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FINANCE PORTFOLIO COMMITTEE
29 MAY 2007
PENSION FUNDS AMENDMENT BILL: BRIEFING
Chairperson: Mr N Nene (ANC)
Documents handed out:
Briefing on Pension Funds Amendment Bill
Pension Funds Amendment Bill [B11-2007]
The National Treasury team briefed the Committee on its Pension Funds Amendment Bill. They focused in their presentation on key problems and challenges in the regulation of the retirement funding environment. They focused on specific provisions for pension fund administrators, closing loopholes and clarifying surplus apportionment, jurisdiction and scope of the Pension Funds Adjudicator, increased powers of the registrar, and retrospectivity.
The team consisted of Mr Jonathan Dixon (Chief Director: Financial Sector Policy Unit), Mr Jurgen Boyd (Deputy Executive Officer: Pensions), Ms Jo-Ann Ferreira (Chief Director: Public Entities Governance Unit) and Mr Mike Condron (consultant).
Mr Jonathan Dixon (Chief Director: Financial Sector Policy Unit) highlighted key problems in the regulation of the retirement funding environment which included high costs, skimming of investment returns, investment losses, misappropriation of funds.
Key challenges included lowering costs through proper disclosure, competition and safety nets,
improved governance of retirement funds, trustee knowledge and training, appropriate application of surplus legislation, improving the supervisory abilities and powers of the Financial Services Board (FSB) and encouraging a culture of compliance.
In the short term the Pension Funds Amendment Bill aimed to deal with immediate concerns with the implementation of the current Act, and in the longer term to focus on the social security and retirement fund reform process.
Regarding surplus apportionment this Amendment Bill aimed to build on previous legislation which had sought to rectify past inequities and equitably dividing the surplus amongst stakeholders. It was said by Mr Mike Condron (consultant) that actuarial valuation and surplus scheme must be seen as a unit.
In the Pension Funds Amendment Bill guidelines for the submission of the scheme to the Registrar were proposed.
An ad hoc tribunal was proposed if, for instance, the Registrar was not satisfied that scheme had been reasonable and equitable.
It was indicated that funds were required to submit nil surplus returns if no surplus and for the Registrar to prescribe additional requirements for “nil returns”.
It was aimed to also bring the Pension Fund Act operations in line with the Prescription Act.
Provision has to be made for one or more deputy adjudicators to be appointed by the Minister of Finance.
The Registrar was to be allowed to issue directives and impose administrative penalties for non-compliance by funds, administrators and third parties. In the case of a divorce the “clean-break” principle was to be applied, in other words provision for the payment of benefits to a non-member spouse in terms of a divorce order, and permit payment of benefit.
It was proposed that amendments be made retrospective and deemed to come into operation on 7 December 2001.
Mr K Maloto (ANC) said that the documents that he was going through indicated that the matter which was considered was currently under appeal. He wanted guidance on this issue.
Mr Dixon replied that the matter which had been referred to is no longer under appeal. The Appeal Court had provided their judgment which excluded the Bargaining Council Fund from the surplus apportionment provision of the Pension Fund Second Amendment Act. The way that judgment had come out was that the Act was not sufficiently clear. The current Bill aimed to clarify this section. It had not been the intention to exclude the Bargaining Council Fund from the surplus apportionment provision, which would have implied that members of that fund received less fair treatment.
Mr S Marais (DA) asked how improper use regarding actuarial surpluses and pension funds were determined. He wanted to know if it would be the fund or an objective third party who would determine improper use.
Mr Condron replied that each fund has a board of trustees, an actuary and formal representatives and these parties need to be satisfied that things were being done properly.
Mr Marais asked on what basis would, the Registrar determine if the board of a fund needs to be removed.
Mr Jurgen Boyd (Deputy Executive Officer: Pensions) indicated that an objective process was followed and that information would be verified. An inspection has to be carried out under the Inspection Act. The Amendment Bill aims to empower the Registrar to conduct onsite reviews.
