Pension Funds Amendment Bill: briefing; Pension Funds Second Amendment Bill: deliberations

Meeting report

FINANCE PORTFOLIO COMMITTEE
4 September 2001
PENSION FUNDS AMENDMENT BILL: BRIEFING; PENSION FUNDS SECOND AMENDMENT BILL: DELIBERATIONS

Chairperson: Ms Hogan

Documents handed out:
Pension Funds Amendment Bill [B22-2001] at http://www.treasury.gov.za
Presentation on the Pension Funds Amendment Bill (National Treasury)
Memorandum on the Submissions on the Pension Funds Second Amendment Bill

SUMMARY
The Committee was briefed on Pension Funds Amendment Bill more commonly known as the "housing bill". It deals with allowing pension funds to be used as security on home loans. In the second part of the meeting the deliberations of the Pension Funds Second Amendment Bill continued with Clause 15.

MINUTES
Pension Funds Amendment Bill
The FSB represented by Mr Botha, a pension specialist, briefed the Committee on the Bill. By way of an introduction, he informed the committee that about 1200 home loans were granted every month in the lower income group. 80% were by way of pension funds. This was therefore a major source of financing for home loans. The Bill is to facilitate achieving the ideal where if a member retires he receives a full benefit and has a fully paid up home.

The aims of the Bill are the following:
Clarifies the position of guarantees.
In the Act guarantees are only dealt with by way of inference. The Bill clearly allows the fund to pledge a members benefit as security for a home loan. Financial institutions will know that they are at no risk and this allows the member to negotiate a lower interest rate.

Deductions from benefits.
Under the Act the fund was not allowed to recover the money immediately if the member defaulted on his loan. This meant that the interest would accumulate until the member left the fund and the outstanding balance would wipe out the benefits due to the member. Under the Bill the Fund can immediately deduct the outstanding balance from the members benefits. This way interest does not prejudice the member. The trustees can however only use this as a last resort. The benefits at default are liable for tax as confirmed by the Revenue Service.

Protection of Members.
The limit outstanding on a loan at retirement is 1/3 of the original debt. The Bill wants the loan to be structured in this way. Members are protected from legal action and blacklisting because the benefits can be accessed to recover the outstanding balance. The Bill allows a mechanism for the member to hold onto the house. The Minister is empowered to make regulations should unforeseen abuses take place in the future.

Bill extends home loans to more members.
The brick and mortar concept is extended to include more informal dwellings. Under the Act home loans could be granted if the member or the spouse was the owner. The Bill extends this and recognises joint ownership.

Discussion
Prof. Turok (ANC) asked if it would be a good idea to consult with the Housing Portfolio Committee and get their input.

Ms Hogan said that she would speak to the chairperson. She clarified that if a member wanted a loan for R20 000 then he would have to have R20 000 accrued benefits in the fund.

Mr Botha (FSB) said that this was correct.

Ms Joemat (ANC) asked if the projected benefit or the current benefit is used to determine the amount qualified for.

Mr Botha (FSB) said that if you should resign on the day you apply for the loan, the benefit due to you on that day is what you qualify for.

Mr Nene (ANC) asked how 'member' is defined in this Bill.

Mr Botha (ANC) said that the only definition of a member in this context would have to be a person who still has a benefit in the fund. So even a deferred pensioner would qualify because there is still a benefit in the fund. A pensioner however would not qualify because there is no benefit left in the fund.

Mr Andrew was concerned about abuse that could occur if members deliberately defaulted on the loan to access the benefit in the fund.

Mr Botha (FSB) said that this was a valid point but that the trustees would only access the benefit as a last resort. So if there is any suspicion of abuse, the member will not be able to get another loan from the fund. The benefit at default will also be subject to tax so this could serve as a deterrent.

Mr Andrew (DP) asked if there was thought of capping the amount that could be borrowed from a fund.

Mr Botha (FSB) said that this was thought of in the late 80’s already but that it was a principle decision not to treat small and large members differently. The FSB did not want to give more rights to one group. In his experience over the recent years, the data of pension funds indicate that members are becoming more aware of retaining their benefits for retirement.

Mr Andrew referred to clause 1(a) that amends section 19(5)(c) and asked why there is a reference to hypothecated property while everywhere else in the bill there is a reference to hypothecated immovable property.

Mr Botha (FSB) confirmed that this was one and the same thing but for consistency sake immoveable will be added.

Mr Andrewasked what would happen if a member were dismissed, would it prejudice the fund and other members? This question was occasioned by the fact the clause makes mention of 'voluntary exit' from the fund. In his opinion it should just refer to 'exit' from the fund because people do not always leave the fund voluntarily.

Mr Malan (Treasury) replied that the calculation as to what the member qualifies for is made at the date he applies for the loan. On that date his accrued benefit is the amount he qualifies for. So even if he is dismissed at a later date the fund will always be in a position to meet the obligations of the member.

Mr Andrew again referred to the same clause and said that the date at which the benefit is calculated is not clear from the text. He also wanted to know if the reference to any calculation of a benefit should not refer to being an after-tax amount.

Mr Botha (FSB) confirmed that the date of calculating the benefits would be made clearer. In response to the tax issue, he said that section 37D states that a benefit due to a member is less the tax liability.

Mr Andrew however wanted a reference to this section in the clause to make it clearer because at the moment it seemed as if the whole benefit was being pledged.

Continuing with the tax issue, Mr Botha said that the trustees of a fund take cognisance of the income tax. Further most loans have no tax consequences but they would look at a cross-reference.

Mr Malan (Treasury) confirmed the statements of Mr Botha by saying that the benefit paid to the member is defined in terms of the rules of the fund and benefits are understood to attract certain deductions.

