banking and finance
BY Arabella Bennett AND Leigh Sedice
South Africa: Regulator’s response to the impact of COVID-19 on the retirement funds industry
The Financial Sector Conduct Authority (“FSCA”) has been proactive in responding to the threats posed to the retirement funds industry by the infectious disease caused by the coronavirus (“COVID-19”) pandemic affecting South Africa.
In recent days, the FSCA has made two noteworthy pronouncements for the retirement funds sector in an effort to mitigate potential exposures that the COVID-19 pandemic is likely to have on the retirement funds industry.
Below, we explain the impact of the FSCA’s recent publications.
Call for occupational funds to ensure that their rules regulate the impact of COVID-19 on contributions
On 26 March 2020, the FSCA published Communication 11 of 2020 (RF), in which it stated that the FSCA was mindful of employers and employees who may become financially distressed in the light of unprecedented economic slowdown and consequent financial challenges that COVID-19 presents. These challenges may affect the ability of employers and employees to comply with the payment of contributions as required in terms of section 13A of the Pension Funds Act, 1956. Section 13A requires that all employer and member contributions payable to a fund in terms of its rules must be paid no later than seven days after the end of each applicable month.
To manage the abovementioned key ramification of COVID-19 for the retirement funds industry, the FSCA has called on registered pension and provident funds to consider the provisions of their existing rules and where necessary, submit urgent rule amendments dealing with the potential part- or non-payment of contributions.
The FSCA has provided the following guidance in relation to employers who may be unable to pay contributions in full or in part, on behalf of their employees:
- Emphasis is given to the need for the boards of retirement funds to apply the relevant rules that most funds should have in place to address certain scenarios that have an impact on contributions. These include rules that provide for temporary absence from work (with or without pay), breaks in service, postponement of contribution payments and/or reduction in pensionable service provisions.
- Where employers make formal requests to funds for a suspension or reduction of contributions, the boards of funds are required to consider such requests and apply the relevant rules, taking into account the particular circumstances of the employer.
- Funds must attempt to ensure that full risk benefit premiums continue to be paid in respect of affected members, in order to ensure that fund risk benefits may continue to be provided.
- Where funds do not have rules in place which address these scenarios, appropriate rule amendments must be submitted urgently, following engagement with the relevant employer(s). Such rule amendments should specify an effective date based on the agreement between the employer(s) and the fund and the submission should not include amendments in respect of any unrelated matter.
- Funds should keep a proper record of affected members, which must be produced upon request by the FSCA.
- Funds must inform affected members of employers’ requests to reduce or suspend contributions and of any proposed rule amendments, within 30 days of receipt of such request or decision.
- The FSCA has consulted with the South African Revenue Service (SARS), which has advised that any such reduction or cessation of employer/member contributions will not jeopardise the income tax approval status of the provident funds and pension funds concerned.
The FSCA’s expectations of retirement funds in the wake of COVID-19
On 30 March 2020 the FSCA published FSCA Communication 12 of 2020 (General) in which it set out the measures that the FSCA expects retirement funds (and other regulated entities in the financial sector) to take in response to the COVID-19 pandemic.
A further principal concern of the FSCA is that the COVID-19 pandemic heightens the risk that financial institutions, such as retirement funds, may not treat their customers fairly. The FSCA also emphasised that the uncertainty and market volatility caused by the pandemic is likely to shape customer behaviour and may lead to poor decision-making that leaves South Africans financially vulnerable. In the retirement space, the main concern is that fund members prematurely withdraw their retirement benefits.
The regulator requests financial institutions to consider relief and support options, especially for vulnerable customers, and warns institutions that profiteering off those who are vulnerable and suffering as a result of the effects of COVID-19 will not be tolerated.
It is expected that financial institutions review their business continuity plans and assess the impact of the pandemic on their operational abilities. Clear and continuous communication to all internal and external stakeholders of the current business continuity plans, processes and procedures is expected. Service delivery should not be interrupted while bearing in mind the overall responsibility of the country and institutions to keep all individuals safe and create a safe working environment. In the event that any major risks are identified that could materially impact fair outcomes to customers, these should be communicated to the FSCA immediately.
Board members of retirement funds are tasked with keeping abreast of the risks that COVID-19 poses to their funds and are expected to take the steps necessary to minimise the identified risks. Communication of COVID-19’s impact on the risk management strategies of the fund to members is expected to be implemented in a manner that promotes calm and minimises the risk of early fund withdrawals.
Due diligence, monitoring and control over all third parties should be maintained. The frequency of reporting and the analysis of trends is critical during this period. Benefit administrators are obliged to inform all relevant stakeholders, including retirement funds, of any changes to their processes and procedures. Investment providers, in turn, are expected to manage liquidity risks while enabling investments that benefit investors and the economy. Collective Investment Scheme (CIS) managers are requested to consult with the FSCA regarding significant outflows of their portfolios that may negatively affect remaining investors.
In addition, the FSCA expects complaint management processes and turn-around times on resolving complaints not to be compromised. Accurate reporting of complaints for trend analysis, of the root causes of complaints, and the regular review of the effectiveness of the ability of business continuity plans to mitigate against identified risks is critical.
Lastly, financial institutions are explicitly required to consider, and take steps to counter, cyber-risk and data breach exposures due to the widespread roll-out of remote working capabilities. Members of retirement funds (and other consumers) should be regularly updated and warned of attacks and scams with which they may be targeted in an effort to reduce the risk of them suffering financial losses.
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COVID-19, also known as the Coronavirus, is an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that was declared a pandemic by the World Health Organization on 11 March 2020. The disease has since been reported in over 190 countries.
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