Hot Topics I 2018

KEEPING UP WITH LEGISLATION

ALEXANDER FORBES

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Contents Page

Twin peaks 3

Regulatory round-up, including recent directives and notices 9

Default regulations 15

The draft taxation laws amendment bill 2018 28

Policyholder protection rules 31

Financial Sector Charter 37

Protection of Personal Information Act 41

Medical aid and healthcare 47

Member Watch™ 51

Michael Prinsloo

Fiona Rollason

Vickie Lange

Donna Ellington

Sandile Maphalala

Belinda Sullivan

People we can thank for writing this workbook are:

The issues surrounding trustee duties are complex and depend entirely on the particular circumstances facing each fund. Trustees must in all cases take their own decision on issues based on their particular fund’s circumstances at the time. It is for this reason that trustees can’t simply rely on what we’ve discussed here today, neither should they regard our discussions as advice. Trustees should get specific assistance where they are uncertain of the consequences or reasonableness of any contemplated action.

The information in this document belongs to Alexander Forbes. You may not copy, distribute or modify any part of this document without the express written permission of Alexander Forbes. Alexander Forbes Financial Services is a licensed financial services provider (FSP 1177). Taking action based on information providedWhile care has been taken to present correct information, Alexander Forbes and its directors, officers and employees take no responsibility for any actions taken based on this information, all of which require financial advice.

For further details of our services please contact our office in Johannesburg:Telephone: +27 (0)11 269 1800Fax: +27 (0)11 269 1111Email: info@aforbes.co.za

Twin peaks1

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What is the latest on twin peaks – including the Financial Sector Regulation Act and the Insurance Act?

A twin peaks regulatory environment means that there are two regulators for the financial sector, as is the case in South Africa.

What’s the latest on twin peaks, including the Financial Sector Regulation Act and the Insurance Act?

Financial Sector Conduct Authority

Focuses on the market conduct of financial institutions to make sure that financial institutions treat their customers fairly

Prudential Authority

Focuses on the financial soundness and stability of financial institutions

The legislation that established these two regulators is called the Financial Sector Regulation Act.

Financial Sector Regulation Act

The Financial Sector Regulation Act (FSRA) will be the primary law that applies to all financial institutions.

The two regulators have the power to enforce all financial sector legislation, including pension law and insurance laws.

FSCA

FSB

1 APRIL

2018

promote the fair treatment of customers

support the efficiency of financial markets

assist in maintaining financial stability

support the financial inclusion and transformation of the financial sector

The FSCA will:

The FSCA went live on 1 April 2018 and the Financial Services Board (FSB) no longer exists.

Over the next few years, the entire industry will go through a transition. Some acts, or pieces of them, will be repealed. The FSRA will be implemented in stages, with some sections already having come into effect and others only being implemented next year.

Financial Sector Conduct Authority

Of particular interest to funds is the Financial Sector Conduct Authority (FSCA) since it’s the authority that will be the primary regulator for funds for at least the next three years and will focus on the market conduct of funds.

Twin peaks

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Impact on retirement funds

The FSRA has introduced changes to the Pension Funds Act (PFA).

There are different implementation dates for different amendments to the FPA.

The changes include:

From 1 April 2018

The following new definitions have been added to the PFA:

■ Authority This is the Financial Sector Conduct Authority

■ Conduct standard This is a document issued by the FSCA setting out market conduct requirements for financial institutions

■ FSR Act The new legislation establishing the twin peaks regulatory framework

■ Joint standard This is a document issued by both the FSCA and the Prudential Authority

■ Prudential standard This is a document issued by the Prudential Authority setting out financial soundness or stability requirements for financial institutions

■ Register This is a website containing all laws, standards, cases, rulings and other regulatory documents that apply to financial institutions.

■ Tribunal The Financial Sector Tribunal, which will hear appeal cases.

The following definitions have been deleted from the PFA:

■ Financial Services Board ■ Prescribed ■ Registrar

All references in the PFA to registrar and FSB must be read as a reference to the authority.

The FSCA will have powers under the PFA and the FSRA.

Matters will no longer be prescribed by regulation or in a government gazette but will be prescribed in a conduct standard, joint standard or prudential standard.

Appeals against decisions of the FSB will be read as a reconsideration of the authority’s decision by the tribunal.

The authority will be able to order than an investigation or audit be carried out on the financial position of a fund, without requiring an inspection or investigation to be done first.

The authority can, through a directive, direct a fund to amend its rules relating to trustees if the fund is not financially sound or is not being managed in line with the PFA and the fund rules.

The Pension Funds Adjudicator will be a statutory ombud scheme under the FSRA.

What has been implemented at the FSCA?

A transitional committee has been established to lead the FSCA, under the chair of Abel Sithole. This committee will stay in place until the new executive committee is established, which will include the appointment of a Commissioner and Deputy Commissioner, as envisaged under the FSRA.

All communication (letters, website, decisions) will be in the name of the FSCA.

The FSB Appeal Board has been replaced by the Financial Sector Tribunal, which will make decisions where an entity is aggrieved by a decision of the FSCA. The tribunal will take over existing cases being heard by the FSB Appeal Board. Also, appeals against the decision of the Pension Funds Adjudicator can now be referred to the Financial Sector Tribunal, rather than having to lodge an appeal at the high court.

