Municipal Fiscal Powers & Functions Bill [B9-2007]: adoption & Pension Funds Amendment Bill [11-2007]: responses of National Treasury

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Finance Standing Committee

31 May 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
01 June 2007
MUNICIPAL FISCAL POWERS AND FUNCTIONS BILL: ADOPTION & PENSION FUNDS AMENDMENT BILL: RESPONSES OF NATIONAL TREASURY

Chairperson
Mr N Nene (ANC)

Documents handed out

Municipal Fiscal Powers and Functions Bill [B9-2007]      
National Treasury proposed amendment on Municipal Fiscal Powers and Functions Bill
Pension Funds Amendment Bill [B11-2007]
Summary of Comments of Pension Funds Bill
Response to Section 14 (7) Transfers between A

SUMMARY
National Treasury had previously presented its responses to the submissions made at the public hearings on the Municipal Fiscal Powers and Functions Bill to the Committee. It now tabled a list of proposed amendments. In Clause 1 the definitions of “municipality”, “administration and regulatory costs” “municipal service” and “regulation” were amended. Clause 3 had been amended to clarify that the Bill applied to surcharges and taxes other than normal rates and taxes, and was not a service provision regulation. A new subclause 4(3) required the Financial and Fiscal Commission, within three months from the date of any consultation, to submit its views to the Minister. Clause 5(b) set out a time frame of six months for the Minister to prescribe approved regulations. Amendments to Clause 9 qualified and clarified the power of the Minister to exempt a municipality. Clause 10 now provided that regulations must be submitted for approval during the time that parliament was in session. The Schedule now indicated a replacement for Subsection 28(6) of the Municipal Finance Management Act, instead of a repeal, to provide that municipal tax and tariffs could not be increased during a financial year, except in certain circumstances. Questions by members addressed the wording of “may” and “must” in relation to the Minister, the checks and balances on the discretion, and the scope of the surcharges. Members resolved unanimously to adopt the Bill.

National Treasury briefed the Committee fully on its responses to submissions received on the Pension Funds Amendment Bill. Twelve institutions had submitted comments, and these were fully set out in tabular form, with the comments of National Treasury indicated alongside. Only a few of the suggestions made were supported by National Treasury, and it was indicated that the necessary amendments would be made to Clause 1, the definition of “contingency reserve account”, the definition of  “contribution holiday” and “non member spouse”. Further the word “obligations” would be substituted for “duties” in the definition of the rules. Under Clause 2, reference would be made to the statutory valuation date by inserting a new subclause (b).
 been addressed by NT. There would be an amendment to the new Section 14(8) to provide that there was no need to have agreement 75% of members, as originally provided, but that all members must instead be informed and given the opportunity to object. Under Clause 10, the wording of the new Section 14(8) would be clarified by the addition of the words “as from the date the member joined the fund” in relation to augmentation of contributions. Fund returns would be added to values and the necessary amendments made to the new Section 14B(4)(b). In Clause 11, the new Section 15B(6) would clarify the definition of “employer” as tabled. In Clause 19 the wording would be clarified by deletion of “(or employer who participates in a fund)” to clarify that complaints must be lodged with the fund only. Clause 27 would be amended to exclude the spouse’s and children’s pensions provided for in fund rules. In Clause 28 the clean break principle would be extended to existing divorce orders and therefore there would be an amendment to deal with pension benefits, which must include fund return from the effective date of the divorce order to the date of payment. An amendment to Clause 29 would be made to clarify the retrospectivity aspects, setting out that definitions would be deemed to come into operation on 7 December 2001 for certain funds, and under certain conditions.

No questions were asked by Members.

MINUTES
Municipal Fiscal Powers and Functions Bill [B9-2007](the Bill): National Treasury Proposed Amendments

Ms Jo-Ann Ferreira, Chief Director: Legislation, National Treasury (NT) had previously tabled the NT responses to the submissions made at the public hearings. She now presented the amendments proposed by NT pursuant to those responses.

Clause 1
Ms Ferreira stated that the definition of category of municipality had been amended by inserting “municipality or the..” before the references to the category A. B or C municipality.

Mr Y Bhamjee (ANC) wished to know what would happen in future if there were other regulations.

