Government Employees Pension Fund Increase: briefing by Department of Defence; Insurance Amendment Bill: briefing

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Finance Standing Committee

26 January 2003
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Meeting report

FINANCE PORTFOLIO COMMITTEE
27 January 2003
GOVERNMENT EMPLOYEES PENSION FUND INCREASE: BRIEFING BY DEPARTMENT OF DEFENCE; INSURANCE AMENDMENT BILL: BRIEFING

Chairperson
: Ms Hogan (ANC)

Documents handed out:
Department of Defence Presentation: Recognition of Former Non-Statutory Force (NSF) Service for the Provisioning of Pension Benefits
Insurance Amendment Bill [B52-2002]
Presentation by National Treasury
Presentation by FSB on Non-Prudential Issues
Presentation by FSB on Prudential Issues

SUMMARY
The Department of Defence (DOD) presented their financial model for the provision of pension benefits to previous non-statutory force members. The Committee then discussed this model as a precursor to the public hearings on 29 January.

The presentation by National Treasury dealt with the history of insurance, the economic context of long- and short- term insurance, the profile of both the long- and short-term insurance industries and investor protection. Representatives from the Financial Services Board (FSB) provided input with regard to the prudential and non-prudential issues in the Bill itself.

Members raised the following concerns with the Bill: firstly, whether funeral benefits also cover medical aid schemes in Clause 28. Secondly, whether the inclusion of the phrase "after payment" in Clause 11(b)(c) is satisfactory, and thirdly, whether Clause 7 can impose a positive obligation to disclose reasons.

MINUTES
The Department of Defence was represented by Brigadier General A.L. de Wit (Director Human Resource Planning, Department of Defence, DOD), Colonel Helen Zobane , Peet Maritz (Chief Director: Pensions Administration, Treasury), Tsepe Motumi (Deputy Director-General: Policy and Planning, DOD) and Mr Janse van Rensburg (Human Resource Manager: Ministry of Intelligence Services).

Colonel Zobane conducted the power point presentation on behalf of the delegation. (Please refer to the attached presentation)

Discussion
Dr Woods (IFP) commented that it seems that there are significant financial implications attached to the length of service. He then asked how confident they are on the accuracy of information on the service certificates.

Col Zobane told the Committee that they believe the dates to be accurate. Umkhonto We Sizwe (MK) and APLA issued these certificates from their records. The oldest possible certificate is being used.

Mr Motumi added that the commanders of the soldiers verified their service.

Mr Mnguni asked why those years served by some soldiers when they were younger than 16 were excluded.

Col Zobane answered that the International Labour Law states that people younger than 16 are not employable.

Ms Taljaard (DP) enquired whether there was an estimation of how many potentially eligible previous members of non-statutory forces there are. She also expressed her concern on the perceived lack of actuarial modelling on the impact of the rationalisation process and the liquidity of the fund. She was also worried that individuals who made use of the Special Pensions dispensation will receive double benefit.

Col Zobane replied that their actuaries are developing models that will prevent double benefit. There will be a formula to take care of the Special Pensions dispensation.

Mr Maritz added that there are two databases containing lists of those who took the Special Pension and those who did not. Those who received the special pension will have their new pension adjusted.

General de Wit said that the rationalisation process will affect very few of the ex-NSF members.

Dr Koornhof enquired about their communication plan for this dispensation.

Col Zobane told him that the Department of Defence would develop and implement it. She added that its purpose is to inform members of the new dispensation. It would also spell out the different options for contributions.

Mr Moloto (ANC) commented that there are various options available under this dispensation. He asked whether benefits would be presented in monetary value or percentages. He added that there would be a better understanding if it were done in monetary values.

Col Zobane answered that they were looking at this process in conjunction with Pensions Administration (Treasury). She said that the plan is work out projections for each individual member. She added that they are aware that this could be very difficult and costly.

Mr Smit (NNP) enquired about the ten year pension categories. He expressed his concern on the fairness of this.

The Chair also asked why the exact length of service was not used.

Mr Maritz conceded that he was not exactly sure where this came from and would have to consult his department first. He would get back to the Committee as soon as possible on this.

The Chair felt that the disparity this model would cause disparity between someone in the service for twenty years and someone who served nineteen years. She was worried that this would constitute discrimination.

General de Witt explained that the rationale behind this was that the younger members have time to build their pension through their careers and that this model will advantage the older members.

The Chairperson said that she understood the ten year threshold but not why thereafter they stick to the ten year incriminations.