Future changes by the FSCA

In the next 12 months, the FSCA will establish a new organisational structure and upskill or recruit employees to ensure enhanced analytical, technical and research capabilities.

The FSCA will publish their three-year regulatory strategy, which will provide useful insight into what the FSCA will be focussing on.

Memoranda of understanding will be issued to coordinate and clarify responsibilities between the FSCA, the Prudential Authority, the South African Reserve Bank and the National Credit Regulator.

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From 1 October 2018

Deleting the sections dealing with the registrar’s powers to extend time periods and to issue directives and the requirement to issue an annual report.

The Pension Funds Adjudicator may be designated complaints to attend to under the FSRA.

The Pension Funds Adjudicator must:

■ apply, where appropriate, principles of equity■ have regard to contractual arrangements or legal

relationships between a complaint and financial institution

■ have regard to the Pension Funds Act■ act in a procedurally fair, economical and expeditious

manner

We anticipated that these principles would result in changes in the rulings issued by the Pension Funds Adjudicator. The adjudicator had said that taking fairness into account would result in a more favourable outcome to complainants, rather than strictly applying the terms of a contract or rules that apply to that complainant.

In a recent case of De Beer v Amplats Officials Pension Fund and Alexander Forbes, the Pension Funds Adjudicator dealt with the late payment of a death benefit. The interesting aspect of this case was the compensation that Alexander Forbes was ordered to pay because of an administrative error.

After the fund pensioner passed away in 2008, his family was told in 2009 there was no further money in the fund. It later came to light that there was an amount remaining in the fund that was due to the late pensioner’s estate, as the fund did allow for lump-sum payments on the death of a pensioner.

It was an administrative error that resulted in the miscommunication in 2009. This error was picked up in February 2017 when an audit was performed. Payment was made in March 2018.

The complainant (the deceased pensioner’s grandson) complained that it took 9 years to detect the fund benefit owing to the estate and once it was detected, the further delay in paying out the benefit.

The Pension Funds Adjudicator found that the fund had paid the correct benefit to the estate. But the Pension Funds Adjudicator said that she has the power to issue ‘compensatory damage in order to make its displeasure with the conduct of a body if circumstances fit’.

Alexander Forbes was ordered to pay R10 000 to the complainant as compensation for the miscommunication and administrative error resulting in the extraordinary delay in paying the benefit and prejudicing the beneficiaries.

COMMENT

This case highlights what we believe will be a growing trend of awards being made against service providers and funds. This is in line with market conduct principles and treating customers fairly.

From 1 April 2019

Prescribed fees in the PFA will be set out in the FSRA.

Deleting the section dealing with the registrar’s powers to prescribe matters, for example fees payable.

COMMENT

All fund contracts, policies and rules will need to be reviewed and, where applicable, amended over time to reflect these changes.

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Prudential Authority

The Prudential Authority (PA) is responsible for regulating:

■ banks■ insurers■ cooperative financial institutions■ financial conglomerates ■ certain market infrastructures

The PA is a juristic person operating within the administration of the South African Reserve Bank.

The PA will help the South African Reserve Bank to:

■ maintain financial stability■ cooperate and collaborate with other regulators■ make regulatory instruments (prudential standards and

joint standards)■ gather information ■ carry out supervisory onsite inspections and

investigations■ take enforcement action (directives, leniency

agreements, enforceable undertakings)■ issue administrative penalties■ regulate significant owners of financial institutions ■ regulate and supervise financial conglomerates The PA has already released many standards dealing with the financial soundness and governance and operational standards of institutions.

Retirement funds are not currently regulated by the PA, but over time certain aspects of fund governance may move from the FSCA to the PA. Example of activities that may shift include financial statements and actuarial valuations. However, the PA does regulate insurers and many funds use insurers for their insured death benefits or for investment policies.

The Alexander Forbes group consists of many entities with different types of licences, including long-term and short-term insurance, FAIS and Section 13 administration licences. Given that Alexander Forbes has long-term insurance licences, the entire Alexander Forbes group will be regulated as an ‘insurance group” going forward.

So, even Alexander Forbes companies that don’t have a long-term insurance licence must comply with the PA requirements.

As far as insurers are concerned, the PA has issued the following governance and operational standards:

The Insurance Act (IA) has resulted in changes to the:

■ Long-term Insurance Act (LTIA)■ Short-term Insurance Act (STIA) ■ Policyholder Protection Rules (PPR) The Policyholder Protection Rules provide a ‘treating customers fairly’ framework for insurers in relation to their customers.

As of 1 July 2018, every registered insurer that was registered as a long-term insurer or a short-term insurer under the LTIA or STIA before 1 July 2018 continues to exist as an insurer, as if it had been licensed under the IA.

Over time, all existing registrations granted to insurers under the LTIA and STIA must be converted to licences under the IA.

During the transition period, the LTIA and the STIA will govern market conduct while the IA will apply from a prudential point of view, to all insurers.

We have set out above the prudential standards already issued by the PA in respect of insurers.

