Fighting the battle on two fronts

With all the discussion surrounding the proposed Social Security Tax, many of us have forgotten that government is driving pension fund reforms on two fronts.

The first front is the battle for the extension of basic retirement, death and disability benefits to the poor. And the second front is positioned against the backdrop of the country's private pension fund industry, where government continues to focus on regulation.

Private pension reform is underway

A number of steps have been taken to stamp out unfair practices. The most significant action was the signing of the Statement of Intent (SOI), which requires life companies to pay restitution in the amount of R3 billion to policyholders who suffered losses due to making policies paid-up, surrendering policies or reducing premiums.

A Discussion Paper on Contractual Savings in the Life Industry was subsequently circulated in March 2007. This paper's key proposal was the review of commissions paid in the life (excluding risk) industry. Intermediaries can expect a shift from up-front commissions to an as-and-when payment coupled to ongoing service.

Pension Fund Act revised

Cabinet has also revised the Pension Funds Act 24 of 1958. This Act is a cumbersome piece of legislation which has been subject to numerous changes and enhancements in the past. On 7 February 2007 the Pension Funds Amendment Bill was approved and forwarded to Parliament for consideration during this year.

The Bill seeks to boost the powers of the registrar, and take a close look at conflict resolution and governance, particularly relating to pension fund trustees. A new Pension Funds Act (possibly Act 15 of 2008) will include many of the broader reforms proposed in the various discussion documents already circulated.

In light of the various changes tabled in the Pension Funds Amendment Bill it makes sense to discuss some of the impacts on individual pension fund members.

New legislation for minimum benefits

Section 14A of the Pension Fund Amendment Bill introduces a number of measures to protect the value of retirement fund savings, particularly in the form of minimum individual benefits.

Benefits paid to a member who ceases to be a member at a point before retirement, or when a fund is liquidated,or if the fund is converted from defined benifit to defined contribution, must not be less than the minimum individual reserve.

Pension fund increases must be passed on within six months of the effective date of the first actuarial valuation of the fund, and the board shall grant an increase to pensioners and deferred pensioners at least once every three years.

Clause 2 and 3 make provision for proportional reductions of the minimum individual reserve should the fund have insufficient resources.

Amendments to Section 14B relate to the calculation of a member's individual account, minimum individual reserve and minimum pension increase.

Pension fund benefits upon death

Section 37C addresses the disposition of pension fund benefits on the death of the primary member. Section 37C explains that the deceased member's benefit "other than a benefit payable as a pension to one or more dependants in terms of the rules of a registered fund, which must be dealt with in terms of those rules," does not form part of the deceased's estate.

If no dependants are identified in the pension fund rules, the pension fund has 12 months to trace the deceased's dependants, regardless of whether the deceased has stipulated nominees.

If the trustees are unable to trace dependants, they are obliged to pay the benefits to the stated nominee – after provision is made for any shortfall on the deceased's estate.

New rules apply to divorce

Changes made to Section 37D addresses specific deductions which the pension fund administrator is allowed to make.One such deduction is relates to loans taken by a member secured by his entitlement to pension fund benefits. In such a case, the pension fund benefit is pledged to the loan grantor. Specific rules for such loans are provided.

In terms of the amendments, a spouse, non-member or other natural person will be able to claim certain amounts from a member's benefits provided an order is obtained from the High Court.

A significant change introduced in this section of the Bill is that a divorced person (not a member of the pension fund) is now able to gain access to the ex-spouse's benefits. In the past, the divorcee had to wait for the member to either pass away or resign from the pension fund before being granted access to their share of the pension fund benefit.

Advice to pension fund members

Most of the regulations contained in the Pension Funds Amendment Bill apply specifically to insurers and pension fund administrators, board members and trustees. The changes discussed in this article place no additional regulatory burden on financial advisers.

It is advisable to discuss some of the implications of Section 37C and Section 37D of the Pension Funds Amendment Act with the client, who should be made aware that the rules of the pension fund can override his choice of beneficiary.

The pension fund member should also be advised of the import of Section 37D as it relates to divorce to minimise future shocks.