The FSCA’s “Regulation Plan: 1 April 2022 to 31 March 2025”, which was released last week, highlighted certain high-priority areas that it aims to address in this period.
Mark Bechard of Moonstone reports as follows:
The FSCA said the treatment of lost accounts and unclaimed assets within the financial sector “remains a significant concern”. In the retirement sector alone, unclaimed assets stood at R47.3 billion in 2021.
To mitigate risks relating to lost accounts and unclaimed assets more effectively, the FSCA will develop policy proposals surrounding the treatment of lost accounts and unclaimed assets, with the goal of proposing legislative interventions through a conduct standard.
The policy work will take place this year and in 2023. Formal draft legislative proposals are only expected to be published during the first quarter of 2024 and finalised during mid-2025.
This is, of course, not a new dilemma.
A recent article by Webber Wentzel indicates that retirement funds in the South African mining industry are a major contributor to the R47.3 billion to which the FSCA refers. Idle trade union funds, in particular, are responsible for this situation.
“Unclaimed benefits have long been a problem for the FSCA, and although draft legislation is currently under consideration which will result in stricter governance of retirement funds, government has yet to address this particular issue.”
We reported on the successful efforts by Asisa members of tracing beneficiaries and paying a whopping R22.7bn in 2021 to beneficiaries of 77 790 risk policies, savings and investment policies, annuity polices and accounts in collective investment scheme portfolios.
However, another R23.8bn of assets across 60 837 policies and investment accounts were unclaimed during 2021 because the legal owners had not been found. As a result, unclaimed assets held on behalf of policyholders, beneficiaries, investors and heirs amounted to R33.5bn at the end of December 2021.
The information below is extracted from the Webber Wentzel article.
The most common retirement funding vehicles in the mining industry are large umbrella funds and trade union funds. When employees start work, they have the option of joining the employer’s designated fund or a trade union fund. While employed at that company, employees cannot change their minds later and opt for the other fund.
Trade union funds are popular, particularly among lower-income earners, such as mineworkers. They believe that a trade union represents their best interests in the employment relationship and may also represent their best interests in their retirement. They may also believe that it makes more sense to join a union-affiliated fund, as they are already paying membership fees to the union.
Trade union funds fall under the same laws and regulations as other retirement funds and are therefore regulated by the FSCA.
Most trade union funds are either self-administered (they have been approved by the FSCA to administer the fund themselves) or are administered by large, approved administration companies. This ought to suggest that, apart from some minor issues, these funds should be free from major issues. Unfortunately, this is not the case.
Unclaimed benefits include withdrawal benefits (usually as a result of termination of employment), death benefits (where a member has passed away and the beneficiary has not claimed the benefit), surplus benefits (where the fund has had a surplus distribution to members) and retirement benefits (as a result of members retiring and not claiming their benefit).
According to the FSCA, although many funds have unclaimed benefits, more than 80% of the R47bn resides in trade union funds, with the majority in just two funds, one of which is a mining industry fund. Most individuals who own these unclaimed benefits are low-income mineworkers.
The FSCA, as well as most large funds and administrators, has established procedures for claiming unclaimed benefits and tracing members, but the number of unclaimed benefits continues to increase.
There may be several explanations why this may be a particular problem within the mining industry.
First, there seems to be poor record-keeping by many funds and employers. Often, the fund and employer do not regularly update the employee’s/member’s personal information, with the effect that it becomes outdated.
Second, a lack of knowledge and literacy about retirement funds among low-income earners contributes significantly to this problem. Many of these workers may not be sufficiently literate to understand the consequences of failing to update their information regularly with their employer or trade union fund, and they may not receive or understand communication about the fund.
Finally, although this issue is not unique to trade union funds, the tracing of members is a slow and protracted process, seldom yielding successful results. Most funds attempt to trace members every six months, using the same out-of-date information they have always had. Naturally, this results in unsuccessful traces.
The result of the above is that members and beneficiaries remain untraced, benefits remain unclaimed, and the pot of unclaimed benefits continues to grow. This is, however, not to the disadvantage of the funds themselves. The FSCA stated that “asset managers and fund administrators continue to earn fees from these unclaimed assets”.
It has long been the view of the regulator that employers should be active participants in retirement funds, whatever type of fund those might be, including a trade union fund. Active participation by the employer would ensure (among other things) that:
- Employee information is regularly updated;
- Unclaimed benefits are monitored regularly, together with fees charged by service providers for administering or managing the unclaimed benefits; and
- Employees receive communications about their fund and benefits in a manner and language they can understand.
While the FSCA’s Regulation Plan for the next three years will compel an employer to play a more active role in the governance of funds, it will not solve the dilemma of the untraceable fund members and beneficiaries.
The success achieved by Asisa’s members could provide the authorities with the necessary guidelines on how to proceed, but the dilemma for the masses of missing low-income workers appears to be insoluble.