Regulator confronts savings pot challenges and legacy pension fund issues
Three insights crystalised as your writer mulled the latest regulatory update around the ‘deluge of savings pot withdrawals’ taking place since the 1 September 2024 implementation of the two-pot retirement solution.
Three insights from two-pots implementation
The first is that if you want to stress-test a country’s financial and pensions administration, this type of intervention is spot on. The second is that there is no better way to shine light into the murkiest corners of the pension funds universe than to encourage direct interaction between members and their funds. And the third is that poor communication between members and pension funds remains a sore point in the South African savings context. A recent two-pot media roundtable hosted by the Financial Sector Conduct Authority (FSCA) went way beyond updating attendees on savings pot withdrawals to exploring some of these legacy issues.
The numbers are easier to report on, so we will begin this coverage there. The regulator set the scene by describing the pension funds sector under its supervision: at latest count, there were some R3.15 trillion in assets invested across 887 active funds, serving approximately 155000 employees and an impressive 9.6 million members. According to the regulator, the funds under its supervision had largely complied with the new two-pots retirement regulatory framework, with 837 of 853 applications for rule amendments already registered. A further 11 applications were on hold pending further input from industry, and five were under review with analysts.
The financial stress that local pension fund members find themselves under was on naked display too, per the most up-to-date summary of South African Revenue Services (SARS) activity related to its two-pot withdrawal function. By 22 November, SARS had received 2.153 million tax directives and issued 1.914 million, involving a gross withdrawal value of just over R35 billion. Readers will know by now that pension funds cannot fulfil a savings pot withdrawal without SARS approval. Diving into the statistics reveals 169509 applications (requests) for directives being declined for various reasons ranging from systems failures at fund managers to incorrect ID and tax numbers. A further 41523 directives were declined due to insufficient funds or incorrect codes.
Arrears contributions highlight systemic weaknesses
As mentioned in the opening paragraphs of this piece, the processing of two-pots withdrawals has revealed some glaring compliance shortcomings across the pension fund sector. Commenting on statistics at end-December 2023, the FSCA drew attention to an estimated R5.2 billion in arrear contributions involving around 7770 employers who had potentially contravened section 13A of the Pension Funds Act (PFA), affecting approximately 310000 members. The regulator conceded these numbers may be skewed by double counting of members who belong to more than one fund.
Keabetswe Tsuene, Senior Analyst: Retirement Funds Conduct Supervision at the FSCA, helped the media unpack these statistics further. “Most of the contraventions (36.2%) have occurred in the private security sector, involving just under 2400 employers,” she said. Other sectors included hairdressing, beauty and skin care (12.37%); building (8.57%); metal (7.79%); transport (7.65%); cleaning (7.2%); and electrical (6.8%). Employers in these sectors are often small, facing unique challenges due to the irregular nature of their cash flows and employment contracts. “The problem is widespread across not only private sector employers but also public entities and public employers as well,” Tsuene said. Municipal employers account for 3.95% of the total, or 58% of municipalities countrywide.
The extent of the problem emerges from a closer look at the Private Security Sector Fund which boasted a combined asset value of R12.7 billion at end-February 2024. The fund reflects around 2.4% of total assets as arrear contributions, meaning roughly R305 million is owed by employers. Contraventions of section 13A introduce serious social harm due to delays in benefit payments and fund balances not reflecting the amounts deducted from members’ salaries. According to the FSCA, these retirement fund savings are, in the overwhelming majority of cases, the only form of savings for working South Africans.
Errors and unallocated contributions
The regulator also admitted that the total arrears sum could be significantly misstated. Tsuene noted that many employers had approached the FSCA to argue that they were not in contravention of section 13A due to recording errors made by the funds. In many cases, employers were not paying over any member contributions because they were not operating for the period under review due to the nature of their operations. “The problem is these employers are not informing their funds [about periods of inactivity],” she said, before urging for closer scrutiny of arrears contributions when awarding new government contracts.
At this point in time, the FSCA cannot initiate enforcement actions against employers. “Our role as a regulator is to monitor what the retirement funds are doing in an effort to recover the outstanding contributions and to hold the directors and owners of these companies personally liable in terms of section 13A(8) and (9) of the PFA,” Tsuene explained. “We have limited powers to enforce compliance on employers participating in retirement funds as they are not regulated entities in terms of any of the [current] legislation.” The good news is that retirement fund boards can act in terms of the PFA.
To date, they have responded by taking legal action; using bargaining council enforcement processes; lodging complaints with the Office of the Pension Funds Adjudicator; and reporting contraventions to the South African Police Service. The PFA allows for fines of up to R10 million plus jail time for employers who contravene section 13A. “Our role is to scrutinise what is hampering fund administrators and trustees from carrying out their duties properly, and seeing what tools we currently have, whether through enforceable undertakings, directives or penalties, to hold them to account,” said Takalani Lukhaimane, Manager: Retirement Funds Conduct Supervision at the FSCA.
An evolving supervision framework
The FSCA remit will change with the enactment of the Conduct of Financial Institutions (COFI) Bill, which will see participating employers being supervised entities in respect of an employer’s obligations under the PFA. Until such time, the FSCA is taking an active engagement plus ‘name and shame’ approach to encourage compliance. Case in point, FSCA Communication 41 of 2024 named 2330 of the aforementioned 7770 employers for contraventions of section 13A.
This list includes 2003 employers who have outstanding contributions that are more than R50 000,00 and have been outstanding for a period of more than five months; 200 employers who have outstanding contributions that are more than R50 000,00 but the last contribution date has not been provided; 113 employers whose outstanding contributions are less than R50 000,00 and have been outstanding for more than five months; and 20 employers that have not contributed since date of participation in a retirement fund.
Meeting challenges head-on
“The two-pot limitations and arrear contributions [challenges] are going to be with us for a while,” concluded FSCA Commissioner, Unathi Kamlana. “The FSCA is busy with various interventions and strategies to deal with developments as they arise.”
Writer’s Thoughts:
The two-pot retirement system has exposed critical gaps in both employer and fund compliance. How can employee benefits consultants and fund administrators work together to ensure these systemic issues are addressed? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
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