|
There are two types of funds, exempt funds (underwritten) and non-exempt (privately administrated).
In an exempt fund, the pension or provident fund enters into an arrangement with an insurance company whereby members' benefits are secured by policies of insurance. These exempt funds would get certain exemptions, namely from having to appoint an auditor and a valuator and from having to have annual audits and valuations.
These funds are subject to the full conditions of the Pension Funds Act and are required to appoint auditors and valuators and have full annual audits and valuations.
"Costing" refers to the method of determining the level of contributions needed to fund benefits for which the fund is liable. This together with portfolio growth will be the major determinant of the performance of the fund. The two ways of costing are:
- Individual costing where a separate account is held for each member and the costing is done according to the members' specific requirements.
- Deposit administration - funds are pooled and costs (life cover PHI etc.) are debited to this account. Deposit administration is cheaper and more popular as it involves less administration.
New Legislation
Two important pieces of legislation were approved by parliament in 1996. The first was a bill to amend the Pension Funds Act, and the other was the new Labour Relations Act.
The main controls that the employee has over his pension and provident funds are:
- The right to elect 50% of the trustees.
- The right to be told what is happening in the fund, from rule changes to investment performance.
Most of the protection for the members is in the Pension Fund Act and the Labour Relation's Act, which protects the employee against poor withdrawal benefits on resigning from his/her job and from being discriminated against unfairly.
Any new fund rules must first be negotiated with the fund members before they can be implemented.
Funds must comply with the limits set out in the revised Regulation 28. They must also have a formal Investment Policy Statement (IPS). In practice, most funds already comply with this as it is a requirement of PF130. Some of the key principles to be applied by the fund and its board:
- Promote the education of trustees in respect of governance, investments and related matters
- Take a responsible investment approach that will earn adequate risk-adjusted returns suitable for the funds’ specific member profile, liquidity needs and liabilities. (This effectively makes Annexure B to PF130 law.)
- Ensure the funds’ assets are appropriate for its liabilities. For a defined contribution fund, this involves considering the effect of a long term investment strategy on members’ expected retirement benefits.
- Carefully consider the default option in place for members, which will transition the affected members into less risky assets closer to retirement
- Ensure that in the event of individual member choice, each portfolio offered complies with the regulations
- Understand the nature of the assets in which the fund invests. To this end, they must conduct reasonable due diligence before making contractual commitments to invest in assets managed by a third party for both local and foreign assets They must also understand the changing risk profile of assets over time, as well as the need to consider environmental, social and governance characteristics
- Promote broad-based black economic empowerment of service providers to the fund.
- Foreign exposure limits will fall in line with current exchange control regulations. Any breach need not be remedied if it was due to market movements (this is up to the FSB, but funds generally have 12 months to correct this position). However, no new investments may be made into assets that are in breach.
- Hedge funds and private equity funds are now explicitly allowed, subject to certain restrictions and conditions. Up to 5% can now be allocated to fund of hedge funds, 2.5% to an individual hedge fund and 10% to hedge funds in total.
In other words, a higher amount can be allocated to fund of hedge funds than to individual hedge funds directly
- The “look through” principle is introduced, where an asset holds underlying assets. Historically funds could hide the nature of an investment behind structures such as wrap funds and debentures. The look through principle now applies Regulation 28 limits to all investments.
- There are however some exceptions, including hedge funds, private equity funds, and holdings below 5% with different kinds of assets (only the main asset type will apply). The definitions of equity, cash and immovable property are
defined narrowly in “table 1 of the revised Regulation (“prudential guidelines”). If investments do not fall into these narrow definitions and are specifically excluded, they will be considered broadly as debt and subject to the look through principle
- The following investments could potentially be excluded from the look through principle on reporting, subject to specific conditions being met. These are:
- Collective investment schemes (ie unit trusts)
- Linked policies
- Long term policies with guarantees or partially guaranteed policy benefits. This will be clarified in the guidance notes expected in March 2011
- There are further restrictions on asset combinations relating to unlisted investments. The aggregate exposure to unlisted investments must not exceed 35 percent of the aggregate fair value of the total assets of a fund. Further, the aggregate cash and debt exposure by a fund to an issuer or entity must not exceed 25 percent of the aggregate fair value of the total assets of the fund.
- Securities lending and derivatives are explicitly allowed, subject to certain restrictions and conditions. Each has its own annexure. The annexure on derivatives covers both the use of derivatives (what is allowed and what is not) and the monitoring / reporting on this type of investment. As stated previously, guidance notes are expected in March 2011
- Tighter limits apply to unregulated and unlisted products for smaller assets in comparison to similar assets which are regulated and listed and which have larger market capitalisation values.
- Commodities are recognised as a separate asset class and are limited to 10% of total fund investments. Within this, there are further restrictions: the entire 10% commodity limit can be invested in gold, whereas all other commodities are limited to 5% per commodity
- Retirement funds may only borrow bridging finance, limited to 50% of gross income that can be earned. This needs to be paid back within 12 months.
