GENERAL DE INHOUSE PUBLICIDAD

comprises non – contributory, means- tested public benefit program; various pension and provident fund arrangements; and voluntary savings also known as retirement annuities.

Historically, South Africa operated the Pay- As- You- Go (PAYG) system which was also unfunded54, and converted to a fully funded pension scheme just before the end of the regime of the National Party in the early 1990‟s. The current pension fund system allows for privatised arrangements based on occupational and individual forms of cover, with a supplementary means- tested old age pension acting as a safety net. The old-age grant provided by the government55is the main source of income for 75% of the elderly population in retirement (Global Investor 2010).

Private pension funds accounts for over 44% of current world Gross Domestic Product (GDP), and in South Africa, both private and public pension funds account for over 31% and 48% of GDP respectively (Tausch 2010, 3).

The industry consists of numerous defined benefit (DB) and defined contribution (DC) funds (broadly known as pension and provident funds), retirement annuity funds, umbrella funds and preservation funds.

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Pay- as- you- go system refers to a pension system where the contributions made by current employees and employers go directly to finance the pensions of retired workers, it is usually an unfunded system.

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South Africa has a high poverty rate which cuts across the young and old members of the society, exasperated by a high level of unemployment in the country. A large proportion of the country’s budget goes into funding its social welfare system.

This chapter is divided into four main sections; the first section looks at the definition and the regulatory framework of pension funds in South Africa; the next section discusses the various types and the broad categories of pension funds; the third section will examine the regulation of pension fund investments; and the last section will look at the issue of retirement and withdrawal benefits of pension funds, and the taxation of pension funds. 4.2.1 Definition and regulatory framework

Retirement funds are a pre-retirement savings plan, generally designed to provide workers with lump sums at retirement and an income when they are no longer earning a regular income from employment. It is also a tax deferred savings vehicle that allows for the tax-free accumulation of savings for later use as a retirement income

Pension funds may be set up by employers, insurance companies, governments or other institutions.

The Pension Funds Act No. 24 of 1956 (hereafter referred to as the „Act‟) defines retirement fund, or a “pension fund organization” as:

“(a) any association of persons established with the object of providing annuities or lump sums payments for members or former members of such association upon reaching their retirement dates or for the dependants of such members or former members upon the death of such members or former members : or

(b) any business carried out under a scheme or arrangement established with the object of providing annuities or lump sum payments for persons who belong or belonged to the class of persons for whose benefit that scheme or arrangement has been established, when they reach their retirement dates or for dependants of such persons upon the death of those persons” (Botha et al 2009, 865).

The above definition however only refers to occupational schemes and non- occupational schemes56. This definition was amended by the Financial Services Law General Amendment Act No 22 of 2008 to include a third type of pension fund organization, namely:

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Occupational schemes are funds which have been established by an employer for the benefits of its employees, and non- occupational schemes refers to funds where there is no employer /employee relationship such as Retirement Annuity Funds.

“(c) Any association of persons or business carried on under a scheme or arrangement established with the object of receiving, administering, investing and paying benefits, referred to in Section 37C on behalf of beneficiaries‟ payable on the death of more than one member of one or more pension funds” (Ibid ,865).

This amendment refers to beneficiary funds57. 4.2.2 Legal entity

The Act sets the requirements for the registration of a fund and its subsequent recognition by the Registrar of Pension Funds58.

The effect of this recognition is that the fund acquires a legal identity and therefore has the power to enforce its decisions, rules and activities under the law, capable in law of suing and being sued in its own name.

Furthermore, a retirement fund is a trust fund, which means that it is subject to the basic principles of the common law of trusts that specifies important codes of behaviours for the trustees of that trust. The board of trustees therefore has real responsibilities of which the trustees are liable in law for its decisions and actions (Downie 2008, 9).

4.2.3 Governance

Pension fund legislative landscape is quite diverse and comprises different acts and regulations.

They are governed by more than 60 pieces of legislation including but not limited to:

The Pension Funds Act No. 24 of 1956- the first legislation to recognise and supervise pension funds

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Beneficiary funds were established following the debacle associated with Fidentia Asset Management (Pty) Ltd, an unregulated trust fund, in 2007 and the misappropriation of benefits belonging to widows and orphans of deceased mine workers.

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The industry also comprises ‘official funds’, which are not supervised by the ‘Act’, but are established by special laws for employees of the state and certain parastatals, acquire their subsequent recognition and legal status under such special laws.

The Collective Investment Schemes Control Act Exchange Control Regulations

Income Tax Act

Financial Intelligence Centre Act Long Term Insurance Act

Financial Advisory and Intermediary Services Act

Pension funds as trust funds are also required to have their own set of rules commonly referred to as the „Rules of the fund‟.

Regulations governing pension funds are onerous and are forever changing. Some of the seemingly high costs of administration associated with certain pension funds have been attributed to the cost of complying with the numerous and frequently updated regulations.

4.2.4 Fund management

Pension funds in South Africa are mostly privately managed and even public funds such as the Government Employee Pension Funds (GEPF) which is managed by the PIC, a publicly owned company, still operates in a manner comparable to any private company.

According to Hendricks (2008, 12):

“Pension privatisation has taken on a variety of different forms in South Africa. It encompasses the private management not only of employee‟s benefits, but also of a whole range of interlocking private controls over the investment of public funds. In confirming this trend, the Annual Report of the GEPF states quite clearly that the GEPF has grown and now operates very much like any large private sector business”.

There have been numerous concerns in the industry on the future role of private fund managers regarding the proposed National Social Security Fund (NSSF)59. However the National Treasury has come out strongly to reaffirm the private industry‟s continuing participation in the management of pension funds. The NSSF will be discussed in detail in Chapter Five.

59 _{The proposed National Social Security Fund comprises four savings pillar, and will be publicly}

4.2.5 Summary

Retirement funds can either be set up by the employer or can be voluntary, and are required to be registered by the applicable authorities or bodies. The next section looks at the various types and classifications of pension funds albeit under very broad categories.