Hermans - Shortcomings in the Pension Funds Amendment Bill Bll-2007
From: "Dries Visagie"
Date 29 May 2007: 11 :41 PM
Subject: Shortcomings in the Pension Funds Amendment Bill BII-2007
Dear Mr Hermans,
I am an independent consultant in the retirement funds industry and have of late spotted a number of serious shortcomings in this bill. Would you please bring them to the attention of the decision makers as I am convinced that changes to the bill are necessary in the interests of many pension funds and their members. And some amendments are required for the sake of orderly governance of our country and of having neat written laws.
(I was a member of working groups of the LOA and the Institute of Retirement Funds for many years.)
The shortcomings are the following:
1. The proposed definition of "contingency reserve account" is not merely increasing the regulatory powers of the registrar, but is giving the registrar legislative powers. The registrar's power to disallow accounts or impose requirements should be limited by linking it to some objective. To my mind the registrar's aim with the amendment can be attained by merely giving the registrar the power to limit the amounts of and the "explicit contingencies" for which reserves may be kept, if he/she is satisfied that this is necessary in order to balance the interests of the stakeholders.
Apart from this the proposed amendment can be read as excluding an account which has been amended in accordance with the requirements of the registrar. The choice of words seems to he unfortunate.
I would recommend wording like the following:
"'contingency reserve account', in relation to a fund, means an account of the fund[, which has not been disallowed by the registrar or amended in accordance with the requirements of the registrar, and] to which shall be credited or debited such amounts as the board shall determine, on the advice of the valuator where the fund is not exempt from actuarial valuations, in order to provide for an explicit contingency[ies], provided that the registrar is satisfied that the extent of the amounts credited to and to be credited to the account and the holding of a reserve for the particular contingency reasonably preserve a balance among the interests of the various stakeholders in the fund;"
2. The proposed definition of "contribution holiday" in relation to a defined benefit category of a fund is confusing. It seems as if the contribution payable by members should be ignored, whereas it should only be taken into account in determining the contribution by the employer. The words "and the contribution payable by members" had relevance to the deleted words "the difference between" and should be deleted as well.
3. "Fund return" needs to be expressed as a rate. Within paragraphs (a) and (b) of the
definition of fund return the word "any" should be substituted by "the rate of'.
It seems possible and advisable to make provision for the smoothing of fund return only once under its definition, in stead of repeating it several times within the Act.
In any event, it seems necessary to clarify that it is not the fund return itself that may be smoothed but the augmentation of the benefits by virtue of the fund return.
4. The proposed section 14B(2)(a)(ii) requires a number of amendments.
Firstly the proposed requirement, that all contributions be augmented by fund return as from the date that the member joined the fund, would be impossible to adhere to or at the least would place an enormous administrative burden on many existing funds of the defined benefit category. Record keeping of fund returns and of the dates of payment of contributions were never a necessity for most defined benefit funds. Therefore I would suggest that the proposal be changed to the effect that the amount under paragraph (ii) (which in any case applies only if greater than the amount under (i)) is to be equal to:
(a) the existing withdrawal benefit as on the surplus apportionment date augmented by fund return thereafter; plus
(b) the value of the member's contributions made after the surplus apportionment date, less such expenses as the board deems appropriate to deduct from the contributions, augmented by fund return; plus
(c) any amount payable in terms of the rules of the fund on termination of service in excess of the sum of the amounts referred to in (a) and (b).
Secondly the proposal seems to require that every contribution (notwithstanding the date of payment) must be augmented with fund interest for the entire period of membership. This interpretation may be discarded as an absurdity, but the meaning of the words remains unclear. They may also suggest that a uniform rate of return should be applied to every contribution. There is no definition of fund return in relation to a particular contribution from which one can infer that only the returns generated after payment of that contribution are envisaged. I would suggest that the words "as from the commencement date" simply be deleted and not be replaced by "as from the date that the member joined the fund". Otherwise the words "as from the date that the member joined the fund" can be replaced by "as from the date of payment".
Thirdly the addition to the minimum individual reserve of "any amount payable in terms of the rules of the fund in excess of the member contributions increased or decreased as from the date that the member joined the fund" should be changed to clarify that the withdrawal benefit (termination of service benefit) in excess of the contributions with fund return is envisaged. The minimum individual reserve applies to all exits out of the fund and should be the same in every case. Otherwise, in terms of many fund rules, the minimum individual reserve would be less in the event of transfers of business and liquidations and in some cases even upon the death or retirement of a member.
The following words are suggested for inclusion immediately after the words "in terms of the rules of the fund": "at termination of service".
5. The proposed amendments to section 15F provide for existing contingency reserves to be transferred to the employer surplus account. This would obviously not be allowed by the registrar, but the amendments also provide that existing contingency reserves may no longer be treated as contingency reserves.
I would recommend that, instead of deleting the word "employer" from the expression "existing employer reserve account", the section be amended to refer to a reserve the application of which was under the control of the employer.
Alternatively subsection (1) should at least provide for the transfer of existing reserves to contingency reserves as well.
Section 37D(1)(d) and (e) (Court orders)
6. (a) Paragraph (e) needs to be numbered subsection (3). It does not go with (or match) the introductory words of section 37D(1).
(b) The reference to section 7(8)(a) of the Divorce Act, 1979 should be a reference to the new paragraph (d) of section 3 7D(l). This paragraph provides for orders other than divorce orders in terms of section 7(8)(a) of the Divorce Act, 1979, as well.
(c) In the introductory sentence of paragraph (e) only the amount assigned to the other party (plus the resulting income tax) should be deemed to accrue to the member - and not "the pension benefit referred to" which is the entire benefit.
(d) Sub-paragraph (ii) says that such deduction shall have the effect of reducing the accrued benefit (presumably of the member) at the date of such deduction. I gather that this tries to say that, when in future benefits accrue to or in respect of the member, they will be equal to his reduced accrued benefits on the date of the deduction with fund return plus benefits accrued thereafter. But I do not think this goes far enough, because in many cases benefits are not simply expressed as accrued benefits or as a function of amounts paid into the fund plus fund return. For example under defined benefit funds the accrued retirement benefit for prior service is affected by future salary movements. It is not static, and therefore a provision is required to set out how this changing accrued benefit is affected by divorce payments.
The Act should say that the fund' may reduce the benefits payable to or in respect of the member (including the minimum individual reserve) by the amount of the pension interest assigned to the non-member spouse or other person, plus the amount of the resulting income tax, plus fund return on these amounts for the period following the date of the court order. But paragraph (d) should be worded in line with this, and then subparagraph (ii) can fall away.
Please also note that the reduction should be effective from the date of the court order (which is the date that the amount assigned accrues 'to the other party) rather than from the date of receipt of the court order, which date may be difficult to prove in many cases.
(e) Sub-paragraph (iii) should be extended to include the other person.
(f) The resulting income tax should be worded as the income tax payable by the member following upon the assignation. The income tax should not be limited to the income tax payable on the amount assigned, but should include the income tax payable on the amount to be withdrawn for the payment of the income tax.