Ms Ferreira stated that as the Bill was worded regulations could only be framed under Clauses 6, 8 or 10.

Mr Bhamjee submitted that this assumed these were the only regulations.

Ms Ferreira replied that this was not necessarily so the Ministerial discretion provided in Clause 10 could embrace any prior regulations. They were intended to cater for procedural matters.

Mr Bhamjee said he was trying to understand the proposed amendment and was of the opinion that there could be instances not covered in the Bill.

The Chairperson intervened to state that the items intended by Clauses 6 and 8 were specific, and Clause 10 was of general application.

Mr S Asiya (ANC) expressed the opinion that the regulations could be more stringent than the Bill itself and that effectively they were providing a blank discretion that might override the principal legislation.

The Chairperson argued that as he understood it Clause 10(4)(c) guarded against this.

Ms J Fubbs (ANC) was concerned about the wording, which seemed to her to suggest that the Minister, of his own accord, could make changes.

The Chairperson indicated that the Committee should at this stage note the amendments proposed by NT, and discussion on each point could ensue later, when the reservations of Members might have been addressed to their satisfaction.

Ms Ferreira indicated that the definition of “administration and regulatory costs” was to be omitted.

The definition of “municipal service” was to be substituted and the wording was tabled. Ms Ferreira explained that this new definition had been proposed after discussion with SALGA and Municipalities and accorded with Schedules  4 and 5 of the Constitution, so that if necessary taxes and surcharges could be imposed.

A technical amendment was made to the definition of “regulation” to clarify that this included regulations under Clauses 6, 8 or 10

Clause 3
Ms Ferreira tabled the proposed amendment, and explained that a change had been made to clarify that the Bill applied to surcharges and taxes other than normal rates and taxes, and was not a service provision regulation.

The Chairperson was satisfied with this clarification.

Clause 4
Ms Ferreira tabled a new sub-clause (3), which required the Financial and Fiscal Commission, within three months from the date of any consultation, to submit its views on the proposed municipal tax to the Minister. This new sub-clause answered the Department’s concerns about ht time frames.

Mr Bhamjee wanted to know whether the Act was user-friendly, as he was of the opinion that many municipal councillors were inexperienced, and held short terms of office, meaning that newcomers were constantly changing.

Ms Wendy Fanoe, Director, Local Government Finance Policy Unit, NT, intervened on a point of clarification and stated that the Act was already in line with other relevant legislation.

Clause 5
Ms Ferreira tabled the proposed amendment, which was a substitution of sub-clause (b) and which now set out a time frame of six months within which the Minister, if the regulations were to be authorized, must prescribe those regulations. This answered the concerns of the municipalities about the delays in authorisation. She also indicated that the concerns of Members had been addressed because Clause 10 now was to provide that the regulations must be published during the Parliamentary session.

Clause 9
Ms Ferreira tabled the proposed amendment which qualified the power of the Minister to exempt a municipality, making it clear that this power applied “where practicalities impeded strict compliance with the norms and standards prescribed in terms of section 8”. This issue had been addressed in the earlier comments.

Ms Fubbs questioned whether there would be any automatic charges, for this was not currently done. She was concerned that too much of the legislation pertaining to municipalities was being referred to the Constitutional Court for adjudication. All legislation should be framed in a way that precluded the necessity or possibility of such applications.

Clause 10
 Ms Ferreira pointed out that the concerns of Members had now been addressed by an amendment requiring the regulations to be submitted to Parliament when it was in session
.
The Chairperson pointed out these would be the regulations referred to in Chapter 2

Schedule
Ms Ferreira indicated that the references to Act 56 of 2003 were to be amended. Subsection 28(6) was now to be substituted, not simply repealed, and the draft wording now provided that municipal tax and tariffs could not be increased during a financial year, except when required in terms of a financial recovery plan.

Ms Ferreira stated that this was in accordance with the provisions of the Municipal Finance Act.

Ms Fubbs wished to know whether this reference was to the National, Provincial or Municipal financial year.

Ms Ferreira clarified that it would be the municipal financial year.

