Pensions & Retirement Plans

Almost all retirement fund plans are subject to regulation and supervision in terms of the Pension Funds Act, 1956 (PFA).

Some of those that are not subject to the PFA are state-guaranteed funds established under other specific statutes including the Government Employees Pension Fund (GEPF) and three funds established in terms of the Transnet Pension Funds Act. Answers to further questions will not refer to these funds, as they are unlikely to be of interest to non-public sector employers.

Other statutes of particular importance include the following:

• the Basic Conditions of Employment Act, 2003;
• the Divorce Act, 1979;
• the Financial Advisory and Intermediary Services Act, 2002;
• the Financial Institutions (Protection of Funds) Act, 2001;
• the Financial Sector Regulation Act, 2017;
• the Financial Services Board Act, 1990 (FSB Act);
• the Income Tax Act, 1962;
• the Inspection of Financial Institutions Act, 1998;
• the Labour Relations Act, 1995;
• the Maintenance Act, 1998;
• the National Credit Act, 2005;
• the Promotion of Equality and Prevention of Unfair Discrimination Act, 2000; and
• the Social Assistance Act, 2004.

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The primary regulatory authorities are the South African Revenue Service, which enforces compliance by employers, funds and their members with tax laws, the Financial Sector Conduct Authority (FSCA), and the Prudential Authority (PA). The latter two were established on 1 April 2018 under the Financial Sector Regulation Act, 2017 (FSR Act) to supervise and enforce compliance with laws relating to the financial soundness of financial institutions and the fair treatment of financial sector customers. For a period of at least three years from 1 April 2018 the FSCA will be exercising the powers of the PA in relation to the prudential supervision of pension funds in addition to its own ‘market conduct’ powers in relation to such funds.

The FSCA is authorised in terms of the PFA to exercise wide-ranging powers.

Powers to prescribe requirements

The FSCA is authorised to prescribe requirements, both substantive and procedural, with which retirement funds and other regulated entities and persons must comply in addition to those prescribed by the Minister of Finance by regulation. These requirements include:

• the licensing conditions for funds, fund administrators and custodians of fund assets;
• the information required to be given to fund members;
• the information to be supplied by an employer to a fund, together with the contributions paid by the employer to it;
• the minimum rates at which interest must be paid to funds in respect of arrear contributions;
• the regulatory reporting requirements; and
• the criteria by which the ‘financial soundness’ of a fund will be measured.

Licensing and registration powers and functions

The FSCA has the powers under the PFA to:

• license retirement funds and fund administrators to conduct business as such;
• approve or reject rule amendments;
• exempt funds from ‘full compliance’ with specific provisions of the PFA; and
• require those the FSCA considers not ‘fit and proper’ to act as trustees or principal officers of funds to vacate their offices.

Prudential supervision powers and functions

The FSCA is empowered in terms of the PFA to monitor and supervise compliance by the board of a fund with its duties to ensure that the fund is, remains, or within a reasonable period of time becomes financially sound and complies with investment regulations. The FSCA does this by, among other things, reviewing annual financial statements and reports on triennial actuarial valuations, approving or rejecting schemes for the transfers of assets and liabilities between funds and other entities, and supervising the winding up of a part or the whole of the business of a fund.

General supervision powers and functions

The FSCA conducts compliance visits and investigations, including those prompted by whistle-blowing reports made by members of the public or in compliance with statutory duties imposed on board members, administrators and others. If irregularities are detected, the FSCA may:

• issue directives compelling non-compliant persons or entities to act or refrain from acting in specified ways;
• impose administrative penalties, withdraw licences and require persons to vacate specified positions in relation to regulated entities; and
• apply to a court for orders placing regulated entities under statutory management, curatorship or in liquidation.

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Contributions by employers to both pension and provident funds are deductible in terms of the Income Tax Act, 1962 from their incomes as expenses incurred in the production of income. Contributions to pension and provident funds by employees of up to 7.5 per cent of qualifying earnings are deductible from their income.

Pensions paid by pension funds are taxable in the hands of their recipients at relatively generous rates.

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Employees of the state at the national and provincial level belong to the GEPF. Municipal employees belong to a number of pension and provident funds, subject to regulation in terms of the PFA.

The state provides old-age grants as a social security measure to the elderly who qualify for it following the administration of a means test.

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In terms of the Social Assistance Act, 2004, the state must provide old-age grants to South African citizens, or foreigners with permanent residence status aged 60 or above and who qualify for the grant on the basis of the results of a means test.

