29 February 2008
Parliamentary
Portfolio Committee on Finance
Att:
Mr Andre Hermans
Thank
you for the opportunity to submit comments. The LISP industry welcomes
regulatory amendments that promote clarity, portability and a levelling of the
playing fields within the retirement fund industry.
Specifically, we
welcome the proposed clarity around the definition and status of living annuities, and we support the levelling of
the playing field for all providers of such annuities.
In
August 2006, the
Although
it would appear to be desirable to allow banks and collective investment scheme
management companies* to issue living annuity contracts to pensioners and their
nominees, it needs to be considered whether as a matter of policy it will be
prudent to permit them to do so without a long-term insurance licence.
For
several years, businesses that are not long-term insurers for any other
purpose, have been conducting living annuity business. These include
intermediary organisations and networks, collective investment scheme companies
and companies within banking groups. They have acquired limited long-term
insurance licences in order to issue living annuity contracts. The requirement
of such licenses has not posed a barrier to the conducting of this business.
*
The proposed definition of “living
annuity provider” envisages collective investment schemes as being
living annuity providers. It is our submission that it would be more
appropriate for the collective investment scheme management companies to
play this role.
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It may well be desirable for this
status quo to continue, in that the long-term insurance regulatory environment
currently guarantees consumer protection such as compulsory portability,
tax-free status of the assets underlying the annuity provision, and capital
adequacy regulation.
Although banks and collective
investment scheme management companies are well regulated, their regulation is
not focused on the provision of living annuities. Where
the same level of protection can be afforded by an alternative regulatory
environment that is applicable to all living annuity providers, we would
support the issuing of living annuity contracts by providers other than
long-term insurers. However, it will be vital to first create a central
regulatory regime to ensure consistent consumer protection such as compulsory
portability, which is currently ensured through directives issued by the
Registrar of Long-term Insurers.
LISPA also welcomes the
removal of artificial barriers to entry for preservation funds, and the improved portability that
will be afforded to members of preservation funds.
While strongly supporting principles
in the Bill, LISPA recommends the following drafting amendments for the sake of
clarity:
1.
The definition of “living annuity” refers to an annuity
purchased “on or after retirement date”.
The definition of “retirement date” includes the date on which a benefit
becomes due as a result of death. However, to avoid unnecessary
cross-referencing it would be preferable to insert the words “or death” after
the words “retirement date” in the fifth line of the definition i.e. “on or
after retirement date or death….”
2.
Because of the nature of living annuities, it is possible
that the annuitant may be a “third/fourth/fifth generation” annuitant. Such
annuitants will not fall within the definition as it is currently worded, in
that they will be neither former members nor dependants or nominees of former
members. In order to include contracts issued to “third generation” annuitants,
it is therefore recommended that the words “or any subsequent nominee” be
inserted after “dependent or nominee” in the third line. The definition will
then read as follows:
”living
annuity means a right of a member or former member of a pension fund….or his or
her dependant or nominee, or any subsequent nominee,
to an annuity…”
3.
In paragraph (a), the
phrase "for the purpose of the living annuity" in the last line
should be replaced with the phrase "for the purpose of providing the annuity", which is technically more
correct, since the assets are held for this purpose rather than merely for the
abstract purpose of "a living annuity".
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4.
The quantum of the
regular payment that constitutes the annuity should be referred to consistently
throughout. Paragraphs (b) and (d) refer to the quantum of the regular payment.
For consistency, these paragraphs should therefore be amended to read as
follows:
“(b)
the amount of the annuity is determined in accordance
with a method of formula prescribed by
the Minister;”
“(d) the amount of the
annuity
is not guaranteed by the living annuity provider; and..”
5.
We recommend that a
sub-paragraph (f) be included as follows:
“(f) regulations may be published by the Minister
from time to time.”
We refer to the policy issue
referred to in our introduction, and reiterate that it needs to be considered
whether or not it will be desirable for living annuities to operate in an
inconsistent regulatory environment under bank and collective investment scheme
and long-term insurance licenses, or whether it is desirable that the providers
continue to be required to maintain their limited long-term insurance licenses
until an alternative, holistic regulatory environment can be created.
We recommend that sub-paragraphs (a)
and (c) of the definition of “normal retirement age” be amended to include
references to the rules of the Fund, as follows:
(a) in
the case of a member of a pension fund
or provident fund, the date on which the member becomes entitled to retire from
employment in terms of the rules of the fund
for reasons other than sickness, accident injury or incapacity through
infirmity of mind or body;
(c) in the case of a member of any fund
contemplated in this definition, the date on which that member becomes
permanently incapable of carrying on his or her occupation in
terms of the rules of the fund due to sickness,
accident, injury of incapacity through infirmity of mind or body.