Ms T Modise (ANC, Chairperson of Defence Committee) stated that the problem is that when the NSF members were recognised the process was not followed through then. She said that was a mistake. She added that it seems to her that while they are trying to correct a wrong they are creating new problems.

The Chair added that she was worried about the lump payment members would have to make to cover pension payments they would have made under a normal pension system (7.5% of their annual salary).

Mr Maritz told her that there is no requirement for a lump sum. He said that this amount could be paid of over years.

Dr Koornhof (UDM) enquired whether there are people who joined that Statutory Forces before 1990 and who did not receive pensions.

General de Wit told him that there were some but that they worked on a short-term basis and are not entitled to pensions.

Ms Taljaard commented that this legislation opens the door for other governmental agencies also. She asked whether they knew in actuarial terms what the implications of this would be for other agencies apart from the DOD.

The Chair added that an overview of numbers would be necessary.

Mr Motumi told the Committee that the largest number of affected individuals is in the Defence Force.

Mr Smit expressed the opinion that category five which was selected (slide 9 of presentation) was discriminatory.

Ms Joemat (ANC) asked whether the Treasury had projected figures for members in other parts of the public service than the Defence Force.

Mr Maritz referred them to slide 10 of the presentation where it says that R1.5bn has been set aside for these issues. He added that they have no accurate projection but reiterated that the majority of affected members were in the Defence Force. He added that the Pension Fund stood at R270bn at 31 March 2002.

Mr Janse van Rensburg added that the projection for the Intelligence Ministry is R140 million.

The Chair stated that the DOD has a list of all their members. She asked whether the other departments have such lists.

Mr Motumi told her that this list covers all ex-NSF members.

Ms Taljaard asked whether the demobilization benefit would be deducted and was answered in the affirmative.

The Chair then summarised the issues that have to be dealt with:

- The ten year banding
- The possible disadvantages in choosing option number five instead of option number one on slide nine.
- NSF members having to pay back the amount they would have had to pay in under normal circumstances.
- Making sure that the agreements are the same for members in other governmental agencies.

The Chair added that part of the motivation of this bill was that a number of people have died and retired and they and their families are being undermined. She asked what the extent of affected people was.

General De Wit told the Committee that he did not have the exact numbers there, but that it was between 800 and 1200 people.

Afternoon session
Presentation by National Treasury

Mr Andrè Swanepoel, Deputy Executive Officer: Insurance from the Financial Services Board (FSB), stated that the presentation would be highlighting some of the salient features of the South African insurance industry.

Ms Samantha Anderson, Director: Financial Markets in the National Treasury, conducted the presentation, which focused on the history of insurance, the economic context of long- and short- term insurance, the profile of both the long- and short-term insurance industries and investor protection (see document).

Discussion
Dr P Rabie (NNP) referred to the slide entitled "Profile of short-term insurance industry: terrorism", and asked whether there are any other emerging commodity-driven economies such as South Africa that provide adequate short-term insurance for terrorism.

Mr Swanepoel replied that this is an international problem, and the government is expected to be the reinsurer of last resort. The industry is struggling with this issue at the moment.

The Chair proposed that the Committee now be taken through a clause-by-clause briefing on the Bill, and the presenters may offer points of clarity with regard to any clause covered, and Members are encouraged to raise any concerns with problematic clauses.

Briefing on the Insurance Amendment Bill
Clause 1
The Chair requested clarity on the purpose of this clause.

Mr Deon van Staden, Head: Insurance Registration & Policy from the FSB, responded that this clause aims to insert provisions that will amend the index of the Long-term Insurance Act, and this is therefore an administrative issue.

Clause 2
The Chair sought clarity on the meaning of the term "capital adequacy requirement".

Mr Billy Clarke, Specialist: Insurance from the FSB, replied by referring Members to the explanation on this term provided in the document circulated (see document).

Mr Van Staden added that it is actually a solvency buffer needed in addition to the technical liability.

Mr N Nene (ANC) asked whether this is similar to the minimum reserve requirement employed by the banks.

Mr Swanepoel responded that he is not certain here, but the two do appear to be similar. It depends on the guidelines laid down by the South African Actuarial Society.

The Chair asked how the amendment to the term "capital adequacy requirement" would affect paragraph 2 of Schedule 3 of the Long-term Insurance Act.

Mr Swanepoel replied that this amendment merely serves to separate liability and "capital adequacy requirement", so that any potential misunderstanding may be avoided.

The Chair asked whether this then means that the insurance's company's assets must equal its liabilities plus the capital adequacy requirement. If this is the new proposed position, what then was the position before this amendment?

