Occupational pension schemes in South Africa

Occupational pension schemes

What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

Most private retirement plans are either pension or retirement annuity funds (which must use at least two-thirds of retirement capital to pay life-time pensions) or provident funds (which pay retirement benefits in single lump sum amounts).

Most employers are not required by law to enrol their employees in retirement funds but, due to generous tax incentives, at least 50 per cent of formal sector employers do. Employers which employ employees in specified posts in industries in which bargaining councils have been established may be required to enrol those employees in specified occupational retirement funds and to contribute to them in terms of bargaining council agreements. By notice published by the Minister of Labour in the Government Gazette, bargaining council agreements may even be made applicable to employers and employees that are not members of parties to the bargaining councils. The Minister also has the power to issue sectoral determinations in terms of which employers in specific industries may be required to enrol employees employed in specified positions in specific occupational retirement funds. This has been done in relation to cleaners employed in the contract cleaning industry in the northern provinces and in relation to security guards employed in the private sector security industry countrywide. The sectoral determination applicable to the latter is likely to be withdrawn after the parties to the new bargaining council for the private sector security industry have concluded agreements on minimum conditions of employment and other matters canvassed in the applicable sectoral determination.

Fewer than 10 per cent of occupational retirement funds are defined benefit funds. However, approximately 10.1 per cent of formal sector employees who were members of an occupational retirement fund as at December 2016 were members of the Government Employees’ Pension Fund, which is a defined benefit fund and the aggregate value of the assets of which accounted for 40.13 per cent of the aggregate value of all occupational retirement funds in South Africa at that date.

Some defined contribution funds provide for the accrual of benefits on a defined benefits basis for members who were members on the dates on which their defined benefit funds were converted to defined contribution funds. A large proportion of funds are provident funds -that is, funds that pay lump-sum benefits on retirement.

Until recently, contributions to these funds have been subject to less favourable tax treatment than those made to pension funds. It is expected that, within the next few years, contributions to provident funds will again be subject to less favourable tax treatment as policymakers seek to encourage people to save towards pensions, rather than lump-sum benefits.

In the past decade, the shift from ‘stand-alone’ to ‘umbrella’ or ‘multi-employer’ funds as employer funds of choice has gathered pace and is likely to continue. Financial services providers, trade unions and bargaining councils may establish umbrella funds under the Labour Relations Act or by the Minister of Labour in terms of sectoral determinations issued in terms of the Basic Conditions of Employment Act.

What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?

For contributions to, and benefits paid by, an occupational retirement fund to enjoy generous tax treatment in terms of the Income Tax Act, 1962, it must fall within the scope of the definitions of either a ‘pension fund’ or a ‘provident fund’ in that Act. It will not do so unless ‘membership of the fund throughout the period of employment [is] a condition of the employment by the employer of all persons of the class or classes specified [in the registered rules of the fund]’.

If an employer wants to exclude certain employees from participation in its retirement plan, it must ensure that the fund’s rules exclude all employees within the relevant category from membership of the fund. The category may not be determined on a basis that unfairly discriminates on prohibited grounds (eg, race or gender).

Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?

The rules of a fund may provide that an employee must have worked for a participating employer for a specified period before he or she will be eligible for membership of the fund. But once an employee becomes a member of the fund, the PFA provides for prescribed minimum benefits as discussed in the following paragraph.

Funds must provide for prescribed minimum benefits on termination of employment before retirement, regardless of the reasons for such termination. In essence, the prescribed minimum benefit payable by:

• a defined benefit fund is the fair value equivalent of the member’s accrued deferred pension, or the aggregate of the member’s and employer’s contributions, less expenses, adjusted by net investment returns, whichever is the greater; and
• a defined contribution fund is the aggregate of the member’s and employer’s contributions and any other amount credited to the member’s fund account and a pro rata share of any amount standing to the credit of each of the fund’s investment reserve account, and member surplus accounts, less expenses and adjusted by rates of net returns earned on the investment of either the share of the fund’s assets attributable to the member or the fund’s assets as a whole, depending on the fund’s rules.

The vesting of benefits is thus no longer permissible in funds subject to the PFA, but is permissible in other funds.

What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?

South African nationals working overseas may be permitted to join or remain members of a South African regulated retirement fund.

Until March 2017, a portion of a member’s benefit that accrued during periods of his or her foreign service was not subject to taxation. Since then, however, it has become subject to tax if the member becomes resident in South Africa again and withdraws his or her benefit as a result of retirement or otherwise.

Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?

Most occupational retirement funds are funded by contributions made by both employers and employees. Some are funded only by employers and others only by employees.

All occupational retirement funds (other than the exceptions referred to in the answer to question 1) are required to be registered in terms of the PFA. If they were not legal entities before registration (that is, if, for example, they were trusts), upon registration they become legal entities separate from and independent of the participating employers and other sponsors.

What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?

Unless exempted from this provision (and such an exemption is seldom, if ever, granted to a defined benefit fund unless its liabilities are wholly underwritten by a registered insurer), a fund subject to regulation in terms of the PFA must at all times be ‘financially sound’, that is, the aggregate value of its assets must not be less than 90 per cent of the aggregate value of its liabilities.

Likewise, unless exempted, a fund is required to be made subject to statutory actuarial valuation, at intervals not exceeding three years. The report on each such valuation must specify the rates at which contributions must be made to the fund to ensure it remains or becomes financially sound within the inter-valuation period, and must be submitted to the FSCA.

