The Pension Funds Act is to be amended to allow the former spouses of retirement fund members to transfer their share of the fund into their own names at the time of the divorce.
The change is one of a number to be made to the Pension Funds Act in an omnibus amendment bill to be submitted to Parliament shortly.
Currently, any share of retirement savings attributed to a member's ex-spouse must remain in the member's fund until the member retires.
In most cases, the non-member former spouse does not receive any growth on his or her share of the retirement fund, and the member must pay all the tax due on any lump sum withdrawn at retirement.
Jurgen Boyd, the deputy executive in charge of pension funds at the Financial Services Board (FSB), says the current system of reserving the pensions of non-member former spouses in the fund until the member spouse retires has caused significant administration problems for retirement funds, which have to keep track of divorce settlement documents and calculate claims.
The transfer of funds into the name of the non-member former spouse at divorce will resolve many of these problems, including the record-keeping burden on retirement funds and their administrators, he says.
Non-member former spouses will have the choice of withdrawing their share of their ex-spouse's retirement fund in cash, and paying the tax on that withdrawal, or transferring the cash tax-free to a retirement annuity (RA) or preservation fund, he says.
Boyd says the South African Revenue Service still has to determine the tax consequences of cashing in any entitlement.
Retrospective
He says the amendment to the Pension Funds Act will apply retrospectively, so non-member spouses who are already divorced and whose divorce settlement entitlement is recorded with a retirement fund, will be able to choose to either withdraw the cash (less tax) or transfer the money tax-free to an RA or a preservation fund.
The new legislation will also clarify the entitlement of spouses and children to pension benefits payable on the death of a fund member.
The amendment will remove the discretion held by retirement fund trustees to decide whether a spouse or children or both have an entitlement, and how much.
Boyd says the amendments being made to the Act will not affect the overall reform planned for the Act.
None of these changes are of a policy nature, but rather in response to some current operational challenges we are facing.
Other amendments include:
- Tough new powers that will enable the Registrar of Pension Funds to intervene in the management of a delinquent retirement fund without a court order and to determine penalties for non-compliance with
provisions of the Pension Funds Act.
Currently, the registrar has to go through the laborious process of applying for a court order before he can take action to protect the interests of a fund and its members.
- Changes to retirement fund surplus apportionment legislation to provide greater clarity on how to deal with surpluses and to prevent consultants and employers from hiding surpluses away from members.
The changes will include:
* A better definition of what can be held in what are called contingency reserve accounts, particularly
by employers;
* A broader definition of what constitutes the improper use of retirement funds by an employer; and
* A provision that will allow the Registrar of Pension Funds to publish specific requirements for how a surplus must be apportioned.
- Numerous amendments to improve the administration of funds, the liquidation of small funds and the transfer of assets between funds.
Subordinate regulations
Boyd says a number of amendments are also being considered to regulations that are subordinate to the Pension Funds Act. These include:
- The investment regulations. Regulation 28, which sets down parameters for the prudent investment of retirement fund assets, is to be tightened up, limiting the use of derivative instruments and improving disclosure requirements about investments in these instruments.
Funds will not be able to use derivatives to speculate or to leverage investments (effectively borrowing to invest).
This will limit the use of derivatives by retirement funds to protecting any downside risk to which a fund is exposed.
Parameters will also be set on offshore investments.
Finance Minister Trevor Manuel has previously said that foreign investments made by retirement funds should be limited in terms of prudential regulation rather than foreign exchange controls.
- A change to the prescribed rate of interest for housing loans granted by retirement funds to their members. The rate will become variable and be linked to the prime lending rate of the major commercial banks.