The amount of the grant is 1,690 rand per month and will rise to 1,700 rand from 1 October 2018.

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Pensions payable to retired state employees are determined in terms of the rules of the GEPF by reference to their years of membership of the fund and final average salaries.

The old-age grant is a fixed amount determined without reference to years of work or income prior to retirement.

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Pensions paid by the GEPF are fully funded and guaranteed by the state.

The amount of the state old-age grant is determined each year by Parliament as part of its decisions in relation to the national budget. It has never been reduced to date, but the amount of the increase granted each year is determined with reference to budget priorities.

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Employers are not required by law to enrol their employees in retirement funds but, due to generous tax incentives, at least 50 per cent of formal sector employers do.

Fewer than 10 per cent of occupational retirement funds are defined benefit funds.

Some defined contribution funds provide for the accrual of benefits on a defined benefits basis for members who were members on the dates on which their defined benefit funds were converted to defined contribution funds. A large proportion of funds are provident funds -that is, funds that pay lump-sum benefits on retirement.

Until recently, contributions to these funds have been subject to less favourable tax treatment than those made to pension funds. It is expected that, within the next few years, contributions to provident funds will again be subject to less favourable tax treatment as policymakers seek to encourage people to save towards pensions, rather than lump-sum benefits.

In the last decade the shift from ‘standalone’ to ‘umbrella’ or ‘multi-employer’ funds as employer funds of choice has gathered pace and is likely to continue. Financial services providers, trade unions and bargaining councils may establish umbrella funds under the Labour Relations Act or by the Minister of Labour in terms of sectoral determinations issued in terms of the Basic Conditions of Employment Act.

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For contributions to, and benefits paid by, an occupational retirement fund to enjoy generous tax treatment in terms of the Income Tax Act, 1962, it must fall within the scope of the definitions of either a ‘pension fund’ or a ‘provident fund’ in that Act. It will not do so unless ‘membership of the fund throughout the period of employment [is] a condition of the employment by the employer of all persons of the class or classes specified [in the registered rules of the fund]’.

If an employer wants to exclude certain employees from participation in its retirement plan, it must ensure that the fund’s rules exclude all employees within the relevant category from membership of the fund. The category may not be determined on a basis that unfairly discriminates on prohibited grounds (eg, race or gender).

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The rules of a fund may provide that an employee must have worked for a participating employer for a specified period before he or she will be eligible for membership of the fund. But once an employee becomes a member of the fund, the PFA provides for prescribed minimum benefits as discussed in the following paragraph.

Funds must provide for prescribed minimum benefits on termination of employment before retirement, regardless of the reasons for such termination. In essence, the prescribed minimum benefit payable by:

• a defined benefit fund is the fair value equivalent of the member’s accrued deferred pension, or the aggregate of the member’s and employer’s contributions, less expenses, adjusted by net investment returns, whichever is the greater; and
• a defined contribution fund is the aggregate of the member’s and employer’s contributions and any other amount credited to the member’s fund account and a pro rata share of any amount standing to the credit of each of the fund’s investment reserve account, and member surplus accounts, less expenses and adjusted by rates of net returns earned on the investment of either the share of the fund’s assets attributable to the member or the fund’s assets as a whole, depending on the fund’s rules.

The vesting of benefits is thus no longer permissible in funds subject to the PFA, but is permissible in other funds.

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South African nationals working overseas may be permitted to join or remain members of a South African regulated retirement fund.

Until March 2017, a portion of a member’s benefit that accrued during periods of his or her foreign service was not subject to taxation. Since then, however, it has become subject to tax, if the member becomes resident in South Africa again and withdraws his or her benefit as a result of retirement or otherwise.

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Most occupational retirement funds are funded by contributions made by both employers and employees. Some are funded only by employers and others only by employees.

All occupational retirement funds (other than the exceptions referred to in the answer to question 1) are required to be registered in terms of the PFA. If they were not legal entities before registration, they become legal entities separate from and independent of the participating employers upon registration.

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Unless exempted from this provision (and such an exemption is seldom, if ever, granted to a defined benefit fund), a fund subject to regulation in terms of the PFA must at all times be ‘financially sound’.

It is required to be made subject to statutory actuarial valuation, at intervals not exceeding three years. The report on each such valuation must specify the rates at which contributions must be made to the fund to ensure it remains or becomes financially sound within the inter-valuation period, and must be submitted to the FSCA.

