The final Default Regulations, issued in terms of section 36 of the Pension Funds Act, were recently issued by the South African Minister of Finance. They aim to provide retirement funds with greater discretion and flexibility in relation to their default investment portfolios and annuity strategies. 

To comply with the regulations, many funds will need to amend their rules and investment policy statement. The board of trustees of funds will also need to carefully consider their fund’s position to ensure compliance with the new regulations.

On 22 July 2015, the first draft of the Default Regulations was published by National Treasury. The first draft broadly followed the principles set out by National Treasury in its 2011 paper titled “Charges in South African Retirement Funds”. Following extensive consultation with various stakeholders, National Treasury published a revised second draft of the Default Regulations on 10 December 2016. Following further amendments to the second draft, the final Default Regulations were issued on 25 August 2017, and took effect on 1 September 2017.  

The Default Regulations require that existing default arrangements in respect of a fund be fully compliant by 1 March 2019 and that all new default arrangements adopted after 1 September 2017 be immediately compliant. 

The main purpose of the Default Regulations is to generally lower charges and improve outcomes for members of retirement funds. This is proposed by: 

• creating a default investment portfolio for all defined contribution funds;
• providing greater opportunity for the preservation of members’ benefits if such members leave a fund prior to retirement; and
• providing guidelines relating to how a member’s retirement savings may be applied to provide for an annuity for the member following his or her retirement.

Below is an overview of the key terms of the final Default Regulations and the amendments that funds will need to make to their rules in order to comply with them. 

Default investment portfolios (regulation 37)

Regulation 37 provides that every defined contribution fund to which members belong as a condition of employment will need to amend their investment policy statement to include a default investment portfolio. The board of a fund will need to create one or more default portfolios and be able to demonstrate that, among other things:

• the design of such portfolio(s) is appropriate for members, taking into account their needs and likely characteristics; 
• the composition of assets, the performance and fund returns are well communicated to members; 
• all fees and charges incurred on default portfolio(s) are reasonably priced and competitive; and 
• where member investment choice is provided for in the rules, members must be permitted to transfer from the default portfolio to another investment portfolio offered in terms of the fund’s investment policy statement.

Default preservation and portability (regulation 38)

Regulation 38 provides that:

• if a member is enrolled in a retirement fund as a condition of employment, then he or she must, upon termination of service before retirement, automatically become a paid-up member of that fund;
• upon termination of service, the member’s paid-up benefit must be left in the fund until the member instructs, in writing, that his or her benefit must be transferred to another fund or paid out; 
• funds will have to provide paid-up members with a membership certificate within two months of becoming aware that a member has left the service of a participating employer; and
• the fees and charges payable in respect of paid-up members must be reasonable and comparable to the fees and charges paid by active members of a fund.

This regulation will require that the rules of retirements funds, to which members belong as a condition of employment, be amended to allow for transfers of paid-up benefits into and out of such retirement funds; prohibit payment of any further contributions in respect of paid-up members and prohibit deductions from the retirement savings of paid-up members in respect of risk benefits; allow for retirement and early retirement for paid-up members and ensure that paid-up members are offered retirement benefits counselling before making any decisions. 

Annuity strategy (regulation 39)

Regulation 39 requires the board of each pension fund, pension preservation fund and retirement annuity fund to establish an annuity strategy. The board of a provident fund or provident preservation fund must establish such a strategy only where the rules enable a member to elect an annuity.

Members will be entitled to opt into this annuity strategy by pre-selecting the annuity product in which they wish to enrol.  
The board must determine the fund’s annuity strategy, taking into account, among other things, the level of income payable to retiring members, the level of income protection provided to beneficiaries in terms of the rules of that fund, investment risks, inflation risk and other relevant risks.

Funds will be required to communicate to members the high-level objectives, performance and changes to the income of the various annuity options provided by such funds. In addition, funds will need to ensure that all fees charged on annuities are reasonable and competitive in light of the benefits provided to members.

Living annuities: Living annuities can be paid from the fund or through a fund-owned policy or from a third-party external provider as part of an annuity solution proposed by a fund. Investment choice in respect of each of these living annuities will be limited to four investment portfolios, which must comply with regulations 28 and 37, and drawdown levels on these annuities will need to comply with prescribed standards. Where the living annuity is paid from the fund or through a fund-owned policy, the fund will have the added responsibility of monitoring the sustainability of the rates by which retirees are withdrawing benefits and notifying retirees if their drawdowns are not sustainable. 

In-fund or out-of-fund annuities allowed: A fund’s annuity strategy may include the payment of an annuity either by the fund or by a long-term insurer, subject to prescribed conditions where a long-term insurer is used.

The final Default Regulations clarify that retirement annuity funds and preservation funds are generally exempt from the default investment requirements (regulation 37) and preservation requirements (regulation 38).

Funds must now give careful consideration to their rules and investment policy statement in order to ensure compliance with the Default Regulations.