Issue: June 2005
Edutorials
Liberty Life

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:

  1. Pension Funds Act 24 of 1956 (and Regulations & Pension Fund (PF) Circulars)
  2. Income Tax Act 58 of 1962 (and General Notes & Practice Notes)
  3. Financial Institutions (Protection of Funds) Act 28 of 2001
  4. Tax on Retirement Funds Act 38 of 1996
  5. Divorce Amendment Act 7 of 1989
  6. Estate Duty Act 45 of 1955
  7. Constitution of the Republic of South Africa 108 of 1996
  8. Promotion of Equality and Prevention of Unfair Discrimination Act 4 of 2000
  9. Promotion of Access to Information Act 32 of 2000
  10. Administrative Justice Act of 2000

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 fund must primarily provide retirement benefits
  • The rules of the fund must provide that:
    • contributions are based on specified scales
    • membership of the fund is compulsory
    • the employer has no control over the fund’s assets
    • the Commissioner is notified of any amendments to the rules of the fund
    • PAYE/SITE provisions are complied with

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:

  • direct the institution to furnish documents or information relating to the contravention
  • direct the institution to appear before the Registrar for questioning
  • direct the institution to make satisfactory arrangements to satisfy its obligations in terms of the relevant Act.

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 a marriage or customary union recognised in terms of the laws of the Republic
  • in a union recognised as a marriage in accordance with the tenets of any religion
  • in a same-sex or heterosexual union which the Commissioner is satisfied is intended to be permanent.

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:

  • Section 9: The right not to be discriminated against. There may be no unfair direct or indirect discrimination against members on any grounds listed in the Bill of Rights, e.g. race, gender, sex, marital status and sexual orientation.
  • Section 18: The right to freedom of association. The requirement by government that membership of a retirement fund may be compulsory for eligible employees cannot be frustrated or be subjected to an individual’s right to freedom of association.
  • Section 23: The right to fair labour practices. The rules of a retirement fund form part of an employee’s contract of employment and may not constitute an unfair labour practice.
  • Section 25: The right not to be arbitrarily deprived of property. In this context property refers to a member’s right to an interest in a pension fund (the benefit payable by the fund). It is unconstitutional for trustees to withhold payment of a benefit to a member or his beneficiary on unreasonable or arbitrary grounds.
  • Section 32: The right to information. Members can rely on this clause when they require more information, for example in respect of the calculation of benefits or the allocation of death benefits.
  • Section 33: The right to use administrative action. Members have the right to insist that the trustees make lawful, reasonable and procedurally fair decisions. A member has the right to be given written reasons for any decision by the trustees that adversely affects that member’s rights.

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:

  • the equal enjoyment of all rights and freedoms
  • the promotion of equality
  • the prevention of unfair discrimination
  • the protection of human dignity

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.