Valuations are required to be performed in accordance with the Standards of Actuarial Practice and Advisory Practice Notes published by the Actuarial Society of South Africa.

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The vast majority of private sector occupational retirement funds are defined contribution funds, which means that the amounts of the retirement benefits payable by them will depend on the contributions paid, the costs incurred in the governance, management and administration of the funds and the returns earned on the investment of their assets. Most such funds provide in their rules for the payment of additional amounts on permanent disability or death before retirement, but the law does not require this.

The funds’ liabilities for these additional amounts may be underwritten or self-insured, whether in whole or in part.

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Funds-paying pensions (which represent a small percentage of private sector occupational retirement funds) are required to increase the amounts of those pensions at intervals not exceeding three years. The amounts by which pensions in payment must be increased are determined by a formula that takes into account increases in rates of inflation and returns earned on the assets backing the funds’ pension liabilities and the affordability of such increases.

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Most funds provide in their rules for the payment of a lump-sum benefit on the death of a member before retirement. That benefit will not form part of the member’s deceased estate. Instead, it is required to be shared among the deceased’s dependants and/or nominees on a basis deemed equitable by the board of the fund, after it has investigated and taken into account their relative financial needs.

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Normal retirement dates are usually determined in terms of contracts of employment read with the rules of the occupational retirement funds to which employees belong. No ‘early retirement penalties’ may be applied.

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The only loans that may be granted by funds subject to regulation and supervision in terms of the PFA are housing loans secured by the pledge of members’ benefits to the funds.

As providers of housing finance are required to comply with the onerous provisions of the National Credit Act, few funds provide housing loans to their members. Many assist their members to access housing finance by providing housing guarantees to third-party housing finance providers secured by the pledge of those members’ benefits in favour of the funds.

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South African law does not require the preservation of retirement savings on change of employment and most employees ‘cash in’ those savings in such circumstances. This ‘leakage’ results in wholly insufficient provision for retirement. The Minister of Finance has recently sought to address this by publishing regulations that will require preservation by default. In other words, unless a person whose employment terminates before retirement instructs his or her occupational retirement fund to pay the amount of his or her retirement savings in the fund to the member, the fund must retain that amount and only pay it to the member when he or she reaches retirement age.

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The only circumstances in which a member’s retirement savings may be transferred from an occupational retirement fund to another while the member remains employed by the same employer are:

• on the winding up of the first occupational retirement fund;
• on the termination of the employer’s participation in the first occupational retirement fund, in which case, if the employer commences participation in another occupational retirement fund, the retirement savings of all of its employees who were members of the first fund would usually be transferred to the second; or
• when the employer of employees who belong to a trade union has concluded an agreement with it that those employees may terminate their membership of their occupational retirement fund and become, instead, members of a different occupational retirement fund, such as one established by that trade union.

A member whose membership of a fund has terminated on the ending of his or her employment and has become entitled to the payment of a benefit in terms of the rules of the fund may instruct his or her occupational retirement fund not to pay the benefit to him or her but to pay it to a preservation fund, a retirement annuity fund or to the occupational retirement fund to which the member will belong in terms of his or her contract of employment with a new employer.

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Each fund is required to have a board, colloquially referred to as a ‘board of trustees’, although retirement funds do not take the form of trusts. The board is responsible for the investment of the fund’s assets and the appointment of providers of financial products and services to the fund. The boards of funds may delegate investment decision-making powers to licensed asset managers.

Funds are required to ensure that, in the investment of their assets, they comply with the asset-spreading limitations and other investment-related restrictions in PFA regulation 28. Defined contribution funds are required in terms of PFA regulation 34 to establish default investment portfolios that are appropriate for the members whose retirement savings will be invested in them, if they do not exercise investment choice and comply with other prescribed requirements.

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Yes, but only if the cost of those enhancements can be provided for using amounts lawfully allocated to ‘employer surplus accounts’ in the books of the fund. Fund assets which are surplus to their requirements but have not been formally allocated to ‘employer surplus accounts’ cannot be used for this purpose.

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Yes. Such funds typically provide benefits of the same nature as broad-based funds but, as high-pay senior executives are seldom exposed to hazardous workplace conditions and are able to afford excellent medical services and treatment, the proportion of the contributions paid to executive-only funds that are needed to be applied in the purchase of permanent disability and premature death cover is relatively low. This means that the amounts of the retirement benefits payable by these funds to their members are likely to be higher than the retirement benefits to which the same members would have been entitled had they belonged to broad-based funds.

