Four retirement fund supervision truths

A recent round table discussion between the Financial Sector Conduct Authority (FSCA) and the media suggests that retirement fund supervision is in safe hands, albeit that many processes take longer to resolve than industry stakeholders would like. The round table tackled a range of complex issues, including fund cancellations, directive eight, the appointment of fund curators and unclaimed benefits, to name a few. We decided to gloss over many of the topics to present you, dear reader, with the four retirement fund supervision ‘truths’ that we learned during the two-hour session. We begin with the impact of pandemic.

Truth 1: Covid-19 had a devastating impact on retirement funds

The FSCA acknowledged the devastating impact of pandemic at an economic, individual and social level and confirmed that it had interacted with a number of employers and retirement funds that were struggling during lockdown. “We ran a survey in 2020 to [assess] the dispensation which allowed employers to either cease or reduce retirement fund contributions during lockdown, just to get a sense of how many retirement funds were affected,” said Olano Makhubela, Divisional Executive: Retirement Funds at the FSCA. It turns out that 47% of the retirement funds that participated in the survey had been approached for relief. 

Anton van Graan, Specialist Analyst: Conduct Supervision at the FSCA, said that stakeholders in the retirement fund industry had initially underestimated the pandemic. “In March 2020, many were under the impression that the outbreak would last all of three weeks and we would be over and done with lockdown and carry on as before,” he said. “But as [global] news reports filtered through, we realised that we were facing a bigger problem due to jobs being on the line as people were unable to get back to work”. The FSCA responded by issuing a circular in which it asked funds to determine if their rules made provision for temporary contribution relief. If not, the regulator indicated that it would allow funds to submit rules amendments on an urgent basis. 

The next step was to determine to what extent employers and funds had availed of the opportunity to either cease or reduce fund contributions. Van Graan revealed that at 30 June 2020, some 377 of 793 standalone funds in the survey had instituted some form of contribution relief following approaches by employee constituencies or participating employers. The data revealed some interesting facts. “One was that large employers or employers with large cash flows and reserves were better able to weather the effects of Covid-19,” he said. “Unfortunately, small businesses that were mostly participants in umbrella funds were hard hit”. Another fact was that employers were doing whatever they could to keep employees’ risk benefits in place, even if retirement fund contributions were temporarily halted or reduced. 

Truth 2: No more room for curatorship dramas

The FSCA has come in for plenty of stick for its appointment of curators to retirement funds and the ensuing, costly and lengthy, curatorship processes. There are countless media stories of funds in curatorship for years on end, not to mention frequent reports of excessive curatorship fees. Makhubela said that the latest thinking on the matter was to use curatorship as a last resort and to rather appoint a statutory manager. Wilmi van der Walt, Manager: Conduct Supervision at the FSCA, confirmed that reviews of historic curatorship proceedings had flagged shortcomings for which changes had been introduced. For example, curators’ appointment letters must now indicate their monthly fee cap. Curators are also required to submit their invoices to the FSCA offices, along with supporting schedules and monthly statements of the retirement funds they are overseeing. 

“Before a curator can affect payment of its fees, it must receive formal approval of these fees from our office,” said Van der Walt. Other monitoring initiatives include that curators report to the FSCA offices on a monthly or bimonthly basis and a proposed quarterly meeting between regulators and curators. It would appear that this hands-on regulatory approach is yielding results. According to Van der Walt, “the approach has proven to be effective in ensuring that curators discharge their duties efficiently within the ambit of the legislation”. That said it was likely that more reliance would be placed on statutory managers in future, as provided for under the Financial Institutions Protection of Funds Act. “We have and continue to use this valuable regulatory tool which is not considered as adverse as a curatorship due to the statutory manager being appointed by agreement,” she said. 

Truth 3: Fund cancellations will not be rushed

Makhubela confided that the retirement fund deregistration process was fraught with challenges, referring journalists to the lengthy courtroom drama that followed the decision, made by the registrar of the then Financial Services Board, to cancel thousands of pension funds. It is widely accepted that many of these funds were terminated incorrectly because they still had fund members and / or assets. “We are engaging with large players in the industry to find a solution to this issue and [believe] we are making good progress,” he said. The FSCA is considering a staggering 1899 retirement funds for cancellation at present. 

Fikile Mosoma, Head of Retirement Funds Reviews and Authorisations at the FSCA commented that the cancellation process had been put on hold for some years due to the aforementioned legal challenges, during which time the FSCA engaged with fund administrators on the way forward. “The court processes highlighted some shortfalls as to the kind of information that we request before deregistering a fund,” she said. An information circular issued in April 2019 sets out how fund administrators should go about appointing audit professionals to assist in giving the necessary assurances to the regulator that “all requirements as prescribed in Section 27 of the Pension Funds Act are fully complied with”. 

During the remainder of 2019 and 2020 the FSCA worked closely with the retirement fund industry and the auditing profession to produce factual findings reports that should expedite the fund cancellations and deregistration process. Mosoma said that although progress was slow, there were many issues that had to be resolved before the regulator could close a fund: “We are satisfied that the process that we have undertaken will ultimately result in funds being properly cancelled, which requires that funds no longer have assets, members or liabilities…”  The process is long overdue, especially given the lopsided situation of having only 1500 active retirement funds in a universe of more than 5000 registered funds. 

Truth 4: The regulator is pro sustainable investments 

“We are supportive of National Treasury’s approach of tweaking Regulation 28 and introducing infrastructure as an asset class,” said Makhubela, adding that “the issue of prescribed assets is now off the table”. The one caveat was that retirement funds should invest in infrastructure opportunities with proper governance and supervision structures in place. “Sustainable, impact or ESG investing has become a global wealth movement that everyone is talking about; and when you read the media coverage you realise that many funds that embraced ESG during pandemic have performed better than those that did not screen their portfolios using ESG factors,” he said. It is worth noting that although the rules contained in Regulation 28 are issued by National Treasury, the FSCA is responsible for enforcing the asset class limits so imposed. 

Finally, just for fun, we share the regulator’s view on the retirement reform green paper recently published by the Department of Social Security. “It is a policy issue that is ideally discussed and resolved between the two government departments,” said Makhubela, no doubt wishing that the document had not been published a couple of days before the FSCA’s media round table on retirement supervision. His decision proved wise, because days later, News24.com revealed: “Tuesday, Minister of Social Development Lindiwe Zulu withdrew her department’s Green Paper on Comprehensive Social Security and Retirement Reform, which was gazetted two weeks ago”. 

Writer’s thoughts:
In our previous newsletter covering the FSCA’s media round table we reflected on the difficulty in finalising the unclaimed benefits saga given the industry’s shocking record keeping, among other issues. It seems administrative failings coupled with poor record keeping have equally contributed to the retirement fund cancellations backlog. Are you happy with the regulator’s more cautious approach? And have any of your clients been impacted by the FSCA’s historic bungling of the retirement fund cancellations process? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za