Definition of “pension fund”
We recommend that sub-paragraph (dd)
of the definition of "pension fund" be amended to include as the last
phrase of the sub-paragraph the following: "...or
such amount as the Minister may gazette from time to time."
1.
Sub-paragraph (a)(i) of the definition of "pension
preservation fund" should be amended to delete the phrase "...or
another pension preservation fund...".
Employment-related events such as resignation, retrenchment and
dismissal have never triggered termination of membership of a preservation
fund. Members of "another pension preservation fund" are in any event
dealt with in sub-paragraph (a)(ii).
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Sub-paragraph (a)(i) of this
definition should therefore read as follows:
"(a) membership
of the fund consists of-
(i)
former members of a pension fund whose membership of that
fund has terminated due to -"
Sub paragraph (a)(ii) of the
definition should read:
“(ii) former
members of another pension fund which was wound up or
who elected … that other fund;”
2.
The definition of “pension interest” in the Divorce Act
calculates the amount due to the former spouse by reference to a benefit that
would become payable to the member spouse on resignation from employment.
Because resignation never triggers a benefit in a preservation fund, no amount
of pension interest can be calculated for the purpose of a divorce order. A
transfer from a preservation fund as contemplated in sub-paragraph (iv) is
therefore not possible until the Divorce Act is amended to remove this anomaly.
The reference to preservation fund in sub-paragraph (iv) should therefore be
deleted.
3.
Similarly, the reference in sub-paragraph (c) to payments
contemplated in paragraph 2(b)(i) of the Second Schedule should be
deleted. It is not relevant in respect
of preservation funds.
4.
Furthermore, we recommend that the sub-paragraph (c) should
be amended to read as follows:
“(c) Not
more than one retirement fund lump sum withdrawal benefit in
respect of the initial translocation benefit from a pension fund
….. is allowed during the entire period during
which a person is a member of one or more pension preservation fund(s);”
5.
To enable further regulation of living annuities without
the need for legislative amendment, we recommend that the last phrase of
sub-paragraph (e) of the definition of "pension preservation fund" be
amended to include the phrase:
"..., or
such amount as the Minister may gazette from time to time."
The same comments as above also apply to the definition of
“provident preservation fund”.
Please note that there appears to be
a typographical error in par a(ii) of the definition of “provident preservation
fund” – references to “pension preservation fund” should be replaced with “provident
preservation fund”
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General
comments with regards to the definitions of
“pension preservation fund” and “provident preservation fund”
It is not clear from the definitions whether
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translocation benefits may be paid to more than one
retirement fund;
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any amount deducted from the
translocation benefit before transfer to the preservation fund will be regarded
as the once off final withdrawal;
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transfer should be affected within a specific time frame.
Clarity
on these issues would be appreciated.
The new sub-paragraph (b)(v) effectively removes the age 70
limit for entitlement to the payment of an annuity. The removal of this
restriction is welcomed.
For grammatical correctness, we
recommend a small change to sub-paragraph (b) of the definition of
"retirement funding employment" with the deletion of the phrase
"...as respects..." and in its place the inclusion of the phrase
"...with regard to..." so that the paragraph reads as follows:
"(b) in relation to a partner in a partnership who
was an employee of the partnership and who on becoming a partner retained
membership of the pension fund of the partnership as if he or she had not
ceased to be an employee, with regard to
the part....”
Sub-paragraph (b)(i)
The budget tax proposals indicated
that the non-member spouse would be liable for the tax in respect of divorce
settlement payments made by retirement funds.
However, contrary to these proposals, the Bill proposes that these
payments will be deemed to accrue to the member as a withdrawal benefit on date
of deduction of the payment and that the member has a right of recovery against
the non-member. It would be welcomed if the present opportunity is utilized to
give effect to the budget tax proposals and the tax liability of the non-member
spouse is dealt with in this Bill.
See our comment under sub-paragraph
(a)(iv) of the definition of “pension preservation fund” with regard to divorce
orders.
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LISPA
would welcome any further engagement and discussions with National Treasury on
these issues.
Yours
sincerely
Rosemary
Lightbody
(Chairperson: LISPA
Legal & Tax Committee)