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They do not differ.

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In some unionised workplaces collective agreements have been concluded between employers and unions in terms of which union employees are required to belong to a multi-employer or ‘umbrella’ fund established by the unions. All such funds are defined contribution funds and almost all are also provident funds. Non-unionised employees may be allowed to belong to either union funds or other occupational retirement funds identified for the purpose by their employers.

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They do not differ.

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See answer to question 2.

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Employers are not exposed to risk of sanction for non-compliance by funds in which they participate - only for their own non-compliance with their duties in terms of the rules of those funds and the PFA.

An employer’s failure to timeously pay to a fund the contributions it is required to pay in terms of its rules will result in its liability for the payment of arrear interest. The arrear interest rate is prescribed and is punitive.

If a company fails altogether to pay contributions for which it is liable in terms of the fund’s rules, its directors may be held personally liable for the payment of such contributions, found guilty of a criminal offence and liable on conviction to a fine not exceeding 10 million rand, imprisonment for a period not exceeding 10 years, or both.

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The rules of most funds provide that their rules may be changed by agreement between the fund and the employer. Such changes will only be effective on approval of the changes by the FSCA.

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Unless exempted, funds must submit audited annual financial statements and reports on their triennial statutory valuations to the FSCA.

Board members, principal officers, auditors and administrators are required, in specified circumstances, to submit whistle-blowing reports.

Reports on investments made in foreign countries must be submitted to the South African Reserve Bank.

The FSCA may also address enquiries to a fund or its administrator and such requests must be responded to within a period of 30 days.

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Fund members must be given annual statements setting out the amounts of the benefits to which they will be entitled on the happening of specified ‘trigger events’, such as permanent disablement or death before retirement, termination of membership before retirement and on retirement.

They must also be informed in writing of amendments made to the rules in the course of its financial year.

When given choices to make, they must be given sufficient information on the implications of such choices before being asked to make them.

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The office of the Pension Funds Adjudicator was established in terms of the PFA to provide a no-cost and accessible means for the resolution of disputes between fund members and their funds, their administrators and, in relation to the exercise by employers of their powers in terms of the funds’ rules, also their employers.

Employment disputes regarding alleged unfair labour practices relating to the provision of benefits may be referred in terms of the Labour Relations Act to the Commission for Conciliation, Mediation and Arbitration for resolution. Disputes may also be referred to the courts for adjudication but the costs associated with such litigation are prohibitive for most fund members.

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The terms on which benefits are provided by a fund are regulated in terms of its registered rules and may only be changed by amendments to the rules adopted by the fund’s board and approved by the FSCA. If the changes amount to changes to terms of employment, they may implemented only with the consent of the employees, and if implemented without such consent may be interdicted by the high court or the labour court on application by aggrieved employees.

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The rules of most funds allow a participating employer to terminate its participation in the fund, and thus the payment of contributions to it, on written notice to the fund. Nonetheless, if the exercise of this right would amount to a unilateral change to terms of employment, the employer may be interdicted from exercising the power.

If a fund is placed in liquidation when it is underfunded, the employer will be liable to pay to the fund the amount of any shortfall in the amount held by it to provide for prescribed minimum benefits.

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As funds are legal entities separate from their participating employers, employer insolvency should not adversely affect the provision for benefits made before then in such funds.

Claims for the payment of contributions payable, but not paid, by the employer to a fund before the employer was placed in liquidation, but up to specific amounts determined in terms of regulations made in terms of the Insolvency Act will rank as preferred claims on the free residue of the assets of the employer, after provision has been made by its liquidator for specified claims.

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If the shares in an employer company are sold, the identity of the employer and its obligations in regard to its employees’ retirement funding will remain unchanged.

If a part or the whole of the business of a company is transferred as a going concern, the employment contracts of those employees employed in the business, or the affected part of it, will be assigned to the purchaser, which must ensure that their terms and conditions of employment are, when viewed on an overall basis, no less favourable to them than those that applied before the sale.

The new employer may, however, with the approval of the FSCA, procure the transfer of their retirement savings from the fund to which they belonged when employed by their erstwhile employer to a new one identified by their new employer.

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Surplus assets must be treated in the manner specified in the fund’s rules. If the rules do not specify such treatment, the fund’s board or its liquidator must allocate shares of the surplus to a ‘member surplus account’ and/or ‘employer surplus account’ in the books of the fund. So much as is allocated to the former must be used to increase amounts then payable to the fund’s members (and, if applicable, its former members). So much as is allocated to the latter may be paid to the participating employer unless it has already been liquidated, in which case it must be shared among the fund’s members.