Valuations are required to be performed in accordance with the Standards of Actuarial Practice and Advisory Practice Notes published by the Actuarial Society of South Africa.

What are customary levels of benefits provided to employees participating in private plans?

The vast majority of private sector occupational retirement funds are defined contribution funds, which means that the amounts of the retirement benefits payable by them will depend on the contributions paid, the costs incurred in the governance, management and administration of the funds and the returns earned on the investment of their assets. Most such funds provide in their rules for the payment of additional amounts on permanent disability or death before retirement, but the law does not require this. The funds’ liabilities for these additional amounts may be underwritten or self-insured, whether in whole or in part. Vesting scales are no longer permitted by the PFA.

Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?

Funds paying pensions (which represent a small percentage of private sector occupational retirement funds) are required to increase the amounts of those pensions at intervals not exceeding three years. The minimum amounts by which pensions in payment must be increased are determined in terms of a formula that takes into account increases in rates of inflation and returns earned on the assets backing the funds’ pension liabilities over the periods since individual pensioners have retired and the affordability of such increases.

What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?

Most funds provide in their rules for the payment of a lump-sum benefit on the death of a member before retirement. That benefit will not form part of the member’s deceased estate. Instead, it is required to be shared among the deceased’s dependants or nominees on a basis deemed equitable by the board of the fund, after it has investigated and taken into account their relative financial needs.

When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?

Normal retirement dates are usually determined in terms of contracts of employment read with the rules of the occupational retirement funds to which employees belong. No ‘early retirement penalties’ may be applied.

Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?

The only loans that may be granted by funds subject to regulation and supervision in terms of the PFA are housing loans secured by the pledge of members’ benefits to the funds.

As providers of housing finance are required to comply with the onerous provisions of the National Credit Act, few funds provide housing loans to their members. Many others assist their members to access housing finance by providing housing guarantees to third-party housing finance providers secured by the pledge of those members’ benefits in favour of the funds.

Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?

South African law does not require the preservation of retirement savings on change of employment and most employees ‘cash in’ those savings in such circumstances. This ‘leakage’ results in wholly insufficient provision for retirement. As proposals that preservation be made compulsory have faced considerable resistance from trade unions, the Minister of Finance has recently sought to address the ‘leakage’ problem by publishing regulations that require preservation by default. In other words, unless a person whose employment terminates before retirement instructs his or her occupational retirement fund to pay the amount of his or her retirement savings in the fund to the member, the fund must retain that amount and only pay it to the member when he or she reaches retirement age.

In what circumstances may members transfer their benefits to another pension scheme?

The only circumstances in which a member’s retirement savings may be transferred from an occupational retirement fund to another while the member remains employed by the same employer are:

• on the winding up of the first occupational retirement fund;
• on the termination of the employer’s participation in the first occupational retirement fund, in which case, if the employer commences participation in another occupational retirement fund, the retirement savings of all of its employees who were members of the first fund would usually be transferred to the second; or
• when the employer of members concludes an agreement with a category of those members that members in that category may terminate their membership of their occupational retirement fund and become, instead, members of a different occupational retirement fund in which the employer participates, such as one established by that trade union.

A member whose membership of a fund has terminated on the ending of his or her employment and who has become entitled to the payment of a benefit in terms of the rules of the fund may instruct his or her occupational retirement fund not to pay the benefit to him or her but, instead,to pay it to a preservation fund, a retirement annuity fund or to the occupational retirement fund to which the member will belong in terms of his or her contract of employment with a new employer.

Who is responsible for the investment of plan funds and the sufficiency of investment returns?

Each fund is required to have a board, colloquially referred to as a ‘board of trustees’, although retirement funds do not take the form of trusts. The board is responsible for the investment of the fund’s assets and the appointment of providers of financial products and services to the fund. The boards of funds may delegate investment decision-making powers to licensed asset managers.

Funds subject to regulation in terms of the PFA are required to ensure that, in the investment of their assets, they comply with the asset-spreading limitations and other investment-related restrictions in PFA regulation 28. Defined contribution funds are required in terms of PFA regulation 34 to establish default investment portfolios that are appropriate for the members whose retirement savings will be invested in them, if they do not exercise investment choice and comply with other prescribed requirements.

Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?

Yes, but only if the cost of those enhancements can be provided for using amounts lawfully allocated to ‘employer surplus accounts’ in the books of the fund. Fund assets which are surplus to their requirements but have not been formally allocated to ‘employer surplus accounts’ cannot be used for this purpose.

Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?

Yes. Such funds typically provide benefits of the same nature as broad-based funds but, as high-pay senior executives are seldom exposed to hazardous workplace conditions and are able to afford excellent medical services and treatment, the proportion of the contributions paid to executive-only funds that are needed to be applied in the purchase of permanent disability and premature death cover is relatively low. This means that the amounts of the retirement benefits payable by these funds to their members are likely to be higher than the retirement benefits to which the same members would have been entitled had they belonged to broad-based funds.

How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?

They do not differ.

How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?

They do not differ. In some unionised workplaces collective agreements have been concluded between employers and unions in terms of which union employees are required to belong to a multi-employer or ‘umbrella’ fund established by the unions. All such funds are defined contribution funds and almost all are also provident funds. Non-unionised employees may be allowed to belong to either union funds or other occupational retirement funds identified for the purpose by their employers.

How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?

They do not differ.