The table that follows outlines a summary of the main features of the adjusted rules applying to Regulation 28
Market Capitalisation (market cap)
This is the value attributed to a company by multiplying the number of issued shares by the market price
Category |
Limit |
Sub Limits |
EQUITIES |
75% |
|
No more than 15% in an equity where the market cap is in excess of R20bn |
|
15% |
No more than 10% in an equity where the market cap is between R2bn and R20bn |
|
10% |
No more than 5% in an equity with a market cap of less than R2bn |
|
5% |
Limit for unlisted equities
Subject to strict valuation requirements |
|
15% |
Foreign exposure including inward listed shares |
|
25% |
Investment in a suitably regulated vehicle in Africa |
|
5% |
CASH
No more than 25% in a single Money Market instrument issued by a South African bank |
100% |
|
DEBT
The limit for (on-balance sheet) bank issued corporate and public debt is raised to 75% |
100% |
|
PROPERTY
A fund may have up to 25% in listed property similar to equities listed property is divided in to 3
sub-categories |
25% |
|
A market cap greater than R10bn |
|
15% |
A market cap between R3bn – R10bn |
|
10% |
A market cap less than R3bn |
|
5% |
COMMODITIES
A fund can invest in listed commodities up to 10% in gold or up to 5% in any other commodities |
10% |
|
HEDGE FUNDS AND PRIVATE EQUITY
Fund of hedge funds and fund of private equity funds, 5% per fund or 2.5% per hedge fund or private equity fund. |
15% |
|
Other assets not referred to in the amendment |
2.5% |
|
HOUSING LOANS
Loans granted to members directly by the fund
Loans granted to members where the fund stands as surety can take place normally as per the
regulations |
95% |
|
Members of the pension and provident fund must be employees of the participating business and must fall into a specific category of employees.
Membership of more than one fund is permissible, provided that the employee qualifies in terms of the eligibility conditions of both funds.
Fund Income of Pension and Provident Funds
In terms of the Income Tax Act all income received by an approved pension / provident fund is exempt from tax.
Retirement Income
"Retirement funding income" is the remuneration taken into account to determine a member's and / or the employer's contribution to a pension or provident fund.
All contributions by the employer to a pension, provident and benefit fund up to 10% of the employee's approved remuneration are allowed as a deduction from the income of the employer. In practice the Commissioner of Inland Revenue allows up to 20% aggregated for pension, provident and benefit funds.
Pension
An employee can deduct his actual contributions to an approved pension scheme during the year of assessment up to a maximum of the greater of:
7.5% of his/her retirement funding income
Or
R1 750.
Although an employee may contribute to the fund these contributions are not deductible. Provident funds are normally on a non-contributory basis.
The Board of Trustee is appointed in terms of a fund's rules or trust deed to manage the affairs of the fund. The Trustees are required to do this in such a way as to fulfill the goals or objectives of the fund and avoid at all times any conflict of interest.
Every fund shall have a board consisting of at least four board members, at least 50% of whom the members of the fund shall have the right to elect. If member does not exercise their right to elect 50% of the members on the board, the employer will in practice be entitled to appoint all the members on the board of management. The duties and responsibilities of the trustees are governed by statutory law, common law and the documents of the fund.
- The trustee must act with care and utmost good faith.
- Trustees have a duty to know the specific rules in detail, the relevant legislation contained in the Pension Funds Act and the Financial Institutions Act.
- The trustee's must also know the Trust Deed and other policy documents.
- The trustees have a duty to administer the fund in a manner prescribed by the rules of the fund and common law relating to trusts.
- Ensure that the rules and operations and administration of the fund comply with the act, the Financial Institutions Act
- Obtain expert advice on matters where the board members lack sufficient experience
- The object of the board shall be to divert, control and oversee the operations of a fund in accordance with the applicable laws and the rules of the fund.
- Avoid conflict of interest
- Act with impartiality in respect of all members and beneficiaries
- Ensure proper registers, books and records of the operations of the fund are kept.
- Ensure proper controls and systems are employed
- The trustees have a joint responsibility i.e. for the decisions and are therefore unable to avoid individual liability. There are criminal and civil consequences of failing to act in a proper manner.
Actuarial valuation is a complicated affair, generally applicable to Defined Benefit Funds, which take many factors into account including age, gender, period of employment, expected length of retirement, income, interest rates and inflation. During a valuation the fund's actuary calculates the fair value of the fund’s assets and its liabilities. The difference between these values is called the funds surplus.
Defined-benefit pension and provident funds can have what is called a surplus. The surplus is the excess of assets in the fund in relation to a fund's liabilities. A fund's liabilities are the current value of all amounts that will be paid to members in the future in respect of retirements, withdrawals, deaths, pension payments etc.
Umbrella funds evolved in response to a need from smaller employers for cost effective retirement fund solutions. They are normal pension and provident funds in which multiple, unassociated employers participate, often offering a range of benefits on a packaged basis.
There are two types of umbrella funds in the industry. The first type of umbrella fund has one set of rules which sets out all the terms and conditions applicable to all the employers and which bind all employers equally. The second type of umbrella fund has a set of general rules which sets out the main governing provisions relating to the fund. Each participating employer then has a set of special rules which set out the specific condition and benefit conditions applicable to their employees.
Umbrella funds are normally established by a service provider who appoints the initial trustees who are normally employees of the sponsor. The sponsor company is usually the appointed administrator and consultants to the scheme.
There is one board of trustees which manages the fund. This board is normally exempt from the PFA section 7A requirement to have a board consisting of at least 50% member elected trustees. Some funds have appointed one or more independent trustees to the board. A practice has developed to introduce a second level of management through a management committee. The management committee would look after the interests of the members relating to a particular participating employer. The main trustee body delegates some of its functions to the management committee.
|