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All persons authorised to exercise discretion on behalf of a fund owe fiduciary duties to the fund. These include the members of its board (its ‘trustees’) and those to whom the power to exercise discretion in the investment of its assets has been delegated.

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Some of the duties of the boards of the funds are codified in the PFA, while others are to be found in the fund’s rules and in common law.

The PFA states that, among other things, they must ensure that the fund complies with the PFA, other applicable law and its rules, and must:

• act with care, diligence and in good faith;
• avoid conflicts between their interests and their duties to the fund;
• protect the interests of the fund’s members in terms of its rules;
• treat members impartially;
• ensure that members are given adequate and appropriate information;
• employ proper control systems; and
• take expert advice on matters in relation to which they do not have the required expertise.

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A fiduciary who breaches his or her fiduciary duties may be liable to the fund for:

• compensation for any loss to it resulting from the breach;
• the disgorgement of ‘secret profits’, if applicable; and
• the refund of any remuneration paid to the fiduciary if the breach took place in the course of his or her work as such.

A breach of fiduciary duty may also render a transaction concluded in breach of the duty voidable at the instance of the fund or a third party to such transaction, if it was unaware of the breach when it entered into it. In some circumstances it may mean that the transaction was void from the outset. The FSCA may also revoke the violator’s licence to conduct business in terms of financial sector laws and/or, if the violator is a natural person, require him or her to vacate any position of trust he or she occupies in relation to a financial institution.

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Interdicts have been granted against employers which have sought to unilaterally change conditions of employment by terminating participation in defined benefit funds and participating in defined contribution funds instead.

Attempts by employers to procure changes to the rules of funds to convert them from defined benefit to defined contribution funds have resulted in strikes and other forms of industrial action.

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There are numerous disputes referred to the Pension Funds Adjudicator concerning maladministration, poor record-keeping and the computation of benefits, failures by funds to collect contributions due by employers and the allocation among dependants and nominees of deceased members of shares of lump-sum benefits then payable.

There have also been challenges to the way in which the boards of funds have interpreted or applied the PFA or the rules of the fund (eg, in allocating surplus assets) and whether or not proposed rules and rule amendments are inconsistent with the PFA.

Challenges by funds to the conduct of the Registrar of Pension Funds while exercising his or her powers have been adjudicated by an internal appeal board established under the Financial Services Board Act. In the future, such challenges to the conduct of the FSCA will be adjudicated by the Financial Services Tribunal established under the FSR Act.

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As most funds in South Africa are defined contribution funds, funding shortfalls most often result from employer failures to pay contributions for which they are liable rather than from poor investment returns. Longevity risks are not as severe in South Africa as they are in wealthier countries.

The coming into force of the bulk of the Financial Sector Regulation Act, 2017, with effect from 1 April 2018 has brought about the establishment of a ‘twin peaks’ structure for the regulation and supervision of the financial services industry and pension and provident funds.

The FSB has been replaced by the FSCA which is responsible for the enforcement of compliance with ‘market conduct’ standards to be prescribed in terms of the Conduct of Financial Institutions Act, which will replace sectoral laws such as the PFA and statutes in terms of which the conduct of insurance, collective investments, capital markets and other financial services business are now regulated as well as ‘market conduct’ standards to be issued by the FSCA. In future these sectoral laws will be replaced by standards issued in terms of a single Conduct of Financial Institutions Act.

While the second of the ‘peaks’, the Prudential Authority, has been simultaneously established, it will only become responsible for the prudential supervision of pension funds in approximately three years’ time. Until then, the FSCA will exercise the PA’s powers in relation to pension funds.

The government has signalled an intention to put before Parliament within the next few years legislation which will, among other things, provide for the establishment of a single national social security fund (NSSF) to which all employed persons will be required to belong and contribute a percentage of their remuneration up to a specified amount, although contributions for lower-paid workers will be subsidised by the state.

Those whose remuneration exceeds the specified amount may be also required to belong and contribute to approved occupational retirement funds.

The NSSF will pay pensions determined on a defined benefit basis subject to a minimum pension in the amount of the old-age grant.

If these changes become law, most low-paid workers are likely to cease to be members of their occupational retirement funds, some of which will become unviable on their own and will be forced to merge with others.

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