New default regulations to the Pension Funds Act will be implemented from 1 March 2019.
This is according to Carlyle Field, a partner at law firm Shepstone Wylie, who notes that retirement funds are scrambling to ensure that they will be compliant by that date.
Field states that the new regulations will effectively introduce ‘three key pillars’ to the Act.
- The default investment portfolio;
- Default preservation and portability;
- An annuity strategy.
Below, Field outlined what the changes will mean and how they will impact members of these funds.
The default investment portfolio(s)
When a member joins a defined contribution pension or provident fund, their savings will be automatically invested in a default portfolio that is designed to be cost-effective and appropriate, unless and until the member opts out and chooses a different portfolio.
“Many funds already offer a default investment portfolio or only have one portfolio (and so this change will not affect too many members) however this will now be a legislative requirement for all defined contribution pension and provident funds,” said Field.
The default preservation and portability
When a member leaves employment before retirement, the fund must automatically preserve the member’s benefit in the fund and convert the member to a “paid-up” member.
The benefit will only be paid out to the member or transferred to another fund selected by the member when the fund has been specifically instructed to do so by the member (so the member can still chose to receive payment of their benefit).
“The purpose of this regulation is to encourage the preservation of the benefits payable to a member on leaving a fund in a cost-effective and tax neutral manner, rather than those benefits being withdrawn (and spent) by the member,” said Field.
“Preservation in the fund is designed to be more cost-effective than traditional preservation funds have offered. It should be noted that this regulation will not prevent members from accessing their benefits on leaving service prior to retirement if they are adamant that they would like to do so.”
The annuity strategy
When a member reaches retirement, he or she will be offered the option to secure an annuity (regular monthly pension income) in terms of the annuity strategy that the board of trustees has determined to be the most cost-effective and appropriate.
The choice of annuity (or annuities) remains that of the retiring member.
“The fund’s annuity strategy is designed to assist members who lack expertise, are unsure what to do with their money on retirement and/or cannot access suitable financial advisors regarding an appropriate retirement savings vehicle,” said Field.