Mr Clarke responded that the current provisions in the Act are to be changed to now provide that the "capital adequacy requirement" is not part of the liabilities, but is instead a calculation. In this sense it has not changed, but the amendment merely seeks to clarify the position by clearly separating liabilities and the capital adequacy requirement.

Ms R Taljaard (DP) asked whether any specific restrictions are placed on "shareholder assets" in determining the capital adequacy requirement.

Mr Clarke replied that the assets have to consist of the assets listed in Schedule 1 of the Long-term Insurance Act, and will be valued via the new Schedule 3. The minimum capital adequacy requirement is the charges subject to the spreading requirement as well.

Clause 2
The Chair asked for an explanation of the term "fair value". How does this term differ from the current "fair market value"?

Mr Clarke replied that there is no difference between the two terms.

Ms Taljaard suggested that it seems to amount to the substitution of one term with another, and even seems to be the substitution of a term that is potentially more controversial and fraught with difficulty.

Mr Swanepoel responded that it is not a substitution, but is instead aimed at bringing it in line with the generally accepted accounting practice.

The Chair asked whether there is any reason for not underlining the proposed definition of "managing director" in Sub clause (d).

Mr Van Staden replied that it has not been underlined so that the new insertion of the words "and" and "every" can be made clear.

Clause 3
Mr Swanepoel informed Members that this amendment is aimed at catering for electronic communication.

The Chair noted that Sub clause (a)(b) has been included to ensure that the identity of the insurer is disclosed.

Clauses 4 and 5
The Chair noted that no concerns were raised with these clauses.

Clause 6
Mr Van Staden referred Members to the slide in his presentation entitled "Reinsurance: Clause 6", and stated that the current Act provides that only composite reinsurers may be reinsurers. Yet this clause now seeks to amend this to provide that insurers may do business directly with the fund itself.

Clause 7
Mr Van Staden referred Members to the slide entitled "Notification of certain appointments, terminations and resignations", and stated that the current Act provides that should the director or managing director resign or should his/her services be terminated, the insurance company must provide the Registar with reasons for the resignation or termination.

Mr Swanepoel added that this aims to address the current situation in which directors or managing directors resign when there are problems.

Ms R Joemat (ANC) argued that this does not go far enough, and should be made mandatory.

The Chair cautioned against this, because there may very well be personal or confidential reasons for the resignation.

Mr Swanepoel informed Members that the FSB would normally be aware of such problems with the insurer. Should mandatory disclosure be introduced here, unnecessary and meaningless information would be provided.

The Chair stated that if this mandatory disclosure were to be enacted, directors might think twice before resigning.

Ms Taljaard expressed her concern at placing a positive obligation on the person to provide reasons here, as this might not be constitutionally sound.

Mr Swanepoel replied that the person would only be required to provide reasons on matters which were detrimental to the financial soundness of the insurer.

The Chair requested that this matter be checked for compliance with the Constitution, as the provision includes the phrase "to comply with this Act", which goes beyond financial soundness.

Clause 8
Mr Van Staden stated that different classes of shares are issued in an profit-sharing arrangement, and the amendment now provides that the FSB has to approve the issue of the different shares.

Clause 9
Mr Clarke referred Members to his portion of the presentation dealing with Clause 9 which explains the current position, the new approach proposed by this amendment and the reason for its enactment.

Clauses 10 and 11
The Chair stated that these clauses do not seem to contain any substantive amendments. The wording of Clause 11(b)(c) is problematic, however, as the location of the phrase "if after such... payment" presumes that the insurer has already paid, and then discovers that the necessary resources needed to make the payment are not available.

Mr Clarke responded that if the calculation is made and the results show that the insurer is not able to make the payment, the declaration cannot take place.

Mr Swanepoel added that this clause is a precautionary warranty because, once payment has been made, this situation should not arise.

The Chair stated that she would defer to the knowledge of the experts on this matter, but maintained that the clause would not be clear to the layperson. It simply does not make sense to state "after payment" when the very beginning of the clause stipulates that an insurer "shall not" declare a dividend or pay a dividend to its shareholders. This clause seems to say that the insurer can pay out the sum, and then discover that it has made a mistake. This provision has to be checked again, because it does not seem to make sense.

Clauses 12 to 16
The Chair noted that no concerns were raised with these clauses.

Clause 17
Mr Van Staden referred Members to the slide in his presentation entitled "Free choice in certain circumstances", and explained that this amendment now seeks to remove the free choice granted to insurers.

Clause 18
Mr Van Staden referred Members to the slide in his presentation entitled "Cash premiums".

Mr Swanepoel stated that banks are also protected in this regard by their payment trail.

The Chair asked whether the banking sector approves of this amendment.