Insurance Act

1 Prudential Standard GOI 1 Framework for governance and operational

standards for insurers

2 Prudential Standard GOI 2 Guidance Note 2.1 corporate culture

3 Prudential Standard GOI 2 Governance of insurers

4 Prudential Standard GOI 3 Risk management and internal controls

5 Prudential Standard GOI 3.1 Own risk and solvency assessment

6 Prudential Standard GOI 3.2 Business continuity management

7 Prudential Standard GOI 3.3 Reinsurance and other forms of risk transfer by

insurers

8 Prudential Standard GOI 4 Fitness and propriety

9 Prudential Standard GOI 5 Outsourcing

10 Prudential Standard GOI 6 Transfers of business

11 Prudential Standard GOI 7 Miscellaneous regulatory requirements

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What’s next for funds?The FSRA establishes the two regulators and gives them powers. In essence, this legislation tells us what

to expect from the regulators and governs the regulators.

Next will be legislation called the Conduct of Financial Institutions Act. It will govern financial institutions. This will tell us exactly what is expected from funds and service providers, in respect of market conduct

principles and treating customers fairly. However, no draft has been issued for comment yet.

ALEXANDER FORBES

Regulatory round-up, including recent directives and notices2

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In the last twelve months, the FSCA (and formerly the FSB) has issued many documents for comment and some of these have been finalised.

We will cover a few of them in this question. Draft documents that we’ve commented on but which we won’t cover in this article include:

■ TCF and complaints management■ sustainability reporting■ smooth-bonus portfolios■ changes to annual financial statements ■ communication on benefit projections

Notice 1 of 2018

From 1 March 2018 the administrative penalty for the failure to submit to the regulator information requested in terms of the Pension Funds Act increased from R1 000 to R4 000 for each day that the non-compliance continues.

The penalty can be imposed on a fund, administrator or third party. This would be for the failure to submit to the regulator (within a period specified in the act or in a directive or condition imposed by the regulator in terms of the PFA) any of the following that are required in the PFA to be submitted:

The PFA sets out a process to be followed when a penalty is to be imposed. Before imposing a penalty, the regulator must, in writing:

■ inform the administrator, pension fund or third party of their intention to impose a penalty

■ specify the particulars of the alleged non-compliance■ provide reasons for the penalty intended to be imposed■ specify the amount of the penalty intended to be

imposed■ invite interested persons to make representations within

a period specified by the regulator

For example, a closing fund may request the penalty be reduced or waived based on its own specific circumstances.

If the regulator, after consideration of representations made, decides to impose an administrative penalty, the administrator, pension fund or third party must be informed in writing that it may, within 30 days after the date of the notice, pay the penalty or lodge an appeal to the Financial Services Tribunal.

If an administrator, pension fund or third party fails to pay an administrative penalty, the regulator can institute civil action to recover the penalty amount.

COMMENT

The R4 000 a day is the maximum that can be levied. The regulator has the discretion to determine the amount to be charged depending on the circumstances of the non-compliance. Funds must ensure all documents are submitted in time but if there is a genuine reason for the delay then an application for extension can be submitted to the regulator before the due date of the document.

This would include, for example, annual financial statements, section 14 transfer applications and valuation reports.

other document or information

returnreportstatementscheme

Regulatory round-up, including recent directives and notices

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Guidance Note 1 of 2018

Submission of unclaimed benefit data to the FSCA

Funds have to submit quarterly reports regarding unclaimed benefits (last done in 2015), with the reports including new unclaimed benefits and benefits paid since the previous upload of data. The guidance note has a template which sets out what information the fund should submit. The report must be submitted electronically.

The report was due before or on 30 September 2018 and at least once every three months after that to ensure that the data remains valid and current. Alexander Forbes did liaise with the regulator regarding the format of the submissions and the 30 September deadline was met by funds administered by Alexander Forbes.

The FSCA has implemented an unclaimed benefit fund search engine on their website. The public can access that website and see if there is any fund or administrator they should contact in case that fund or administrator may have an unclaimed benefit that they can claim. The public can also telephone, SMS, fax or visit the FSCA to make enquiries.

Information submitted by funds and administrators is helpful in directing the public to the correct fund or administrator to make enquiries about any unclaimed benefits that may be due to them. The FSCA is very conscious about fraud and the protection of personal information. The FSCA will not disclose personal information on their website.

Directive 8 Prohibition on the acceptance of gratification

Directive 8 was issued earlier this year. The directive imposes conditions to combat and prevent bribery and corrupt conduct by and of:

■ principal officers■ deputy principal officers■ board members■ employees of retirement funds■ valuators■ auditors■ administrators■ employees of administrators ■ other officers or other service providers to funds,

including investment managers and investment advisers

The following individuals must not be involved in any conduct which constitutes bribery, fraud or corruption:

■ board member■ principal officer■ deputy principal officer■ employee of a fund■ auditor■ valuator■ administrator■ employee of an administrator or service provider to a

fund

That type of conduct would have a bearing on that person’s fitness and propriety to hold office or provide a service.

At an industry conference earlier this year, the FSCA explained why the FSCA issued Directive 8 by giving some examples of poor behaviour by trustees and service providers, such as extravagant trips to world-cup sporting events, due diligence trips overseas and trustee meetings held in exclusive lodges.

It appeared obvious to the FSCA that some funds and service providers felt their behaviour was legitimate and justified.

In drafting Directive 8, the FSCA considered other industries and bodies that have codes on ethical behaviour and gratification, for example the CFA.