Ms Hogan accepted the word of the department but wanted confirmation that the trustees take account of the tax liability when calculating the pledge.

Mr Botha (FSB) confirmed that to be correct.

Mr Andrew and Ms Hogan agreed that they would feel better if the clause has a reference to section 37D.

It was pointed out by Mr Andrew that the Bill mentions fair value all the time. In the Pension Funds Second Amendment Bill fair value is defined. He was concerned that in this bill fair value had a different meaning.

It was agreed that that this Bill would take the definition from the Pension Funds Second Amendment Bill and add it to the Principal Act because this Bill would be passed before the other one.

Mr Andrew referred to clause 3 that amends clause 37D(a)(ii)(cc) and said that the memorandum says that the last resort is when no other arrangement can be made to repay the loan. But the clause makes it seem as if the last resort is separate from the non-ability to pay. He said that the wording should be made clearer. Ms Hogan agreed.

Ms Hogan instructed the departments to attend to the changes as per the discussion.

Pension Funds Second Amendment Bill: Deliberations
Mr Andrew(FSB) continued to go through the memorandum dealing with the submissions that were received.

CLAUSE 15 H
This clause deals with the use of the reserve accounts, the member surplus account and the employer surplus account to reduce the deficit of a fund. Protection is hereby granted to the employer from contributing more.

COSATU wants this clause deleted. The FSB disagrees with this because even if it is accepted that the employer does not share in the surplus, a framework is still needed to say what happens with the reserve accounts if the fund is in deficit.

The Actuarial Society wants the reserve accounts excluded from the accounts that can be accessed to fund a deficit. The FSB would agree with this only if reserves were seen as the contingent liabilities against explicit future events and if the definition of contingency reserve account definition is strengthened.

CLAUSE 15I
The clause operates in the following manner:
If a fund is liquidated the member’s rights must first be secured. After achieving this and the fund is still in credit then the credit must be used for the benefit of the members and former members. Only what is in the employer surplus account can the employer share in.

COSATU wants this clause deleted. The FSB disagrees because if any reserve or surplus accounts can be retained by the trustees, then it must be clear what happens to these accounts on liquidation.

The Actuarial Society wants the surplus in the employer surplus account to be used for the benefit of the employer.

Dr. De la Rey (FSB) says that Clause 15I(20 should simply read: "On liquidation of a fund, any remaining balance in the employer surplus account shall be paid to the employer." The rationale behind this is that the law of insolvency should take its course. If you say the funds are not the employers then this means that ownership will vest in the trustee. The Trustee will be able to pay things such as outstanding wages that will be a preferred claim. This affords more protection for the current employees who have lost their job and have not received their wages.

Ms Hogan saw that it would make sense that the funds due to the employer are dealt with in terms of the laws of insolvency. This would also cater for the submission of the Actuarial Society.

CLAUSE 15J
This clause allows the employer to access the surplus to prevent job loss provided that the conditions are satisfied.

This is the only time COSATU is willing to let the employer have any part in the surplus. They do want stricter conditions. There must be an independent audit done to assess the operational requirements of the employer. The 2/3 vote of current members must be increased to 75%. The submissions by COSATU strengthens the clause and the FSB has no objection to including these proposals in the amendments subject to some changes. It is also important to note that the COSATU draft makes the whole of the actuarial surplus available to the employer to access in this situation whereas the current form only makes available funds in the employer surplus account.

CLAUSE 15K(1)
This clause is in the form of two long subsections. The Life Offices Association (LOA) proposed a much shorter clause that says the same thing and is therefore merely a technical amendment.

CLAUSE 15K(2)
The clause deals with how the minimum contribution accumulation is calculated. In the current form just the investment return is used in the calculation. COSATU wants the gross investment return to be used. The FSB agrees with this.

The Actuarial Society points out that the date from which reasonable interest is calculated is not given and they suggest that the date should be from the commencement date. The FSB agrees with this. All the other concerns of the Actuarial Society were based on an earlier draft of the Bill and have already been addressed in the current Bill.

CLAUSE 15K(3)(a)
This deals with how to determine a members minimum individual reserve in a Defined Benefit (DB) fund. COSATU wants a calculation that will differ from fund to fund while the government favours a standard across all funds. This is a matter of principle that has to be returned to.

The FSB agrees with the LOA that the calculation must take into account the retirement date rather than age and that the value obtained cannot be less than the minimum contribution accumulation. These changes will be attended to.

Business South Africa wants the main assumptions that are to be used in the calculation to be included in the Act. The FSB disagrees because this was done in the UK and because of the change in economic climate, the law had to be revisited.

CLAUSE 15K(3)(b)
This deals with how to determine a member's minimum individual reserve in a Defined Contribution (DC) fund. The COSATU submission again raises issues of principle. If the Board is allowed to hold back some of the contingency reserves then the wording in the current Bill must be retained.

Because the Actuarial Society used a previous draft of the Bill their concerns have already been attended to in the current Bill.

The LOA wanted the definition of member’s individual account included in the Bill. This has been done already.

CLAUSE 15K(4)
This clause sets out the calculation of the minimum pension increase. In the Bill it is "the lower of the average rate of increase across all pensioners paid from the fund and all deferred pensioners that would result from…"

COSATU wants 'lower' to be replaced with 'higher'. This will mean that funds will have to give full inflationary increases.

Mr Andrew (FSB) said that a number of funds with small employers could not afford full inflationary increases because the cost implications will be considerable.

Ms Hogan wanted the FSB to explain their calculation and COSATU to explain theirs. The discussion on minimum pension increases will therefore be held over.

It was decided the Committee would start with Clause 15L at the next sitting. The meeting was adjourned.