NEWS & ANALYSIS

Funding govt and SOEs (II)

Charles Collocott considers the legislative and regulatory framework for pension funds

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:

Privately administered funds

2 982

Underwritten funds

2 186

GEPF

1

The Associated Institutions Pension Fund

1

The Temporary Employees Pension Fund

1

Transnet Funds

3

Telkom Pension Fund

1

Post Office Retirement Fund

1

Foreign funds

1

Total

5 158

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

Privately administered funds

1 936 972

Underwritten funds

520 262

GEPF

1 705 480

Transnet Funds

84 465

Telkom Pension Fund

199

Post Office Retirement Fund

14 599

Foreign funds

418

Total

4 262 395

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

Asset

R million

% of assets

Cash

79 916

3.30

Commodities

3 833

0.16

Debt Instruments (including Islamic Debt)

210 593

8.70

Investment and Owner Occupied Properties

26 823

1.11

Equities (including demutualisation shares)

374 536

15.47

Insurance Policies

1 015 742

41.97

Collective Investment Schemes

244 222

10.09

Hedge Funds

7 210

0.30

Private Equity Funds

 7 235

0.30

Investment in participating employer(s)

10 404

0.43

Derivative Market Instruments

632

0.03

Other Assets

1 322

0.05

Foreign

437 886

18.09

Total

 2 420 354

100.00

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

1

Eskom Pension and Provident Fund

133 343

2

South African Retirement Annuity Fund

112 151

3

Central Retirement Annuity Fund

104 584

4

Sentinel Retirement Fund

82 490

5

Lifestyle Retirement Annuity Fund

82 490

6

Engineering Industries Pension Fund

72 443

7

Momentum retirement annuity Fund

53 795

8

Old Mutual Superfund Provident Fund

50 219

9

Sasol Pension Fund

48 876

10

Old Mutual Superfund Pension Fund

48 490

11

Metal Industries Provident Fund

42 569

12

Alexander Forbes Retirement Fund (provident section)

39 285

13

Professional Provident Society Retirement Annuity Fund

39 235

14

Telkom Retirement Fund

38 981

15

Standard Bank Group Retirement Fund

36 701

16

Absa Pension Fund

31 619

17

Mineworkers Provident Fund

30 587

18

Allan Gray Retirement Annuity Fund

30 295

19

Firstrand Retirement Fund

28 991

20

Alexander Forbes Retirement Fund (pension section)

25 657

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:

Administrator

Active funds

Other funds*

Total funds

Liberty Group

132

958

1 090

MMI Group

72

728

800

Alexander Forbes Financial Services

294

465

759

Sanlam Life Insurance

113

217

330

Absa Consultants & Actuaries

135

158

293

Old Mutual Life Assurance Company (South Africa)

27

160

187

NBC Fund Administration Services

81

54

135

NMG Consultants and Actuaries Administrators

67

50

117

Own administrator

41

62

103

All other administrators

685

619

1 304

Total

1 647

3 471

5 118

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.