Discussion
Mr S Marais (DA) asked if the references to the Minister in Chapters 1 and 2 meant the Minister on his own account

The Chairperson thought this was answered by the Objects Clause of the Bill

The Chairperson noted that there were no other queries on Clauses 1 to 3.

In respect of Clause 4, Mr Marais raised a question about oversight of the municipalities.

Mr Bhamjee pointed out that currently there was a liberal minister in power, but he was concerned about the wording of “may” rather than “must” if a future Minister might be of a conservative disposition.

Ms Fubbs again made reference to the Courts being seized with more municipal legislation to interpret than any other type. She was concerned that the law should be precise and clear already at this stage rather than having to go through endless interpretative steps.

Mr K Moloto (ANC) asked that the drafters come up with something suitable.

Ms Ferreira pointed out that as currently worded the Bill provided that the executive “must” and other bodies “may” do something. She further indicated that Clause 10 provided for publication and public comment on any proposals, and she believed this was an adequate safeguard.

Members accepted these explanations and approved the clause

Clauses 5, 6, 7 and 8 were approved by Members.

Under Clause 9, Mr Marais pointed out that the references to “his or her” were correct from a grammatical point of view.

Mr Bhamjee said that he had no problems with the reference to “of his or her own accord” but was concerned about the application referred to under Clause 9(1)(b). Mr Bhamjee asked the drafters to be sensitive to the Committee’s concerns expressed under Clause 9 (1)(a), (b) and (c) collectively.

Mr Marais was of the opinion that there were checks and balances sufficient to control the situation and that the matters covered in Section 8 were also dealt with by the provisions of other Acts. He noted that the criteria for the Minister’s intervention were subjective.

Ms Ferreira replied that the subject of any application had to accord with the constitutional powers delegated to municipalities, and although the Minister had a wide discretion the municipalities might apply for consideration or enforcement or relaxation for this effect. She added that at present some municipalities were exceeding the proposed provisions by imposing surcharges in excess of 50 %. The legislation provided for a gradual reduction of surcharge until there was compliance with the norms and standards, and equality among the municipalities.

Ms Fanoe added that in regard to electricity municipalities had to consult with other stakeholders and that the municipalities had about 9 months left to sort out their compliance.

Clause 9 was approved.

Under Clause 10, Ms Fubbs expressed her concern about the Regulations, and asked for clarity on what was intended.

Ms Fanoe explained that the only powers contemplated in this clause were those in terms of the relevant municipal legislation. She gave an example that a municipality had no authority to level surcharges for street lighting, and although in future there might be surcharges for electricity consumed by individual domestic consumers there could not be an attempt to impose them for street lighting.

Ms Fubbs said that the language appeared to be satisfactory.

Mr Asiya hoped that the intention would be satisfactorily expressed when translated into the other languages.

Ms Fubbs requested that provision be made for any amendments to the regulations by the Municipalities to be submitted to parliament for approval.

Mr Asiya asked that the Committee instead be give a progress report every six months.

Ms Ferreira pointed out that the Interpretation Act required all delegated legislation and regulations to be approved within one month of being passed.

The Committee approved Clauses 11,12,13 and 14.

No comments were expressed on the Schedules.

The Chairperson reminded the Committee that Section 229 (1)(h) of the Constitution provided for open consultation and discussion.

The Committee unanimously resolved to approve the Bill, as now amended, and report accordingly to Parliament.

Pension Funds Amendment Bill [B11-2007]: National Treasury Response to public comments
Mr Baron Furstenburg, Director: Financial Markets, National Treasury, tabled a summary of the submissions made on the Pension Funds Amendment Bill (PFAB). He said that all comments had been comprehensively considered. He would deal with the comments for each clause, and would revert to the Financial Services Board (FSB) when there were actuarial matters for consideration.

Clause 1: Definitions
Mr Bhamjee asked whether the definitions were being presented for the first time.

Mr Furstenburg replied that the definitions were already contained in the Bill, which had first been circulated for consideration in October 2006. The Department had an open door policy and welcomed engagement on the definitions. The summary now set out the comments, objections and suggestions.