Mr Swanepoel responded in the affirmative.

Clause 19
Mr Van Staden drew Members' attention to the slide in his presentation entitled "Materiality of misrepresentation", and stated that this amendment now vests the responsibility with the courts to decide if the conduct of the insurer has been reasonable. It thus seeks to introduce an objective test here.

Mr Swanepoel added that this objective reasonableness test is a much more consumer-friendly approach.

The Chair agreed.

Clause 20
Mr Van Staden referred to the slide in his presentation entitled "In duplum-rule", and informed Members that this amendment has been proposed to now allow for interest to accrue to amount larger than the money actually lent to policy holders. If this is not introduced, it would result in a negative effect on the other shareholders.

The Chair asked whether the other lending institutions are happy with this amendment.

Mr Swanepoel responded that no comments have been received since the Bill was first circulated.

The Chair requested clarity on the potential negative effect.

Mr Van Staden replied that the other shareholders would effectively be subsidising that person's interest.

Clause 21
The Chair noted that no concerns were raised with this clause.

Clause 22
The Chair requested clarity on the meaning of the term "body corporate" in Clause 22(e)(c).

Mr Clarke replied that this terms includes any legal person, and does therefore not necessarily apply to a company alone. It could refer to a partnership, trust, close corporation etc.

Ms Taljaard suggested that a narrow approach has been taken with regard to the definition of the term "securities" in Clause 22(a) by including the phrase "prescribed by the Registrar". Should it restricted to the new regulatory framework?

Mr Swanepoel responded that because there is a wide variety of financial instruments in the market, the decision was taken to give the Registrar greater powers to prescribe these securities, for solvency purposed. This would assist in ensuring that the insurer is able to cover its liabilities.

Clause 23
Mr Clarke drew Members' attention to the slide in his presentation dealing with Clause 23, which explains the current position as well as the new approach proposed by the amendment.

The Chair noted that no concerns were raised with this clause.

Clause 24
Mr Clarke drew Members' attention to the slide in his presentation dealing with Clause 24, which explains the current position, the new approach proposed by the amendment as well as the reasons for the clause.

Mr Swanepoel informed Members that the proposed Section 2 to Schedule 3 is really the meat of the evaluation basis, and the guidelines for this will be identified when the FSB meets with the South African Actuarial Society.

Ms Taljaard proposed that, because this provision lies at the heart of the matter, not only the South African Actuarial Society but the industry's regulatory bodies should also be granted the opportunity to voice their concerns.

Mr Swanepoel replied that the FSB has sat together with the South African Actuarial Society and has drafted a Board notice, which gives the whole industry an opportunity to comment on the notice. Thus normal procedure has been followed in this regard, and the notice is even to be found on the FSB web page. Consumers can even comment on it.

The Chair noted that no concerns were raised with this clause.

Clause 25
The Chair noted that no concerns were raised with this clause.

Clause 26
Mr Van Staden stated that this clause seeks to hold those who might no longer be involved in the business of underwriting liable for contracts entered into while still actively involved. Also, the word "natural" has been included in the definition of the term "representative", in an effort to ensure that insurers do not employ companies with the intention of circumventing existing restrictions and conditions.

Clause 27
The Chair noted that no concerns were raised with this clause.

Clause 28
Mr Van Staden referred Members to the slide in his presentation entitled "Funeral policies", which states that the aim of this amendment is to ensure that short-term insurers do not sell funeral or burial policies because it is a long-term insurance business.

Ms Joemat asked whether this includes allowing medical aids to cover funeral policies.

Both Mr Van Staden and Mr Swanepoel replied that they have never heard of this practice.

The Chair contended that the two are related though. Even the Parliamentary form for Members provides for this.

Mr Nene stated that what Members receive is not a funeral benefit, but is called a "death benefit".

Ms Taljaard suggested that the problems here are created with how exactly this matter will be unwound, its implications and the transitional arrangements that would have to be made for those who have already sold policies.

Mr Swanepoel stated that the FSB would consult the industry to identify the consequences of enacting this provision. Most short-term policies are in any event renewed on a monthly basis, and the industry would thus be able to handle this.

Clauses 29 to 42
The Chair noted that no concerns were raised with these clauses.

The Chair stated that there were thus three main matters that arose for further consideration: firstly, whether funeral benefits also cover medical aid schemes in Clause 28. Secondly, whether the inclusion of the phrase "after payment" in Clause 11(b)(c) is satisfactory, and thirdly, whether Clause 7 can impose a positive obligation to disclose reasons.

There were no further questions or comments and the meeting was adjourned.

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