The transformation of retirement funds continues apace, with the consequences of the move away from defined benefit funds still being felt.
As a result of the closure of most private sector defined benefit funds to new members, and the encouragement of existing members to join defined contribution funds, most defined benefit funds are finding themselves top heavy, namely, they have very few contributing members, but thousands of pensioners. Added to this, pensioners can often get better pensions outside of the fund.
The result is that many defined benefit funds (and defined contribution pension funds) have been considering allowing pensioners to buy pensions (annuities) from life assurance companies.
But until recently, the process has been dogged by regulations. Any transfer from one fund to another required approval from the Financial Services Board (FSB), under what was called Section 14. The process could be drawn out affecting the durability of quotations from life assurance companies whose annuity quotations are normally only valid for two weeks.
This requirement has now been dropped for the purchase of outside annuities.
Section 14 has also been simplified to permit funds which have already had approval to transfer a member from one fund to another, to transfer any additional outstanding amounts, such as a surplus distribution, without making a further application.
There has been concern about whether there is still a remaining responsibility from the defined benefit fund to guarantee a pension after a member has bought an annuity outside the fund.
The FSB has now set down requirements for rules of funds wishing to allow pensioners to seek their pensions outside the fund. These rule changes apply to both defined benefit and defined contribution pension funds, which provide the pensions for members.
If you are a pensioner, it is in your own interests to ensure you know the details of these rules.
Jeremy Andrew, chief actuary at the FSB, says that even with acceptable rule changes, there is still some uncertainty about whether the fund (and ultimately, I suppose, the employer) is still the final guarantor of the pension. Under current circumstances, only a court would be able to decide whether this is the case.
Andrew says, however, that amendments are currently being drafted to put it beyond doubt that a fund will be absolved of liability.
There are a number of rules that the FSB will require funds to adopt in allowing pensioners to buy annuities from life assurance companies. Among these fund rules are:
* Fund membership will cease and the fund will have no further obligation to the member once the pension has been purchased;
* No annuity can be purchased that would exclude a current beneficiary, such as a spouse, from receiving a pension; and
* You should be given a choice of annuities, but there should be a minimum guarantee period and a provision for subsequent increases in the pension.
The funds will also have to state exactly how they arrive at the capital amount used to buy a pension from an assurance company.
For a defined benefit fund, the fund will either have to pay out a minimum of your actuarial reserve, which must be calculated on the same basis as the previous actuarial calculation, is to ensure the basis is not changed so that you receive less; or the annuity policy purchased must provide the same level of benefits that you currently receive.
For defined contribution fund pensioners, you must receive at least the full value of your individual account (your accumulated retirement savings that remain).
A few extra words of advice.
* There are many different types of annuities; and
* Costs and commissions. Ensure your fund helps you by negotiating packages for groups of members, reducing both costs and, particularly, some of the commissions currently being paid out. I understand the recent transfer of Johannesburg City Council pensioners saw a commission of R2,8 million being paid out!