Mr Furstenburg tabled suggestions for changes to the definitions of “administrative penalty”, “audit exempt”, “board members” and “contingency reserve account”, but noted that NT did not support these suggestions, for the reasons tabled. However, NT did support the view of Dries Visagie and Institute of Retirement Funds (IRF) that the proposed amendment to the definition of “contingency reserve account” could be read as excluding accounts amended due to the requirements of the registrar. Therefore NT proposed that the wording be clarified by addition of the words” which has been amended in accordance with the requirements of the Registrar, or which has not been disallowed by the Registrar”.

The Actuarial Society of South Africa (ASSA) and Jacques Malan Consultants and Actuaries (JMCA) had commented that the definition of “contribution holiday” be amended by deletion of the reference to contributions payable by the Members, as this did not accord with the provisions of the new and current Act. NT agreed with this suggestion and suggested the deletion of the relevant words. However, NT did not agree with the further suggestion that the method of funding be the Projected Unit Method, nor that it should be specified in the definition.                                         
Suggestions were tabled for amendment of the definitions of “dependant”,” fund”, “fund return”, “prescribed” and “spouse” but were not supported by NT for reasons fully set out in their summary.

Linked Investment Service Provider Association (LISPA) was concerned that the definition of “non member spouse” was too narrow, and proposed that this definition be expanded to include relationships dissolved without a court order. NT supported this suggestion and tabled an appropriate wording.

IRF had suggested that the word” obligations” be substituted for “duties” when referring to rules, to ensure consistency. NT agreed and had made the substitution. A further concern had been expressed, in relation to this definition that the obligation to register additional documents would create substantial administrative burdens. NT did not agree that additional obligations were imposed.

Clause 2: Application of Act to bargaining councils
A number of issues had been raised by Employee Benefit Studio (EBS), Financial Planning Institute of South Africa (FPI) and Furniture Bargaining Council (FBC). Firstly there was concern that the inclusion of bargaining council funds under the Pension Funds Act (PFA) would result in conflict between this Act and the Labour Relations Act (LRA), and therefore that the LRA must be amended. Mr Furstenburg explained that Minister of Labour supported the inclusion of bargaining council funds, and the FSB already had capacity to regulate these funds, and was doing so, since already 165 funds, with 1.5 million members, had registered voluntarily. IN addition special circumstances were already accommodated. All that remained outstanding was to make reference to the statutory valuation date, and he tabled a proposed new subclause (b) that would cater for this.

Other concerns were fully set out (P 5 of attachment) and explained.

IRF had proposed that the clause must clarify that it only included funds established in terms of a collective agreement under the LRA, and that it should also clarify that information should only be required to be furnished for the past three years. Mr Furstenburg said that these were already adequately dealt with.                

Clause 7(b) : amending Section 13B(5): Requirements for an administrator
Concern had been expressed by two commentators about the additional powers given to the Registrar, and further comments suggested that there needed to be clarity on the appointment of administrator appointed trustees. Neither suggestion was felt to be necessary, for reasons fully set out.

JMCA and IRF made several comments. They believed the words “endeavour”, “conflict” and “responsible manner” were too vague, that the registrar must describe “well-defined procedures” and “adequate financial resources”, that the powers of the registrar must be justifiable, that the costs of administration would increase, that there should be guidelines on minimum requirements for qualification, and that a number of small providers would be adversely affected. None of these comments were supported.

Clause 8: Substitution of Section 14(1)(a) of the PFA
Mr Mike Codron, Former Chief Actuary, Financial Services Board, indicated that the time period of 180 days had now been incorporated into the Bill it was felt that a specific time period instead of the vaguer ”three months” was warranted. The registrar had the right on application for good and sufficient cause to extend the time period. Some commentators had supported the provision, some had believed it should be included in the regulations. NT did not agree that the provision needed to be amended.

Mr Codron added that many of the definitions were wide and that in practice they should be taken on a case by case review.

Mr Jonathan Dukes, National Treasury, pointed out that with transfers between funds there was a danger of numerous changes as financial advisors would churn over the funds to obtain the benefit of commissions, thus it was essential to establish a balancing system whereby the Fund members would receive genuinely appropriate advice instead of advantaging the financial advisors. For this reason the suggestions made by JMCA, LISPA, Life Offices Association (LOA) and Business Unity SA to amend the new Section 14(7)(a) and (b), as set out in Clause 8(d), were not supported. Although NT was concerned about the problems of potential conflicts,  through different remuneration models across different industries, this was already being addressed by a review of the remuneration models. The concerns that the Financial Advisory and Intermediary Services Act (“FAIS”) was ineffective had already been addressed by NT.