The duty to report to the authorities

Fund officers have a duty under the Pension Funds Act, to inform the regulator in writing of on becoming aware of matters relating to the fund which may seriously prejudice the fund or its members. This reporting duty includes reporting any breach or attempted breach of Directive 8 immediately upon becoming aware of that.

A report can be a protected disclosure, which gives protection to the person submitting the report.

Also the Prevention and Combating of Corrupt Activities Act requires fund officials and service providers to report corrupt transactions to the South African Police Service.

The duty to report to the authorities

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What qualifies as ‘gratification’ in Directive 8?

Gratification means:

■ money, whether in cash or otherwise■ any donation, gift, loan, fee, reward, valuable security,

property or interest in property of any description whether movable or immovable or any other similar advantage

■ the avoidance of a loss, liability, penalty, forfeiture, punishment or other disadvantage

■ any office, status, honour, employment, contract of employment or services, any agreement to give employment or render services in any capacity and residential or holiday accommodation

■ any payment, release, discharge or liquidation of any loan, obligation or other liability, whether in whole or in part

■ any forbearance to demand any money or money’s worth or valuable thing

■ any other service or favour or advantage of any description, including protection from any penalty or disability incurred or apprehended or from any action or proceedings of a disciplinary, civil or criminal nature, whether or not already instituted, and includes the exercise or the forbearance from the exercise of any right or any official power or duty

■ any right or privilege■ any real or pretended aid, vote, consent, influence or

abstention from voting■ any valuable consideration or benefit of any kind,

including any discount, commission, rebate, bonus, deduction or percentage

Gratification excludes any remuneration paid by a sponsor of a fund to a trustee appointed by the sponsor of a fund.

Specific types of gratification not permitted

The directive says that the below types of gratification are automatically not permitted to be accepted, agreed or offered to be accepted by a trustee, principal officer, deputy principal officer, valuator, auditor, administrator, employee of an administrator or other officer or service provider to a fund, from any other person connected in whatsoever manner to a service provider of a fund, or form any potential future service providers, in which such a person serves:

■ any gratification which, objectively viewed, creates a conflict of interest with their fiduciary duty towards the fund

■ token gifts that exceed the yearly limit set by the board in terms of the fund’s gift policy, which annual limit may not be more than R500 a year on average from any one service provider

■ any gratification relating to local or international due diligences, including subsistence, travel or accommodation

■ any gratification relating to local or international entertainment or sporting events, including but not limited to subsistence, travel or accommodation

■ conferencing costs of board of trustee expenses

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Guidance Note 2 of 2018 Clarification on Directive 8 Prohibition on the Acceptance of Gratification

The FSCA received many queries about Directive 8 and subsequently released guidance note 2 to provide practical guidance on the application of Directive 8.

Training

Directive 8 is not intended to limit or stop legitimate training provided by service providers to fund officers.

The FSCA prefers that funds pay the cost of training, travel and accommodation. If the training is free, then the fund should pay for the travel and accommodation costs.

If a service provider provides training at no cost, which includes refreshments, then such training must be open for registration to the general public or a general category of persons.

The actual cost of training, whether paid for by the fund or offered free by the service provider, must still be reasonably justifiable.

Business-related meals and similar considerations

Service providers may pay for business-related meals, provided the meals are legitimately for the purpose of conducting the business of the fund.

The activities must be kept to the minimum necessary to maintain effective business relationships and should not be exorbitant.

The value of any meals paid for by a service provider must be declared in the fund’s gift register.

Entertainment

Fund officers may not accept invitations to events paid for by service providers.

These prohibited events include hunting, sporting events, meals, coffee, concerts and jazz festivals.

Service providers are cautioned not to justify an entertainment event in an attempt to legitimise that event as being not contrary to Directive 8.

Retirement fund officers must apply their minds to whether an invitation is for a legitimate purpose or simply for entertainment.

COMMENT

Our interpretation of this is that a meal that forms part of a legitimate business activity is permitted. For example, refreshments provided at a trustee meeting or training is acceptable. However, a meal that is purely for entertainment purposes and is not linked to fund activities or business is not permitted.

Token gifts

Token gifts can include pens, calendars, mugs and chocolates. Token gifts may be accepted by a trustee, subject to a yearly limit of R500 per service provider.

The FSCA purpose behind this limit is to prevent a goodwill concession being converted into corrupt activities.

COMMENT

Our interpretation is that the R500 yearly limit applies per trustee, per service provider.

Due diligences and other fund-related activities

If it is necessary for a fund official to conduct a due diligence or other fund-related activity then all costs (including travel and accommodation) must be paid by the fund.

The due diligence or other activity should not be an excuse to go on holiday at the expense of the fund.

There must be a proper motivation for such activity, including considering the number of fund officers required to go and whether those going have the right skill and experience to conduct the due diligence or fund-related activity.

After any due diligence or activity has been concluded, the fund officer must produce a written report to the board.

Sponsored funds

Sponsor-appointed trustees can be remunerated by the sponsor of the fund. This applies to section 26(2) trustees as well.

COMMENT

Often in the case of closing funds there are insufficient assets to pay a section 26(2) trustee and so the sponsor remunerates the section 26(2) trustee.

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Gratification which objectively viewed creates a conflict of interest

As far as possible, a fund should pay its own costs, unless circumstances dictate otherwise and no conflict of interest is created.

