Pension Funds Second Amendment Bill: Government’s Response to submissions

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Finance Standing Committee

27 August 2001
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Meeting report

FINANCE PORTFOLIO COMMITTEE
28 August 2001
PENSION FUNDS SECOND AMENDMENT BILL: GOVERNMENT’S RESPONSE TO SUBMISSIONS

Chairperson:
Ms Hogan

Documents handed out:
Memorandum on the Submissions on the Pension Funds Second Amendment Bill


SUMMARY
The Financial Services Board and the National Treasury presented their response to the submissions on the Pension Funds Second Amendment Bill. Their memorandum considered the submissions made on each clause and it commented on the validity thereof and whether Government agrees or disagrees with the submission. In this meeting, Clauses 1 and  3 were addressed. The Financial Services Board pointed out that issues of principle needed to be decided on to inform the clause by clause analysis. One such issue was whether the employer shares in the surplus or not. However the Committee said that it could not make such decisions yet.

MINUTES
Mr Andrew (FSB) took the Committee through the memorandum. Before starting, he said that major issues needed to be decided that will inform the clause by clause analysis. One such issue was whether the employer shares in the surplus or not.

Ms. Hogan said that this is one of the questions of principle and that the Committee cannot make this call at the moment. The Committee needed to go through the clauses first.

Clause 1: Definitions
”accrued liability”
Mr Andrew said that labour had submitted that the actuary, using the statutory valuation basis, prior to the first restructuring or transfer, must determine accrued liability. The accrued liability therefore, would be determined by what the fund had done in the past. The Government proposes that an independent standard across all funds is used, independent of what they had done in the past. This standard will be objectively set and is yet to be formalised. The difficulty of using what the actuary had done in the past related to the fact that actuaries worked out what the contributions had to be and did not determine the benefit payment. The independent standard that Government proposes looks at what would have been a reasonable expectation at that time.

COSATU’s definition of accrued liability need only be considered if its version of the minimum benefit is to be applied.

”actuarial surplus”
It was submitted by the Actuarial Society of South Africa that the actuarial surplus should take into account the contingency reserve. It needs to be decided whether the contingency reserve should be added to the liabilities or deducted from the assets. The Actuarial Society says that the contingency reserve must be added to the liabilities because it is part of the fund’s liability to the beneficiary. The FSB agreed with this.

”contribution holiday”
Should there be no surplus, the employer would have to pay a standard contribution rate. If the fund has a surplus, the contribution could be zero and this is commonly termed the balance of cost. The difference between the standard contribution and the balance of cost is the contribution holiday.

The Actuarial Society would prefer the use of contribution rate as opposed to the wording standard contribution rate. The FSB sees this to be one and the same but would agree with the Actuarial Society in that their wording is better.

Mr Andrew quickly explained the distinction between an employer reserve account and an employer surplus account. When there was a transfer to the Defined Contribution (DC) fund, the money that was left behind was commonly transferred to the employer reserve account. The employer surplus account is a new account established by the Bill. After going through the process of redressing the past, the money that can be apportioned to the employer in terms of the Bill goes into the employer surplus account.

COSATU wants the definition of contribution holiday deleted because they do not want the employer to share in the benefit of the surplus. Ms Hogan noted that this could be revisited as again this is a matter of principle.

Ms. Hogan requested that the concept of a deficit be explained. Mr Andrew said that when an actuary places a greater value on the liabilities than the assets, the fund is in deficit. Clause 5 of the Bill makes a deficit a debt of the employer. Also Clause15H (1) states that if the actuarial valuation declares the fund to be in deficit but there are funds in any reserve accounts, money must first be used from these accounts before the employer has to pay in.

”conversion”
The definition is simply the transfer from a DB fund to a DC fund or vice versa. The current state law advisor’s definition states that conversion in relation to a category of a fund means the change of the retirement benefit from defined benefit to defined contribution. COSATU suggests that the word ‘category’ be deleted and that conversion means the change of the basis of the retirement benefit as opposed to just the change of the retirement benefit. The FSB agrees that the word ‘basis’ makes the COSATU version more clear but states that the word ‘category’ needs to be retained as some funds are mixed. This means that in the same fund, members could be given the option of DB or DC or when the transfer took place employers agreed that the benefit in the new DC fund would not be less than the benefit in the DB fund.

”deferred pensioner”
This is someone who left service but opted to leave his benefit in the fund. The current version of the Bill defines this person as someone who left service before normal retirement age. The LOA says that the definition should not read retirement age but rather retirement date. Mr Andrew said that this submission was correct.

”defined benefit category”
This means a category of a fund other than a defined contribution of a fund. COSATU proposes that the definition should read as follows: defined benefit fund means a fund other than a defined contribution fund, irrespective of the manner in which the employer contribution rates are defined or calculated. Mr Andrew said that the definition in the state law advisor’s version of the Bill would sort out COSATU’s problem.

In the definition of defined contribution of a fund the current definition excludes any share of actuarial surplus in the benefits payable to a member. The LOA suggests that the actuarial surplus should be included. Again the FSB was in agreement.

”employer surplus account”
COSATU wants the definition of employer surplus account to be deleted. This is consistent with their view that the employer cannot share in the surplus.

After the redress of the past the remaining surplus is apportioned between the employer surplus account and the member surplus account. Therefore funds can only get into this account through the Board carrying out the process of the Bill. The current definition states that the employer surplus account contains amounts allocated by the Board in terms of Section 15A. The LOA says that 15A must be deleted because it is incorrect. The correct sections to be included are Section 15 B, C. and F. The FSB agreed with this.