IRF and JMCA had suggested that the new Section 14(8), which presently required agreement of 75% of members affected by the proposed transaction, was not practical, and that it would be sufficient if all members had to be informed and given the opportunity to object. NT agreed with this suggestion and had prepared an amendment.

A further suggestion that provision must be made to smooth fund return was not supported as NT believed that once the transfer value was quantified any subsequent return must be full fund return, without smoothing.

A suggestion that a deeds registry procedure be followed for 14(8) transactions was not supported.

Clause 10: Substitution of Section 14B of PFA
Mr Dukes said that Dries Visagie had complained that there was too great an administrative burden imposed by adding the fund return from date of joining and proposed an alternative calculation. NT did not support this suggestion as the position was already covered in existing legislation. However, a suggestion to amplify the wording to clarify augmentation of contributions was supported and the words “as from the date the member joined the fund” would be replaced by “as from the date of payment of contribution”. Dries Visagie’s suggestion that the minimum individual reserve apply to all exits and be the same in each case was not supported.

The new Section 14B(4)(b) related to determining the minimum pension increase. JMCA suggested that fund returns be added to values. This suggestion was supported and the proposed new wording was tabled.

Clause 11: Substitution of Section 15B of PFA
Business Unity South Africa and the Chamber of Commerce (BUSA/CHAMSA) had raised constitutional queries – one relating to possible retroactive effect and the second querying assignment of legislation authority to the executive. Both objections had been addressed adequately and were therefore not supported.

Mr A Moloto (ANC) then pointed out that the Fund members had different expectations, and there was often a lack of financial literacy. He suggested that brokers should be required to provide breakdowns of the asset classes in which there had been investment. Investors signing sheaves of papers did not have all clauses explained, although they subsequently discovered that they had apparently signed declarations that this had been done, and were therefore precluded from claiming otherwise.

The Chairperson ruled that there would be an opportunity to engage on these issues next week and for the moment Members would merely be hearing the responses of Treasury.

Mr Dukes continued that JMCA had expressed concern that under the new Section 15B(5)(d) the risk of paying members benefits based on outstanding amounts due from the employer was not addressed. NT believed that there was adequate protection as these cases would be considered individually by the registrar.

Under Section 15B(6) IRF’s request to clarify the definition of “cost” was not supported, but the suggestion to clarify “employer” was, and a revised definition was tabled by NT.

ASSA had requested clarity on the wording relating to improper use investigation, but NT believed that the legislation was already clear. Similarly the clarification requested for the term “additional”, for the deductions against improper use, and exclusion of surpluses were not supported for reasons fully detailed in the document.

Suggestions made to amend wording under the new Sections 15B(6)(c)(iii), 15B(6)(e) were tabled but not supported by NT for reasons fully outlined.

Suggestions made in relation to the new Sections 15B(9)(a), 15B(10), and 15B(11) were also tabled but none were supported by NT for the reasons that surplus apportionments, being a one-off, required a greater degree of scrutiny, and because the queries were already covered by the retrospectivity sections 40B.

Clause 13: Amendment of Section 15F of PFA
Dries Visagie suggested that this clause allowed for transfer of existing contingency reserves but NT believed that the wording was clear,.

Clause 14: Proposed amendment to Section 15K of PFA
FPI had suggested that the appointment of a special ad hoc tribunal was unmanageable and suggested that the process be left in the hands of members or the registrar. NT did not support this, as it felt that the process was manageable.

BUSA and CHAMSA had complained that there were no criteria to determine whether the registrar’s dissatisfaction was warranted, and that it was vague. They were concerned about constitutional challenge. NT pointed out that there had been no constitutional court challenges to the legislation since 2001 and that the wording was sufficiently clear.

Clause 15 Amendment of Section 18 of PFA
Mr Furstenburg noted that IRF had suggested that this section be deleted. He explained that the powers were accorded to the registrar due to historical abuses and in order to align with international best practice. Once again he reminded members that there was a right to appeal against the decision of the registrar.