Mr Marais asked how costly would it be to appoint people to the Registrar for administering directives and imposing penalties.
Ms Jo-Ann Ferreira (Chief Director: Public Entities Governance Unit) replied that the process was based on access to fair administrative action. She said that there was a basic set of criteria that every process must comply with. The process only became expensive where people secured legal support to respond. It was cheaper and quicker to have followed the prescribed administrative penalty process. At the moment the Registrar have to approach the court which was a lengthy process
Proposed administrative process would not be costly.
Mr Marais also referred to the retrospectivity issue in the presentation which stated that if amendments had not been made retrospective, then many funds would not submit surplus schemes and the Registrar would not have been in a position to determine whether a fund had a surplus to apportion. He asked if there was a way to determine if what you had was realistic.
Mr Moloto asked Treasury and FSB how confident they were that the words “improper use” and “retrospective” in the Bill would not be legally contested in the future.
Ms Ferreira indicated that improper use was clearly defined in the Bill on page 17.
Mr Moloto also asked if currently administrators/ key individuals can be immediately removed if they were found to be not fit and proper. If these people became members of a company, can they be barred from being directors?
Mr Boyd said that the licensing procedure indicated that all members need to be fit and proper. He said that regulation did not allow for individuals to be removed but that through the Amendment Bill there is a request for additional powers to act.
Mr Moloto indicated that before schemes can merge they have to get permission from the Registrar. He asked what the role of the Competitions Commission would be in terms of mergers and acquisitions. The Competitions Commission have to be consulted in terms of mergers and acquisitions before a decision can be reached.
Mr Dixon replied that the merger of schemes was not subject to the approval of the Competitions Commission.
Mr Moloto also asked under which conditions would the Registrar exempt certain funds from complying with the legislation.
Mr Dixon replied that exemptions aimed to deal with transitional issues. He said that, for instance, the proposed Bargaining Council funds were to be brought in under the Pension Funds Act. Exemptions would be provided for temporary flexibility if there were certain provisions of the Act that the Bargaining Council cannot comply with on day one.
Mr Moloto asked why Treasury did not state that the regulations have to be submitted to Parliament for scrutiny.
Ms Ferreira indicated that the regulation section was not an amendment in the Act and therefore no allowance was made for scrutiny before Parliament. She said that in terms of the Interpretation Act they did allow for regulations to be submitted to Parliament. She said that should the Portfolio Committee require regulations to be submitted to Parliament, they would include it.
Mr M Johnson (ANC) and Ms Mokoto (ANC) asked if there has been discussion regarding the independence of the Pension Funds Adjudicator (PFA) by the Financial Services Board (FSB) given that the latter were regulated by the FSB.
Mr Dixon indicated that the Office of the Pension Funds Adjudicator was an independent body and only fell under the FSB with regards to their financial management. Aforementioned did not impinge on the independence of the Adjudicator. He also said that regarding the broader retirement reform process there would be a focus on ways of improving the effectiveness and efficiency of the PFA.
Mr Johnson also said that there was a need to empower members so that they could know their rights. Members needed training. Given surplus apportionment members were largely disempowered when it came to decision making. Trustees usually found themselves bought over to represent interests other than those of the members.
Mr Condron replied that trustees needed training. Training was however costly with only larger schemes being able to afford it. Smaller schemes would not be able to afford costs. Future pension reform should address training of trustees.
Mr Moloto also asked that Treasury should give an indication of instances where tribunals had been made use of.
Mr Condron replied that about 7 or 8 tribunals were appointed where there had been a dispute. Two or three disputes disappeared when it was indicated that a tribunal would be appointed. Only 4 or 5 tribunals were submitted of which the Shell tribunal was the best known.
Mr Nene (ANC) indicated that since 2001 when Pension Fund Second Amendment Act was passed some schemes have not submitted. He wanted clarification regarding this matter.