Administrators can pay the closing costs for shell or dormant funds, without breaching Directive 8. In an underwritten fund, the administrator can meet fund expenses without this being a conflict of interest. Trustees must still exercise their minds independently.

If a trustee or a principal officer has an interest in a service provider to the fund, this would be a breach of Directive 8 and a conflict of interest, unless the fund can’t reasonably appoint any other service provider. An example given is of a trustee or principal officer who is also an employee or director of a law firm that is appointed by the fund to provide legal advice.

If there is any uncertainty about whether a practice complies with Directive 8 or not then the FSCA urges funds to avoid that practice.

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Default regulations3

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PART 1 Summary of key aspects of the regulations

1. DEFAULT INVESTMENT PORTFOLIOS

Defined contribution retirement funds’ investment policy statements must make provision for one or more default investment portfolios.

The default investment portfolios must comply with regulation 37 and may differ from member to member, depending on the:

■ age or likely retirement date of the member ■ value of the retirement benefit ■ actual or expected contributions to the fund ■ other reasonable factors the trustees consider to be appropriate

In terms of regulation 37, the investment portfolios that members are defaulted into must be:

■ appropriate for members (trustees must consider the objective, asset allocation, fees, charges, risks and returns of the portfolio)

■ reasonably priced and offer good value for money ■ communicated to members in clear and understandable language, specifically the composition of assets, performance of portfolios and the relevant information about all fees and charges

Trustees must:

■ consider active and passive options ■ allow members to switch out of the default portfolio at least once every 12 months if the fund offers member investment choice

■ not allow loyalty bonuses or other complex fee structures ■ monitor investment portfolios regularly to ensure continued compliance

Performance fees will be allowed but subject to a standard to be issued by the FSCA and a regulatory or policy review. Funds may apply for exemption from some or all of the requirements, subject to any condition the registrar imposes.

Default regulations

What are the latest developments relating to the default regulations?

Retirement funds have to comply with the new regulations, the so-called ‘default regulations’, by 1 March 2019. The new regulations aim to improve the outcomes for members by ensuring that they get good value for their savings and retire comfortably.

The regulations require funds to implement:

■ a default investment strategy (regulation 37)■ a default preservation and portability strategy

(regulation 38)■ an annuity strategy (regulation 39)■ retirement benefits counselling

The regulations require that trustees help members in the accumulation and retirement phases of their membership of a fund.

PART 1Includes a summary of the key aspects of the regulations and covers technical feedback

PART 2Covers best practice for retirement benefits counselling and best practice for an annuity strategy

For purposes of this Hot Topics workbook, we will cover default regulations in two parts:

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2. DEFAULT PRESERVATION

Trustees of funds in which members are enrolled as a condition of employment must offer a default in-fund preservation arrangement to members who leave the service of the participating employer before retirement.

Fund rules must:

■ allow for employees who leave the service of a participating employer to automatically leave their accumulated retirement savings in the fund

■ However, members will have the right to opt out of the fund and withdraw their fund credit in cash or to transfer to another fund for which they are eligible. No initial once-off charge may be levied for paid-up members when they become paid-up.

■ allow for transfers in from other funds ■ specify for paid-up members:• no ongoing contributions• no deductions for risk benefits• that a defined benefit amount must be converted to a

defined contribution amount• their eligibility to receive their fund credit on death,

retirement and early retirement• access to retirement benefits counselling before their

benefit is withdrawn or transferred Funds must:

■ For new members joining:• ask for a list of all paid-up membership certificates

within four months• arrange the transfer, if they want to transfer any

retirement savings • not levy a charge on the transfer amounts

■ For members leaving:• issue paid-up membership certificates within two

months after the fund becomes aware that the member has left the employer’s service.

The certificate must contain:

name, address, registration number and contact details of the fund

name, address and contact details of the fund’s administrator

name, address, identity number, tax number and most recent contact details of the member

the date the member became paid-up

the date the certificate was issued

the value of the fund benefit when the member became paid-up

investment portfolios in which the benefit is invested

other prescribed information

Trustees must ensure that:

■ investment fees for default portfolios must be the same for paid-up member and active members

■ administration fees charged to paid-up members must be fair, reasonable and commensurate to the fees charged for administrative services for active members

3. ANNUITY STRATEGY

For retiring members, pension funds and provident funds which allow the purchase of an annuity, must have an annuity strategy with annuity options, either an in-fund or out-of-fund annuity. This means the annuity can be in the name of the fund or the member. Life or living annuities can be chosen as options within a fund’s annuity strategy.

A life annuity, once chosen, becomes irreversible. To better manage this irreversibility, retiring members can only move into an annuity with their consent. This election by the retiring member makes the purchase of an annuity a ‘soft default’ by having the member opt in instead of opting-out.

The annuity options must be:

■ appropriate for members. Trustees must consider, where reasonable, the:• level of income payable to members• investment, inflation and other risks in the annuity• level of income payable to beneficiaries

■ reasonably priced and offer good value for money ■ communicated to members in clear and understandable language:• for living annuities, specifically the asset class

composition, performance and changes in the incomes

• relevant information about all fees and charges and their effect on benefits

For living annuities, the trustees must ensure that:

■ the investment choice is limited to four portfolios, which must comply with regulations 28 and 37

■ drawdown levels are compliant with the prescribed standard

■ for in-fund living annuities, the sustainability of the income drawn by retirees is monitored and members are made aware if their drawdown rates are not sustainable

Trustees must review the annuity strategy at least once a year.