The Committee was concerned that the employer has direct access to the employer surplus account. Mr Malan (Treasury) said that the wording of the definition of ‘employer surplus account’ needed to be made clearer to show that the employer needs approval from the Board. It is also important to remember that the employer surplus account can only be used for fund activities and not to benefit company profit.

Mr Andrew (DP) said that the law already sets what one is able to do with the employer surplus account so he has no problem with employers having discretion as to what they want to do with the funds.

Ms Hogan said that the employer surplus account is still part of the fund and thus one still requires the ultimate approval from the Board. For example, the employer might want to take a contribution holiday which is his right in terms of the Bill, but the Board might still want to have a say in the extent of the contribution holiday. She instructed the drafters to look at this to see how the Government’s procedures can be made clearer.

”former members”
Currently this term is not defined. COSATU suggests the definition that includes all members before 1980 and all members who exited funds due to dismissals, retrenchments and resignations since 1990. Mr Andrew said that this definition is too restrictive because in the future former members may relate to much more recent members.

”investment reserve account”
This definition in relation to defined contribution funds is better dealt with by LOA’s suggestion because it provides more flexibility. The definition in the Bill does not take into account that different methods were used to devise the investment accounts.

COSATU proposes a definition for ‘investment reserve factor’ not included previously. Mr Andrew said that a definition for this is only necessary if the COSATU submission regarding minimum benefits is accepted.  

”member surplus account”
The definition in the Bill defines this as one account. The Actuarial Society proposes that the definition split the account between active members, former members and pensioners into separate accounts. Mr Andrew said that this split is unnecessary because the rules of the fund can deal with it.

COSATU wants the definition deleted again in line with their overall principle of not allowing the employer to share in the surplus.

”regulation”
This means a regulation made and in force under this Act. COSATU wants this definition replaced with one that will ultimately bring all regulations in this legislation under the control of Parliament and will compel consultation and scrutiny.

The FSB disagreed because it would be making the regulation part of the legislation. Ms Hogan echoed the sentiment because this would touch on the Rules of Parliament. One would have to change the rules to have the regulations tabled in Parliament so that members can have insight into them but not necessarily giving them the power to interrogate.

”repatriation “
All the submissions wanted the definition of repatriation deleted and has been done.

”pensioner reserve account”
The Association of Retired Persons and Pensioners want this to be defined to facilitate separate investment of the assets backing pensioner liabilities. Mr Andrew said that currently the law allows for this, so the rules of the fund could therefore allow for the member surplus account to be split between the various categories of members.

”stakeholder”
COSATU wants the definition of stakeholder deleted because they do not want the employer to benefit. Mr Andrew said that if it is decided that the employer will benefit then the definition needs to be retained.

Clause 3: Minimum benefits
Mr Andrew explained that the minimum individual reserve is the most generous benefit the member will be entitled to depending on how a person left the fund such as via retrenchment, being involuntarily transferred etc. It is in other words a minimum benefit defined by law.

Cosatu wants Section 14A(1)(a) to be amended because in its current form it discriminates on the basis of the manner in which you left the fund.  COSATU, therefore, does not want this section to refer solely to members who were retrenched, but should rather refer to members who exit the fund.

Mr Andrew said that the pension funds adjudicator proposes an amendment that elegantly encapsulates COSATU’s principle. Section 14A(1)(a) should read the following: the benefit paid to a member who leaves the fund prior to retirement shall not be less than the minimum individual reserve.

This amendment need only be effected if COSATU’s principle of non-discrimination is endorsed. It was the view of the Committee that they would favour no discrimination.

Mr Andrew (DP) asked if the increased liability as a result of non-discrimination would prejudice other members of the fund.

Mr Andrew (FSB) replied that this was not the case in a DC fund but it could be possible in a DB fund that there is not enough money to fund the other members at the time when another member leaves.  

The Actuarial Society proposed that Section 14A(1)(c) that deals with crediting a member’s individual account upon transfer, should make provision for a proportional reduction in benefits if the fund is in deficit. The FSB agreed with this but only if the employer first makes good the deficit.

The Association of Retired Persons and Pensioners expressed concern about Section 14A(1)(e) that deals with when the pension increase should take place. They are concerned that they will wait for a long time before they see any benefit. They submit that the surplus apportionment date is too far away and that the date should be brought forward. Mr Andrew said that to do this, a mini actuarial valuation would be needed.

Mr Andrew (DP) questioned the cost-effectiveness of this and suggested that the fund should bring the date closer only if the circumstances allowed them to. Ms Hogan commented that the cost does need to be weighed up but the dire straits of pensioners also needs to be considered. She suggested that they think about this and revisit the question later.

The Municipal Gratuity Fund submitted that in terms of Section 14A(1)(a) if a person is retrenched a month before he would have resigned he could get considerably more than had he resigned. This is so because if you are retrenched you share in the contingency reserve. The FSB agreed with the amendment to Section 15G that would allow the fund to consider whether a member should share in the contingency reserve.

Section 14A(2)(b) deals with the window period. COSATU suggests that there be no window period. Mr Andrew explained that the window period was provided to allow funds to re-negotiate the benefit structure if they could not afford to implement the procedures in the Bill. Ms Hogan agreed that the window period is needed.

The LOA noted that the word ‘scheme’ in Section 14A(2)(b) iii should be replaced with ‘fund’. Mr Andrew agreed and said that this was a drafting error.

COSATU wants this Section 14A(3) deleted. This protects the employer from liability if before the commencement date, the employer in terms of the rules of the fund terminates it or if during the window period renegotiates with the members a new benefits structure.
 
Mr Andrew said that the clause can only be deleted if the window period is removed.

The LOA wants the Board of the fund to be protected from liability as well because it could also take decisions as contemplated in Section 14A(3).

The meeting was adjourned.

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