Clause 16: Substitution of Section 25 of PFA
FPI and IRF suggested that the powers of the registrar were too wide, and that it was unclear if the Promotion of Administrative Justice Act (PAJA) would apply. NT submitted that this comment was incorrect.

Clause 17: Substitution of Section 26 of PFA
IRF was concerned at the Registrar’s powers to intervene in the management of a Fund. Mr Furstenburg said that, as already stated, there were reasons for the powers assigned.

Clause 19: Amendment of Section 30A of PFA
LOA had suggested deletion of the words “for consideration by the Board of the Fund” as complaints against the employer must also be envisaged. Although NT did not support the suggestion, it believed that the complaint must be lodged with the fund only, and therefore proposed that the words “(or employer who participates in a fund)” be deleted.

Clause 20: Substitution of Section 30C of PFA
LOA had suggested that the appointment of the adjudicator be subject to consultation with the PF advisory Committee and not the FSB, and that a time limit must be included. Neither suggestion was supported by NT as the amendment in relation to the appointment reflected the current convention, and the lack of a time limit was informed by the need for flexibility.

New proposal to amend Section 30J of PFA
Mr Furstenburg stated that LOA and FPI had suggested that sections 30J(1) and 30J(3) should be amended, and that disputes should be resolved by a conciliated settlement by the FAIS Ombud. None of the suggestions were supported by NT as the office of the Adjudicator was already subject to review, and the current measures did not impede his independence and allowed already for a conciliatory approach.

Clause 22: Substitution of Section 30P of PFA
A number of institutions had suggested that the power of the High Court to accept new evidence was being limited. NT did not agree that this was correct. The new Section 30P(3) encouraged all facts to be put before the adjudicator and the Court had the discretion to admit new evidence.

Clause 24: Insertion of Section 33A into PFA
JMCA and IRF complained that the powers given to the registrar were wide. Mr Furstenburg referred to the historic reasons why the registrar required such powers, and that the directives were consistent with due administrative action.

Clause 26: Substitution of Section 37(1) of PFA
IRF had submitted that the maximum penalty of R5 million per day was too high. Mr Furstenburg indicated that this was a maximum penalty and would be subject to both appeal and review.

Clause 27: Amendment of Section 37C of PFA
IRF was concerned that death benefits would not be regarded as pensions and recommended that the Bill should expressly exclude the spouse’s and children’s pensions provided for in the fund rules. This was supported by NT and the phrase “ “one or more dependants” would be replaced by “the spouse’s and children’s pensions as provided for”.

Clause 28: Substitution of Section 37D of PFA
IRF had raised a number of comments on the insertions of sub clauses (d) and (e). Only one of the suggestions was supported by NT, in relation to the ‘clean break “ principle that should be extended to existing divorce orders. NT therefore proposed to amend the existing wording and to insert additional wording to deal with pension benefits to non-member spouses, providing that the benefit must include fund return from the effective date of the divorce order to date of payment.

Suggestions from JMCA to amend the Divorce Act, and suggestions from LISPA in relation to calculations and use of the word  “beneficiary”, from FPI in relation to tax dispensations and transfer to an approved fund, and from Dries Visagie  were not supported, for reasons fully detailed in the summary tabled.

Clause 29: Insertion of new Section 40B
Mr Furstenburg had previously referred to this clause when dealing with other comments. A number of institutions had not supported the clause nor the application of retrospectivity. NT commented in general that it recognised that there was a risk there is a risk of constitutional challenge, but that this may be challenged by employers to protect ill-gotten gains to avoid paying surpluses that were used improperly. The amendment clarified the intention of the Pension
Funds Second Amendment Act of 2001. NT however did propose that there should be a further amendment to clarify the retrospectivity of nil returns, and this specified that certain definitions would be deemed to come into operation on 7 December 2001 for those funds whose surplus apportionment schemes had not been approved, or where nil returns were not received by the registrar. Conditions were imposed and the registrar must inform funds of non-compliance and give them a chance to review and resubmit their schemes.

The Chairperson thanked National Treasury for their comprehensive report.

The meeting was adjourned.

 

 

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