Issue: June 2005
STATUTORY FRAMEWORK OF RETIREMENT FUNDS
This is the fourth in our series of twelve articles on the boards of trustees of retirement funds, sponsored by Liberty Life to inform trustees in the public interest. Liberty Life does not endeavour to promote, through the content, its own products or services. In previous articles we’ve briefly touched on the Acts that have a bearing on retirement funds. Since trustees need to be aware of these Acts, the most pertinent provisions of these Acts are briefly discussed in this article.
THE RELEVANT ACTS
The Acts that have a direct, and in some instances indirect, impact on retirement funds are:
Pension Funds Act
This is the most important Act that governs retirement funds and its main function is to protect the rights and reasonable expectations of members. It provides for the registration, incorporation, regulation and dissolution of funds.
The Regulations to the Act contain details pertaining to retirement funds. The Financial Services Board, which is the regulator of the financial services industry, issues PF Circulars (or practice notes) from time to time to clarify particular sections of the Pension Funds Act and the Regulations to the Act, or to establish best practices for the industry. These notes do not constitute law as they do not form part of the Pension Funds Act. Whilst they are issued for guidance only, they form an important aspect of administrative pensions law in that the Registrar will not register fund rules or changes to fund rules unless the tenets of PF circulars are adhered to.
Section 7D of the Pension Funds Act provides that it is the duty of trustees to ensure that the rules, practices and procedures of their retirement funds comply with all legislation, including the Constitution.
Income Tax Act
This Act specifies the conditions funds must comply with to enjoy tax concessions as well as the conditions for tax approval, the most important of which are:
The Commissioner of the SA Revenue Service issues general notes and practices from time to time to clarify particular sections of the Income Tax Act and/or best practice for the industry. These notes do not constitute law but noncompliance risks jeopardising the Commissioner’s approval.
Financial Institutions (Protection of Funds) Act
Failure to comply with the provisions of this Act constitutes a criminal offence and a fine and/or 15 years imprisonment can be imposed.
This Act applies to financial institutions (including retirement funds, long-term insurers, unit trust schemes and banks), associated institutions and unregistered persons by virtue of the definition of institution, and imposes on them the typical common law fiduciary duties of good faith and the duty to disclose. It also lays down the conditions for the investment of trust property.
It extends the Registrar’s powers to act against the above persons or entities. The Registrar must exercise his powers by following due processes.
Where the Registrar has reason to believe that an institution is contravening a provision of a relevant Act, he has the power to:
If the Registrar believes that prejudice has occurred or may occur as a result of noncompliance, he may apply to the High Court for a restraining order until a curator has been appointed. The Registrar may apply for the appointment of a curator to take control of and manage the business of a financial institution (or an institution as defined in the Act).
Section 7 of this Act applies to financial institutions only, and allows the Registrar to declare certain practices or methods of conducting business by financial institutions as irregular or undesirable practices/methods of conducting business.
The Act also extends the remedies of the Financial Services Board to protect consumers of financial services.
Tax on Retirement Funds Act
In terms of this Act the gross interest and net rental income earned by retirement funds are taxed. The current rate of tax is 18%.
Divorce Amendment Act
This Act provides for the splitting of a member’s pension interest on divorce. The portion of the pension interest allocated to the non-member spouse must be specified in the divorce order and must be endorsed against the fund’s records.
This will only be paid out to the non-member spouse when the benefit accrues to the member (i.e. on withdrawal from the fund, retirement, death or liquidation of the fund).
The member is liable for tax on the full benefit but has the right to recover the tax on the nonmember spouse’s portion from the non-member spouse.
Estate Duty Act
This Act excludes annuities from estate duty. This exemption does not apply to benefits payable other than by way of an annuity; however, lump sum benefits left to a surviving spouse will not attract estate duty.
The definition of spouse was amended in December 2001 to include a person who at the time of death of the deceased was the partner of the deceased:
In the absence of proof to the contrary a marriage or union referred to above will be deemed to be out of community of property.
The amendment was aimed at recognising same-sex and heterosexual unions (i.e. common-law spouses) where the partners live together in a permanent relationship.
Constitution of the Republic of South Africa
The Constitution is the supreme law of South Africa and as such all legislation and the rules of a fund are subject to the Constitution.
As mentioned earlier, Section 7D of the Pension Funds Act provides that it is the duty of trustees to ensure that the rules, practices and procedures of their retirement funds comply with the Constitution. Trustees must therefore avoid discriminatory provisions in the rules of their funds, for example different benefits for males and females. Such practices may be regarded as unconstitutional and the trustees can be held liable for maladministration of the fund.
Constitutional rights that specifically apply to retirement funds are:
Promotion of Equality and Prevention of Unfair Discrimination Act
The main objects of the Act are to give effect to the equality provisions in the Constitution, and more in particular:
Promotion of Access to Information Act
Trustees have a statutory duty to communicate adequate and appropriate information to members, whereas members have the right to obtain copies of and inspect fund documents such as the rules and the last revenue account.
The Promotion of Access to Information Act is aimed at giving effect to the constitutional right of access to any information held by the State or by another person (e.g. a retirement fund) that is required for the exercise or protection of that right.
Although this Act strengthens members’ constitutional right to access information, this right is limited to information required for the purpose of exercising or protecting any right, such as the correct payment of a benefit or exercising a particular option in terms of the rules of the fund.
Administrative Justice Act
The purpose of this Act is to give effect to the right (e.g. on the part of trustees) to administrative action that is lawful, reasonable and procedurally fair and to the right to written reasons for administrative action.