressed in the draft legislation.

All other contributions (whether tax-deductible or not) must be made to the retirement pot.

The split of contributions between the savings pot and the retirement pot is after expenses, fees, risk premiums, etc have been deducted.

All the pots continue to earn fund returns.

Payments out of the pots

Summary

More detail

On emigration, and if a member is not a tax resident for a period of at least 3 years and on visa expiry: member can take the full amount from all three pots in cash. The vested pot be taxed according to current tax provisions, the savings pot will be taxed as gross income and the retirement pot will be taxed according to the lump sum withdrawal tables.

Transfers between the pots

Compulsory annuitisation

It appears that Treasury’s intention is that the current compulsory annuitisation rules will continue to apply to existing members of funds after the draft legislation is enacted. Thus, those amounts that are “vested” (for compulsory annuitisation purposes) now for existing members in terms of current legislation will continue to enjoy vesting and can be taken in cash on retirement.

For fund members who were 55 years or older on 1 March 2021, contributing to a provident fund at that time and still contributing to the same provident fund, under current legislation these members’ continued contributions (and fund return on these) to the same provident fund may be taken in cash on retirement. It appears that Treasury’s intention is to keep this situation unchanged, as these older members will make their ongoing contributions, after 1 March 2023, to the vested pot, ensuring the current legislation and rules continue to apply to these contributions when these members withdraw or retire.

Section 37D deductions, including divorce orders

The draft legislation does not clarify how section 37D deductions, such as maintenance orders, housing loans, and deductions related to employee misconduct, are to be dealt with under the two-pot system.

However, it is suggested that divorce orders must state which pot a non-member spouse’s pension interest is to be paid from. For this, the Divorce Act will need to be amended to take the pots into account. It is likely that there will be more discussion around how divorce orders and deductions should be managed under the two-pot system.

Last word

The draft legislation is subject to many interpretations for now. It is complex and may change before it is finalised. It is recommended that major decisions should not be taken in relation to the two-pot system, as draft legislation is currently structured.

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FSCA Regulation Plan 2022 – 2025

FSCA Regulation Plan 2022 – 2025

The Financial Sector Conduct Authority (‘FSCA’) has published its Regulation Plan (‘Plan’) for the next three years, effective from 1 April 2022 to 31 March 2025.

Purpose of the FSCA Regulation Plan

The Plan seeks to set out the regulations and rules within which financial institutions (including all retirement funds) must operate and for which the FSCA is responsible.

The financial sector is currently in the process of undergoing two major legislative reforms –

The Conduct of Financial Institutions (COFI) Bill will reshape the future conduct regulatory framework by consolidating the conduct financial sector laws into a single overarching piece of conduct legislation, and will also bring a broad scope of new activities within the conduct legislative framework; and

The Financial Markets Act.

Main focus areas of the FSCA Regulation Plan

The focus areas forming part of the Plan are regulatory framework developments related to:

Conduct
Financial markets (integrity and efficiency); and
A number of themes will be cut across all financial institution sectors (some of which are set out below).

Conduct of Financial Institutions Bill (‘COFI Bill’)

The framework envisaged in the Plan will position the FSCA to ensure an efficient transition into the COFI Bill. The framework consists of three phases to be executed concurrently:

PHASE 1: A high level design of the regulatory framework

A consideration of the overall design of the regulatory framework under the COFI Bill, including the structure and how conduct standards will be managed.

PHASE 2: Harmonisation of regulatory frameworks

Based on the need to start harmonising laws administered by the FSCA, the harmonisation project identifies key conduct themes and the subsequent development of cross-cutting (across financial institutions) requirements for each of those themes. The result is a regulatory framework applied to the financial industry as a whole, regardless of the type of financial institution or activity.

PHASE 3: Transition to the COFI Bill framework

the third phase entails a significant redesign of the current regulatory framework[1] and transitioning existing sectoral standards to the COFI Bill framework. All the subordinate legislation (for example, Conduct Standards) currently sitting under all the sectoral laws (for example, the Pension Funds Act) will continue to exist after the COFI Bill has come into operation, even though the laws in terms of which they were made have been repealed until they are replaced by Conduct Standards under the Bill (once promulgated).

[1] The COFI Bill contains a provision that provides that anything done or prescribed under a section of an Act amended by the COFI Bill remains valid and enforceable until replaced by Conduct Standards under the COFI Bill.

Retirement funds

Some of the reporting requirements and formats for retirement funds are outdated. New and revised standards include the following that is in the pipeline:

- Pension Funds Financial Statements and Regulatory Reporting Standard.
- Conduct Standard – payment of contributions (section 13A of the Pension Funds Act): this Conduct Standard has already been submitted to Parliament and is expected to be finalised shortly. Regulation 33 of the Pension Funds Act will be repealed at the same time.
- Conduct Standard – conditions for investment in derivative instruments: a final version of this Conduct Standard will be submitted to National Treasury to provide to Parliament during the third quarter of 2022.
- Conduct Standard – conditions for living annuities in an annuity strategy: this Conduct Standard is undergoing final refinements and will be submitted to the National Treasury to provide to Parliament during the last quarter of 2022.
- Conduct Standard – communication of benefit projections to members: this Conduct Standard is undergoing final refinements and it is expected that it will be submitted to the National Treasury to provide to Parliament during the last quarter of 2022.