4. RETIREMENT BENEFITS COUNSELLING

The regulations require that retirement benefits counselling be made available to members, specifically:

■ before their benefits are taken in cash or transferred ■ at least three months before members’ normal retirement age

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According to the regulations, retirement benefits counselling is simply the explanation of:

■ the investment portfolios ■ the annuity strategy ■ the rules about preserved benefits ■ other options made available to members

Retirement benefits counselling can be provided in writing or verbally. However, it must be in clear and understandable language and must include an explanation of risks, costs and charges.

The regulations specify what needs to be communicated to members but does not stipulate how it should be communicated. The decision on how the relevant information must be explained to members rests with trustee boards.

Technical feedback

What follows is a summary of industry feedback on some of the technical aspects of the default regulations.

The regulations allow for additional aspects to be prescribed. A summary of these include:

1 Definitions

Several definitions allow for further conditions or formats to be prescribed, for example paid-up membership certificate

2 Default investment portfolios

• Frequency and format of communication (assets and performance) to members

• Format of disclosure of all fees and charges

3 Default preservation and portability

• Manner in which to request a list of all paid-up membership certificates

• Manner in which to request whether members want to transfer retirement savings

4 Annuity strategy

• For living annuities: the format of communication (assets, performance and changes in income) to members

the drawdown levels must be compliant with a prescribed standard (this is one exception to ‘ … may be prescribed’, as this will be prescribed)

• Format of disclosure of all fees and charges• Access to retirement benefits counselling• Conditions related to out-of-fund annuities (other

than living annuities)

At the time of drafting this workbook, no further requirements, formats or conditions had been prescribed by the regulator. The industry has asked the FSCA if and when these will be issued. Alexander Forbes will use its best judgement to assist funds in complying with the default regulations and will review any processes, formats or conditions if any of this is prescribed in the future.

Clarity has also been sought from the regulator on the matters below.

■ Practically, there is inconsistency between the definition of retirement benefits counselling and when this needs to be made available to members. For example, it’s not clear when a fund needs to make retirement benefits counselling available to members regarding their investment portfolio options.

■ Whether existing defined benefit (DB) paid-up benefits are excluded from 1 March 2019 in respect of the requirement to convert DB amounts into defined contribution (DC) amounts on becoming paid up

Note

Some DB funds administered by Alexander Forbes have submitted exemption requests to the FSCA regarding the conversion of DB amounts into DC amounts but to date, they haven’t received a response.

■ Whether the category for deferred pensioners can be converted into the category for paid-up members or if the two separate categories need to continue to exist

■ Treatment of unclaimed benefits going forward. There are practical implications for closing down funds, as the regulations effectively imply that a benefit could never be unclaimed. Paid-up members may never be classified as unclaimed.

■ Implications for Section 197 transfers. The possible implication of the regulations may be that funds will need to get members’ instructions in writing before transferring their benefits

■ That on death of a paid-up member the death benefit is limited to the value of the paid-up member’s fund credit

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■ The application or non-application of Section 37C to paid-up benefits in the event of death

■ Whether partial withdrawal of a paid-up benefit is allowed and, if it is, what are the tax consequences (for example, tax on only the withdrawn portion or tax on the full paid-up benefit?)?

■ Whether defined benefits funds and beneficiary funds are meant to implement an annuity strategy.

■ Whether provident funds have to implement an annuity strategy where the rules allow a member to buy an annuity but doesn’t compel the purchase of an annuity.

■ The fund’s communication obligations to retiring members who buy an external (out-of-fund) annuity.

■ Flexibility regarding stipulated time periods for access to retirement benefits counselling. For example, can members be given access to retirement benefits counselling six months and two months before normal retirement age.

■ Clarity regarding the requirement of no more than four investment portfolios where a living annuity forms part of a fund’s annuity strategy.

Note

Alexander Forbes’s view is that up to four investment portfolios must be selected to form part of the fund’s chosen living annuity. The trustees can therefore choose one, two, three or four investment portfolios. National Treasury has confirmed with Alexander Forbes that the limitation must be made at trustee level, in other words, members must be given no more than four portfolios to choose from where the fund has implemented a living annuity as part of its’ annuity strategy.

■ Whether member access to transferred paid-up benefits at instances other than an exit event is allowed

The above list contains some of the technical feedback to the FSCA and is not exhaustive.

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The regulations provide flexibility to trustees on how they could implement on retirement benefits counselling. For example, most funds will resort to written explanations of the fund’s options or a combination of written and verbal (through group education sessions or contact centre facilities) explanations.

PART 2 Best practice for retirement benefits counselling

From a best-practice perspective, the objective is to do more than simply meet the regulatory minimum. This will be done by aiming to improve members’ outcomes through facilitating better financial decision-making. The assumption is that most funds will apply written communication as the minimum to comply with the regulatory requirement.

Alexander Forbes’s view is that simply meeting the regulatory minimums will, on its own, not lead to better decisions and therefore better outcomes for members, especially retiring members. Funds should take extra steps in assisting their members to make more informed decisions. This approach is aligned with National Treasury’s objective which is to improve outcomes for members.

