The Financial Services Board (FSB) has warned that it will be on the lookout for the manipulation of figures or attempts by retirement fund trustees to cheat members, former members and pensioners out of a fair share of any pension fund surplus.
Addressing members of the Pension Lawyers' Association in Johannesburg and Cape Town last week, Mike Codron, the FSB's chief actuary, said trustees will have to follow the requirements of the Pension Funds Second Amendment Act and apply their minds to their surplus apportionment schemes.
A surplus apportionment scheme is a detailed plan drawn up by the trustees of a fund, outlining how surpluses are to be distributed. The scheme must be approved by the Registrar of Pension Funds at the FSB .
Some pension funds have a surplus mainly because the actual experience of the fund's finances turned out differently to the actuary's predictions. Two of the major reasons for surpluses building up in funds include:
- Better-than-expected investment returns; and
- Instances of people leaving the fund with less than their full share.
Although there are no accurate figures, Codron says about 2 000 of the 16 000-odd retirement funds in South Africa are expected to have a surplus to distribute.
Surplus apportionment date
The Pension Funds Act requires that retirement funds have valuations every three years. If a fund has a surplus, its first valuation after the implementation of the Pension Funds Second Amendment Act is the fund's surplus apportionment date.
By November 30, all retirement funds, except those that have applied for an extension, will have passed their surplus apportionment date and will have to do an actuarial valuation of the fund.
The valuation, which is done by the fund's actuary, is to ensure that the fund is financially sound and will also show if a fund has a surplus.
When valuing a fund, the fund's actuary makes assumptions to calculate the fund's liabilities (the pensions that members are to receive). Codron says that any changes from the assumptions used in a fund's previous valuation must be justified, because a change in assumptions may be used to hide a surplus.
Many funds have not yet submitted their statutory valuations to the Registrar of Pension Funds, because they are waiting for further information on the surplus distribution, but many other funds have not even applied for an exemption from performing these valuations, he says.
Codron says the FSB may fine those funds that do not submit valuation reports and fail to apply for an exemption or for permission to submit a late valuation in time.
Even if a fund has been exempted from having to submit a statutory valuations in the past, it is still required to submit a surplus apportionment scheme to the FSB. Codron says this is to make sure that all funds with surpluses do, in fact, distribute them.
He says there have been delays in issuing regulations and board notices to the industry on how to implement the legislation, but appealed to the
industry to try get its surplus apportionment schemes ready in time.
Legislation on surplus apportionment was introduced in December 2001 and the accompanying regulations were released in April 2003.
The registrar released circulars aimed at clarifying legislation in June and the final step will be the issue of a guidance note to fund actuaries by the Actuarial Society of South Africa.
Oversights
Codron says he is aware of certain oversights in the Act and the FSB will attempt to correct these oversights in an amendment to the Act.
A full rewrite of the Pension Funds Act of 1956 is under way and due to be discussed at a workshop in October.
One of the oversights in the Act relates to the fact that at the surplus apportionment date, a fund must consider the surplus available, and if it does not have sufficient assets, the fund may reduce the increases to pensioners to avoid putting the fund in deficit. However, the fund is required to look at these increases every three years, but at these future dates, the fund is not allowed to reduce the minimum increase if the assets are not sufficient and so the fund would then go into deficit. This was not intended.
The Act requires that minimum withdrawal benefits be paid to members who leave retirement funds, but refers to pensions only and not to lump-sum payouts.
The intention of the Act was to ensure you get a minimum withdrawal benefit based on lump sums as well as on pensions when you retire.
There are concerns that funds will try to hide surpluses by creating and/or padding contingency reserve accounts, which are to cover unforeseen future liabilities. Codron warned that the FSB would look carefully at the use of reserve accounts.
If an employer misuses any portion of the surplus, it will be required to pay it back. Furthermore, the FSB also expects investment returns on the misused portion to be taken into account, Codron says.
He says some employers are looking for loopholes in the law in an attempt to do members and former members out of their due. The FSB will strongly oppose such attempts.
Excessive charges to funds will also be scrutinised. A fund may need its administrator to assist in constructing records of former members. In one case, an administrator asked for R91 000 for this service, while another wanted to charge the fund R2.5 million. Codron says such a discrepancy in these charges is unacceptable.