Other FSCA Sectoral Developments

The FSCA is working on several cross-sector regulatory developments, which will be prioritised in the next three years. These include those set out below.

Joint Standard – Culture & Governance

The FSCA and Prudential Authority (“PA”) are currently developing a high-level Joint Standard relating to culture and governance of financial institutions which will be published for public consultation during 2023.

Joint Standard – Information Technology Governance & Risk Management

A draft Joint Standard relating to information technology governance and risk management has been published. The FSCA and PA are busy with final refinements to the Joint Standard, and it is expected that it will be submitted to National Treasury to provide to Parliament by the end of 2022 or beginning of 2023.

Joint Standard - Cyber Security & Cyber Resilience Requirements

The draft Joint Standard relating to cyber security and cyber resilience requirements was published for public comment in December 2021. Further refinement of the Joint Standard is taking place, and it is envisaged that a second version of the draft Joint Standard will be published for public consultation.

The FSCA and PA are also working on other IT-related topics, such as cloud computing and outsourcing of IT functions, which may lead to further proposals for legislation.

Conduct Standard regarding Industry Practices & Treatment of lost accounts & unclaimed assets

The treatment of lost accounts and unclaimed assets in the financial sector remains a significant concern. The FSCA will be developing policy proposals for the treatment of lost accounts and unclaimed assets with the ultimate goal of proposing legislative interventions through a Conduct Standard. Formal draft legislative proposals are expected during the first quarter of 2024 and should be finalised during mid-2025.

Development of Cross-Sector Licensing Forms

To ensure a consistent approach to licensing and in anticipation of the licensing framework under the COFI Bill, the FSCA will be developing cross-sector licensing forms. The cross-sector licensing forms are expected to be finalised during 2023.

Implementation Timetable

The Plan includes a table that outlines the various projects forming part of the Plan, as well as the implementation timetable of each project.

Importance of the FSCA Regulation Plan

The FSCA’s Plan is important to the industry. Financial institutions and customers require an efficient regulator that delivers and is structurally prepared for the upcoming changes. In addition, understanding the Plan puts financial institutions in a better position to engage with the developments as well as to work the timelines and requirements into plans and projects to ensure compliance with the upcoming developments as and when they are rolled out.

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FSCA Draft Omni-CBR

FSCA Draft Omni-CBR

Recently the Financial Sector Conduct Authority (FSCA) published Communication 16 of 2022, about the Omni Conduct of Business Return (Omni-CBR). The roadmap for the roll-out and implementation of the Omni-CBR and the draft Omni-CBR template (an excel spreadsheet) was also published.

FSCA Omni-CBR Communication 2022

The Communication included information about various industry engagements planned by the FSCA to provide explanatory guidance and solicit initial feedback on the draft Omni-CBR template.

YouTube videos (recorded by the FSCA) are available as an introduction to the Omni-CBR. Links to the YouTube videos are contained in the Communication, which is available on the FSCA website.

Written commentary was invited on the draft Omni-CBR template.

What is the Omni-CBR?

The idea is that from a future date most financial institutions (see below) will be required by law to submit online quarterly information to the FSCA. Thus, the term “Omni” as it applies to many types of financial institutions. This provision of information will entail answering questions prescribed by the FSCA. The FSCA will then use the information financial institutions give to them (and other information) to supervise the financial institution in relation to whether it treats its customers fairly and how it conducts itself.

The main supervisory tool

The Omni-CBR will be the main (not the only) supervisory tool for the FSCA to obtain information from financial institutions. It will be compulsory, statutory reporting. It will form the “cornerstone of the FSCA’s off-site supervisory toolkit”.

The following financial institutions will have to submit the Omni CBR quarterly:

Timeline for the implementation of the Omni-CBR

Consultation and implementation of the Omni-CBR will take several years. By June 2026, all the relevant financial institutions will be required to be accurately and fully reporting on a quarterly basis in compliance with the Omni-CBR.

There are implementation steps laid out in the roadmap, including testing and compliance on a best effort basis. The four phases of roll-out are summarised in the roadmap as follows:

What information will financial institutions be required to provide in the Omni-CBR?

The draft excel spreadsheet includes the information that the FSCA requires and can be obtained on the FSCA’s website. This spreadsheet is part of the consultation process and will still, therefore, undergo change. The spreadsheet consists of instructions, a declaration, definitions, a general section (which all the types of financial institutions will answer), customisable sections, and a number of tabs that include questions that are specific to the particular type of financial institution completing the spreadsheet.

The Omni-CBR includes current regulatory requirements as well as new requirements that are still in the pipeline. The FSCA states that the Omni-CBR takes into account key financial sector regulatory reforms currently underway, such as the FSCA’s sector-based regulatory harmonisation project, the Conduct of Financial Institutions Bill, and outstanding proposals from the Retail Distribution Review.

The following are the themes around which information will be requested:

More information on the Omni-CBR categories of information can be found in the videos on the FSCA website.

The information that is required under the Omni-CBR will be refined during the consultation and test phases.

Engaging

The Omni-CBR still has a long way to go. Once finalised, it will become a vital supervisory tool for the FSCA. Thus, it is in the interests of financial institutions and their customers to understand and engage in the Omni-CBR as it is developed and executed. Management information, systems, and reporting will become even more essential for financial institutions. This is particularly true for retirement funds, as this is mostly new reporting for them.

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