Voluntary retrenchment plan for public sector workers – Test for Default Pension Fund Regulations
Legalbrief Today recently commented as follows on a Business Day article:
Thousands of public sector workers over the age of 60 will be offered voluntary retrenchment as part of an effort by the government to cut its salary bill. A Business Day report says the decision to offer voluntary severance packages – the first such offer in 20 years – follows the conclusion of a new three-year wage agreement last week that bust the budget by about R30bn.
The Department of Public Service and Administration said the consequence of this was that measures to contain costs had to be taken. These would include: encouraging early retirement by topping up pension funds for those who take the package; reviewing the government’s performance management and incentive systems; and more effective management of allowances. The department said that it was too early to say how many jobs would be affected. It can be assumed though that if the savings target is R30bn over the next three years, the government would need to cut salaries by R10bn a year. This would imply scaling down thousands of jobs. The department and the Treasury are crunching the numbers to calculate what it entails.
This could become a litmus test for the recently published Default Regulations, which require that Pension Funds provide members with a default preservation fund. Those able to retire will first have to seek retirement benefits counselling to enable them to decide on which annuity strategy (living or life annuity) will suit them better.
What does the Default Regulations determine?
On 25 August last year, the minister of finance issued the final Default Regulations to the Pension Funds Act to be effective on 1 September 2017.
Unfortunately, the regulations failed to provide a lead-in period for existing funds that do not currently have default arrangements. ASISA raised this with National Treasury and the Financial Services Board (FSB – now the FSCA). In response the Registrar of Pension Funds issued an exemption for funds registered before 1 March 2018. These funds now need to be compliant by 1 March 2019.
The regulations have three components:
- a default investment strategy;
- a default preservation strategy; and
- a fund annuity strategy.
What does the Default Regulations mean for members?
The Default Regulations to the Pension Funds Act are meant to improve the outcomes for members by ensuring that they get good value for their savings and retire comfortably. Member defaults should be relatively simple, cost-effective and transparent. Trustees are required to help members in the accumulation and retirement phases of their membership of a fund.
The media statement of the National Treasury also stated that “employees will also be required to first seek retirement benefits counselling before they make a decision”.
According to ASISA’s Rosemary Lightbody retirement benefits counselling is compulsory for all funds. She mentioned that it is important to note that it refers to disclosure and explanation of information on risks, cost and available options. It is important to note that this refers to information, not advice.
On withdrawal, members must have access to counselling before being paid a withdrawal benefit or benefit being transferred to another fund. On retirement, members must be given access to counselling not less than 3 months before NRA (Normal Retirement Age) per fund rules. (Where there is no NRA – it is suggested that counselling should be three months before earliest retirement age permitted in fund rules).
Counselling therefore will include the disclosure and explanation, in clear and understandable language, of a fund’s investment portfolios, annuity strategy and how preserved benefits are handled (the risks, costs and charges of these options must be explained).
What does “counselling” mean in the world of the adviser?
Should counselling be seen as an opportunity or threat by financial advisers?”
The definition of counselling determines that the fund decides how information (not advice) is provided to its members. This opens a window of opportunity for advisers to provide advice on where the business can be placed.
Click here to read the ASISA full article.
Click here to read the Treasury’s media statement.
Click here to download a copy of ASISA’s Rosemary Lightbody presentation for more details on the Regulations.