Financial institutions bill gives reason for optimism over umbrella funds
Draft law deals with the conduct-related requirements of a wide range of financial institutions, such as asset managers, financial service providers and retirement funds
The retirement industry has seen a number of important shifts over the past few decades, with the one from defined benefit pension funds to defined contribution provident funds probably having the biggest impact. The current shift is to commercial umbrella funds.
The Financial Sector Conduct Authority (FSCA) is committed to the consolidation of retirement funds and most small, medium and increasingly large employers have transferred to, or are in the process of transferring to, commercial umbrella funds, for all the right reasons. However, there is no clear supportive umbrella fund legislation, nor is there industry consensus on the most appropriate and desirable management structures for umbrella funds.
Many market commentators who looked at the Conduct of Financial Institutions Bill for guidance and direction were disappointed to find that it contained no clear reference to these funds. I am optimistic about the possibilities offered by the wording of the bill.
Once promulgated, the bill will deal with the conduct-related requirements of a wide range of financial institutions, such as asset managers and financial service providers as well as retirement funds.
Regarding retirement funds the following provisions of the bill are important:
- Retirement funds will constitute financial institutions and will be defined as product providers. The benefits provided by retirement funds will therefore constitute financial products subject to the approval of the FSCA. Although a fund will be registered and approved and fully compliant with the Pension Funds Act, it will at some point have to register in terms of the act as well. When it does, its benefits will have to comply with a range of new requirements designed to ensure adherence to the fair treatment of customers and the other conduct-related principles.
- It appears to be the intention of the legislators to create a new breed of independent trustees for commercial funds. They will be required to be properly qualified, independent of the sponsor and may even have to be licensed in terms of the act. The trustees nominated by the employer and the members will not be required to register but the FSCA may prescribe conduct standards regulating and imposing requirements on all board members and sponsors of pension funds.
- Sponsors are defined in the bill as “the entity that establishes a pension fund for the benefit of the members of the pension fund”. This definition can be used to distinguish between various types of pension funds such as those established by the state, an employer, an industry (union/bargaining council) and commercial sponsors.
- The definition of “pension fund” in the bill specifically includes state funds and, but for technicalities, should also incorporate the following retirement funds: umbrella (pension and provident) funds, preservation (pension and provident and unclaimed benefit) funds, beneficiary funds and retirement annuity funds. It is therefore possible that retirement funds can be identified and regulated in broad categories.
Categorising retirement funds in this way makes it much easier to see the new requirements that may apply to them in terms of the act. Employer-sponsored funds, for example, are unlikely to be affected by the new requirements relating to “marketing, distribution and post-sale barriers” because they do not perform those activities. Commercial funds do and will have to comply with the new requirements. New requirements issued about “financial products, reporting and communications” may require all funds to adjust their practices and comply in one way or another.
There may be other ways to identify and regulate the various types of retirement funds. One of them is to consider their activities. The guiding principles of the bill allow for funds that are activity-based rather than institution-based; principles-based rather than on narrow rules; risk-based and proportionate; and outcomes-focused.
The significant shift to commercial umbrella funds is coinciding with the introduction of the “twin peaks” regulatory approach. The latter was kick-started with the promulgation of the Financial Sector Regulation Act in 2018. The extent of all these new measures will only be clear once the conduct standards have been published in terms of the act in roughly the next three years.
Much is expected to change. We should for the first time see more dedicated legislation regarding commercial funds such as commercial umbrella funds.
We should also see dedicated requirements for union and bargaining council umbrella funds. These requirements should recognise the commercial or other relationships between the sponsor and the board, and the sponsor and the members.
It will also lay down new requirements regarding the use and application of the latest technology, the protection of data and the way in which funds contact and communicate with members.
• Hanekom is editor and original author of The Manual on SA Retirement Funds.