Funding government and State-Owned Enterprises (II) – Pension funds

13 February 2020

The series deals with the following topics:

Introductory brief.

Pension funds.

Funds regulated by the Registrar of Pension Funds.

The Government Employees Pension Fund and other public sector funds not regulated by the Registrar of Pension Funds (1)

The Government Employees Pension Fund and other public sector funds not regulated by the Registrar of Pension Funds (2)

Funds other than pension funds which might be pressed into financing SOE’s

Country comparisons (1).

Country comparisons (2).

Conclusion

Briefs 1 and 9 summarize the approach and findings, and they will be published first. Shortly thereafter, Briefs 2 to 5 will be published, and finally Briefs 6 to 8.

INTRODUCTION

This brief considers the legislative and regulatory framework for pension funds, the regulations on investment holdings currently in place, funds which are not subject to the Pension Funds Act, descriptions of the different types of pension funds and a broad overview of the South African pension fund industry at present.

PENSION FUNDS: LEGISLATIVE AND REGULATORY FRAMEWORK

The Retirement Funds Division of the Financial Services Board (FSB) is mandated by the Pension Funds Act, 1956 (Act No. 24 of 1956) to license and supervise retirement funds, beneficiary funds, pension fund benefits administrators, and related persons and entities.

Reforms were initiated in 2011 towards a financial regulation regime called Twin Peaks, which came into full-effect on 1 April 2019. The legislation through which the new model is implemented is the Financial Sector Regulation Act, tabled in Parliament in October 2015 and enacted in August 2017. Twin Peaks did away with multiple regulators and saw the establishment of only two regulators;[1] the Prudential Authority (PA) established on 1 April 2018, and the Financial Sector Conduct Authority (FSCA) on 1 April 2019.

The PA is housed in the South African Reserve Bank (SARB) and is responsible for the prudential regulation and supervision of financial conglomerates, banks, insurers, corporate banks, co-operative financial institutions and certain financial market infrastructure. The role of the PA is to ensure the soundness of these institutions and infrastructures in order to maintain financial stability. The CEO of the PA is a SARB Deputy Governor.

The FSCA, which replaced the FSB and its mandate by the Pension Funds Act to license and supervise retirement funds, is now responsible for regulating and supervising the conduct of financial institutions, including those housing pension funds.

EXISTING PENSION FUND ACT REGULATIONS ON INVESTMENT HOLDINGS

Regulation 28 issued under the Pension Funds Act gives effect to Section 36(1)(b) of the Act, which limits the extent to which retirement funds may be invested in particular kinds of assets. The main purpose of Regulation 28 is to protect the members’ retirement provisions from the effects of poorly diversified investment portfolios. This is done by limiting the maximum exposure to certain asset classes. Regulation 28 includes the following asset class limits, which will be looked at further in the following brief:

Equity 75%

Listed Property 25%

Offshore Assets 30%[2]

Hedge funds 10%

PENSION FUNDS NOT SUBJECT TO THE PENSION FUNDS ACT

There are several fundsthat were established in terms of specific provisions in statutes other than the Pension Funds Act. These funds are not subject to regulation and supervision of the Pension Funds Act, and by extension the Registrar of Pension Funds. The most significant of these funds includes:

The Government Employees Pension Fund (GEPF).

The Post Office Retirement Fund.

The Telkom Pension Fund and the Telkom Retirement Fund.

The Transport Pension Fund, the Transnet Retirement Fund and the Transnet Second Defined Benefit Fund.

DEFINED BENEFIT AND DEFINED CONTRIBUTION PENSION FUNDS

Retirement funds in South Africa comprise pension funds, provident funds, retirement annuity funds, preservation funds, unclaimed benefits funds and beneficiary funds. These are then classified in the records of the Registrar either as defined benefit funds or defined contribution funds.

A defined benefit fund is a retirement fund which provides a retirement benefit that is determined as an amount equal to the member’s final average salary multiplied by the years of pensionable service, multiplied by an accrual factor determined in terms of the fund’s rules. The member’s retirement benefit is determined by this formula and not by the contributions paid by the member. The rate at which the member contributes to the fund is usually fixed as a percentage of that their pensionable salary. The rate at which a participating employer is required to contribute to the fund, which may change from time to time, is usually determined on a ‘balance of cost’ basis. This means that the fund’s valuator works out the rate at which the employer will need to contribute to the fund over the next three years if the fund is to remain financially sound and able to meet its benefit liabilities as and when they arise.

A defined contribution fund is a retirement fund which provides a benefit on retirement determined by the accumulated contributions made to the fund by the member and/or the member’s employer, increased by returns earned on the investment of those contributions, less deductions made to meet the costs of running the fund and providing for death and disability benefits. The rates at which the member and employer contribute to the fund are fixed or defined as a percentage of the member’s remuneration. The member carries the risks and rewards of the fund’s investment performance.[3] Most retirement funds today are defined contribution funds.

BROAD OVERVIEW OF PENSION FUNDS AT PRESENT

The figures below are somewhat dated because since the Registrar of Pension Funds was incorporated into the FSCA in 2019 an annual report by the Registrar is yet to be released.

Number of retirement funds in South Africa at 31 December 2017:

Retirement fund assets at 31 December 2017 (R million):

Investment holdings of Financial Services Board registered funds at 31 December 2017 were as follows:

The top 20 Financial Services Board registered funds ranked by total assets (R million) were:

The largest 100 funds comprise 67.3% of total assets while the top 500 largest funds make up 95.7% of the assets.

The number of retirement funds by administrator at 31 March 2018:

By Charles Collocott, Policy Researcher, HSF, 13 February 2020

[1]Andrew Godwin (2017) Introduction to special issue – the twin peaks model of financial regulation and reform in South Africa, Law and Financial Markets Review, 11:4, 151-153, DOI: 10.1080/17521440.2017.1447777.

[2] Prescribed by the South African Reserve Bank.

[3] Registrar of Pensions Funds Annual Report 2017, p60.