Although retirement benefits counselling does not have to include advice to meet the regulatory requirements, Alexander Forbes’s best practice view is for funds to make personal advice available to members during their working careers and at retirement. If a fund’s objective is to assist members in making better retirement decisions to meet their unique needs then personal advice must be part of the solution. Research shows that advice can improve the chance of meeting outcomes by up to 30%1, adding up to 1.59%2 of assets a year in value.

The objective should be to increase individualisation of communication and information, which in turn increases the effectiveness in improving financial outcomes.

1 Dempster, M.A.H., Kloppers, D., Medova, E., Osmolovsky, I. and Ustinov, P., (2016), Life Cycle Goal Achievement or Portfolio Volatility Reduction?, Journal of Portfolio Management, Winter 2016 2 Blanchett, D., Kaplan, P., (2013), Alpha, Beta, and Now…Gamma, The Journal of Retirement, 1 (2) 29-45

Regulatory minimum Improved outcomes

Written explanation of fund's preservation rules, investment strategy, annuity strategy and other options:

■ member booklet ■ Investment booklet ■ options on retirement

brochure ■ options on leaving

brochure ■ newsletters

Verbal explanation on a group basis of the fund's options:

■ education sessions ■ videos ■ digital

Verbal explanation on an individual babsis of the fund's options and other options in the market:

■ telephonic ■ face to face ■ digital

Full needs analysis and personal advice:

■ telephonic ■ face to face

Group Individualised

Facilitating better financial decision-making

ALEXANDER FORBES

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DIFFERENT INTERVENTIONS AT DIFFERENT STAGES

On-boarding of new

members

Ongoing assistance for active members

Counselling on exit

Counselling on retirement

COUNSELLING WHEN IT COUNTS

Increased contributions | Increased preservation | Increased annuitisation | Better decisions

The objective of the Alexander Forbes retirement benefits counselling package is to help members improve their financial

ALEXANDER FORBES

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Contact prospective retirees through the Individual Advice Centre

Financial well-being consultantsat the worksite(face to face)

Proactive outbound contact

Worksite consulting

BrochuresFormsMember bookletsInvestment bookletsOptions on leaving guides

Written material

AF OnlineAF app

Fund contact centre

Member education services

Digital Telephonic inbound Engagements

What is offered?

Channel

We offer your employees advice onsite and contact those who are

nearing retirement for advice.

What’s our enhanced RBC offering?

Alexander Forbes has enhanced its offering by adding worksite consulting and more proactive communication interventions.

Our current offering

financial well-being consultants

individual advice centre

contact centre

financial planning consultants

member educators

fund consultant

Alexander Forbes is able to

provide an end-to-end solution

to funds, everything from

written fund communication

and group educational

sessions to personal consulting

services at the workplace.

Retirement benefits counselling, with the integration of worksite consulting, is delivered through the Alexander Forbes financial well-being team which consists of:

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These three best-practice components provide a guidance framework for employees to help them make better retirement decisions.

The communication plan and advice services should apply across the preretirement phase, at retirement and after retirement. Therefore, think of the annuity strategy as applying preretirement and not only at retirement, as communication and access to advice should be provided well before actual retirement date. This is important to help retiring members make an informed decision about their retirement savings, including, for example, choices about contribution rates. Despite the default regulations, retiring members still have to make an active decision at retirement as they are not automatically defaulted into a retirement income solution.

Best practice for an annuity strategy An annuity strategy for a fund is about more than just the annuity products. Even though the default regulations define annuity strategy as making annuity products available to members, from a best-practice perspective, an annuity strategy should consist of three components:

Communication plan

Advice services Annuities

These three best-practice components provide a guidance framework for employees to help them make better retirement decisions.

RETIREE PARTICIPATES ON AN 'OPT-IN' BASIS

Fund's annuity strategy

Communication plan (including the explanation of the terms of the fund's annuity strategy) and advice services

should be delivered through retirement benefits counselling

Communication plan

Advice services

Annuities

ALEXANDER FORBES

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1 Communication plan

A fund’s communication strategy needs to be reviewed to incorporate the fund’s communication plan regarding its annuity strategy and the communication requirements of Regulation 39. The fund must make retirement benefits counselling available to members not less than three months before their normal retirement age. Alexander Forbes recommends that trustees ensure members have access to retirement benefits counselling at least 12 months before their normal retirement age to plan appropriately and also help members who may retire earlier.

Retirement benefits counselling for the purposes of the regulatory requirements is to simply explain the options available to the member when approaching retirement age. This can be done in writing or verbally. All communication must be clear and in an understandable language.

Example of what to do to ensure the retirement benefits counselling requirements are met:

■ Options on retirement brochureThis should explain all available options to the members, such as:• deferred retirement options• the fund’s annuity products in line with its annuity

strategy (including risks, costs and charges), • other types of annuities • where and how to get individual financial advice

■ Videos that explain the options

■ Access to individual advice centres can be made available

■ Consulting with members at their workplace

Communication plan

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2 Advice services

Simply meeting the regulatory requirements is still not enough to help members make appropriate retirement decisions. Funds should do more by expanding their retirement benefits counselling offering to include access to advice. Advice services can meet the regulatory requirements for retirement benefits counselling. They can also add even more value to retiring members by helping them make an informed decision about the available annuity options or to explore deferred retirement where appropriate.