Mr Condron indicated that compliance regarding submission by schemes was a big problem despite communication with schemes. There were about 13 000 funds which were registered with FSB. Two thousand to three thousand funds were thought to have been terminated but the termination has not been registered with the board. Of the remainder, 1 500 to 2 000 have a surplus, but that they do not have the right number. Of aforementioned, about 600 had sent in submissions. A tribunal was appointed to deal with 130 funds where it was believed there was a surplus. There were however only a limited number of people who could serve on a tribunal
Mr Moloto asked if funds which are audited by the Auditor General refers to the Government Employee Pension Fund (GEPF)and also whether that fund was regulated in terms of the Pensions Act
Mr Dixon indicated that the GEPF was subject to audit by the Auditor General and that it was not covered by the Pension Fund Act.
Ms Fubbs (ANC) asked if it would not be better to put in a new clause where there were complex definitions and explanations within the old Act.
Mr Y Bhamjee (ANC) asked if the whole Act could be repealed, and something which was user friendly and relevant be developed given that legislation was conservative.
Ms Ferreira said that the amendments were a first step to deal with critical issues. At a later stage as part of a broader pension fund reform, legislation would be completely rewritten. Amendments were drafted in a style to corresponding to the older principle Act.
Mr Bhamjee said that regulations should be included to enable the Portfolio Committee to review and monitor pension issues.
Ms Mokoto (ANC) asked if Treasury are not leaving things up to chance if they allow practitioners within the pension industry to regulate themselves. Mr Dixon confirmed that the objective of the Bill was not to allow self regulation but to increase regulation within the pension fund environment.
Ms Mokoto asked what necessitated an inspection. She said that Treasury got information from 13 000 funds. To what extent did Treasury ensure that schemes did what they had to do? She wanted to know if they report it or if Treasury detected it or did they have to do door to door inspections.
Mr Jurgen used the example of a recent inspection of a fairly large fund. He said that an inspection was started after a meeting with the trustees over a particular matter which was picked up in a submission. His office found issue with about R 350 million. They had to determine if there were issue and if so what the issue were.
Mr Jurgen said that they were introducing risk based supervision whereby funds would be risk weighted. Risk weighting was an efficient use of resources given the regulation of 13 000 funds. Risk weighting would indicate how often there was a need to engage with funds.
Mr Nene asked what the current position was to determine if pension fund administrators were fit and proper at the licensing stage and if a mechanism for black listing were being used.
Mr Jurgen responded that there were criteria in use to determine if administrators were fit and proper. Applications were assessed and recommendation would be made to the licensing committee for approval. He said that the intention was to black list.
Mr Nene also asked why this legislation does not compel the submission of schemes given problems in the past.
Mr Condron replied that the Registrar only had the power to impose a fine of R 50, 00 a day when submissions did not take place. The amendment wanted to push up the penalty to a maximum of R 5 million a day which would enable the Registrar to act with force.
Mr Nene said, regarding retrospectivity, that nil schemes that have already recorded will be deemed to be approved and no re-submissions will be required. He asked, if as a result of improper use of funds, would it mean that they escaped the net.
Mr Condron replied that the amendments will allow them to reopen cases if there had been improper use of funds.
Ms Fubbs said that method for identifying members used to be biased towards the employers benefit. With regards to former members she asked if there was any method of ensuring that elected former members has the support of former members.
Mr Condron replied that former members were appointed by the Board of Trustees. He said that there were a lot of checks and balances which include sign off by the valuator, trustees and the former member. The Registrar, when he has received the scheme, looked at all complains and determined whether complaints had been dealt with in a reasonable manner. If not, the Registrar was obliged to investigate.
Mr Marais asked Treasury if they were convinced that the proposed amendments will be enough to stand in a court of law.
Mr Jurgen said that they had benchmarked themselves internationally and picked up gaps from an operational perspective and put forward an appropriate solution.
Mr Nene said that the Portfolio Committee would be getting submissions and comments from the industry.
The meeting was adjourned.