Funds are encouraged to consider an advice service level agreement due to the complex and sometimes irreversible decisions retiring members are faced with at retirement in particular. This helps members by making advice easily accessible and will provide trustees with peace of mind that retiring members have the best possible chance of making an appropriate decision about their retirement savings.

Deferred retirement

The Alexander Forbes best-practice view for someone retiring from a company is to defer their retirement from the occupational fund if they don’t require an income immediately.

The reasoning for this is simple: Why buy an annuity and start drawing an income if you don’t need the income straight away?

Also, most retirees don’t have enough savings and need more time to build up their savings by continuing to work full-time or part time. In addition, the older one is when buying a life annuity, the more income it provides yearly. Legislation allows retirees to do this and they have two options available:

OPTION 1 OPTION 2

Leave the accumulated retirement savings in the occupational fund as a deferred retiree

Transfer the accumulated retirement savings to a retirement annuity fund

This is an option if the member doesn’t want to continue making contributions and if they prefer the occupational fund’s pricing and investment options. The member could also keep the accumulated savings in the occupational fund and open a new retirement annuity fund just for new contributions going forward.

This is an option if the member wants to continue making contributions to a fund and wants to keep accumulated savings in the same pot. This option could be appealing to members who plan to do contract work, especially if they’re not remaining with their current employer.

Alexander Forbes has introduced a retirement annuity option in the Alexander Forbes Retirement Income Solution (AFRIS) that is competitively priced and if the fund has adopted AFRIS, this is available to retirees.

There are several factors and implications for members who want to defer retirement and these would typically be addressed with a financial adviser.

ALEXANDER FORBES

26 |

Without going into the full extent of detail and primarily on a qualitative assessment, Alexander Forbes’s best-practice view is for funds to consider a blended living annuity which includes a with-profit component as well as standalone with-profit annuities as part of a fund’s annuity strategy. Because inflation-linked annuities, while providing the most protection, are expensive relative to with-profit annuities and unaffordable for most, our view is that funds should consider including a with-profit annuity as part of a living annuity to provide a blended solution (bringing some longevity protection into the living annuity) and to provide with-profit annuities on a stand-alone basis for those members who do not want or can’t manage a living annuity. The best-practice view is that the with-profit annuity should target inflationary increases so that an annuitant’s standard of living has the best chance of being maintained.

The Alexander Forbes best-practice view is not a substitute for individual financial advice. This best-practice view is generalised taking wide factors and assumptions into account.

Research by ASISA shows that up to 90% of annuities purchased are living annuities. What makes living annuities appealing in the South African market is that these annuities allow for a benefit to be passed onto beneficiaries. However, we know that living annuities come with longevity and investment risk. So by providing a blended living annuity which allows switches into a with-profit annuity, a member is able to benefit by protecting against longevity risk, by accessing a guaranteed income for life, while at the same time still providing a legacy on death.

With-profit annuities allow the member to participate in investment performance which provides them with an opportunity on the upside for pension increases, however if investment performance is poor this does lower the pension increase. What’s important to note is that a with-profit annuity will not provide a member with a negative pension increase but the pension increase could be as low at 0% in years where the investment performance is very poor or poor over a sustained period.

Alexander Forbes’s suggested products and solutions for a fund’s annuity strategy

The onus to appoint service providers and select preferred products in terms of regulation lie with the trustees. Alexander Forbes has however considered various solutions and offers certain solutions to help the trustees execute their duties.

The Alexander Forbes retirement benefits counselling package can deliver on a fund’s communication plan as well as advice services.

The Alexander Forbes suggested annuity products include:

■ Alexander Forbes Retirement Income Solution living annuityCompetitive living annuity that also includes the Just Lifetime Income portfolio, allowing members to access a with-profit annuity targeting inflationary pension increases within the living annuity

■ Just with-profit annuity* Targeting inflationary increases

■ Just with-profit annuity* Targeting 75% of inflationary increases, which provides a higher starting income but lower pension increases

* Alexander Forbes is in the process of adding another insurer to the best-practice framework to enhance trustee choice.

Process to implement an annuity strategy

Trustee awareness and

education

Analyse member data, needs and

wants

Identify appropriate annuities

In-fund or out-of-fund

Review strategy, monitoring and

reporting

Implement & document strategy

Appoint service and product

providers

Agree retirement benefits counselling approach and advice

framework

3 Annuities

Alexander Forbes previously provided a process, illustrated below for ease of reference, to help trustees implement an annuity strategy. For purposes of this workbook, we won’t repeat this detail. However, it’s important that trustees follow a rigorous process in deciding the appropriate annuity products that form part of the fund’s annuity strategy.

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Alexander Forbes best practice

These three best-practice components provide a guidance framework for employees to help them make better retirement decisions.

Alexander Forbes retirement benefits counselling package

Alexander Forbes suggested annuity products

AFRIS living annuity, including the Just Lifetime Income portfolio

1 JUST life annuity with a higher starting income but lower future increases*

2 JUST life annuity with a lower starting income but higher future increases*

COMMUNICATION PLAN

ADVICE SERVICES

ANNUITIES

*Annuity provider option to be added in the future to enhance trustee choice

With-profit annuity

Blended solution: living annuity including a with-profit annuity component targeting inflationary increases

This information is not advice nor is it intended as a personal recommendation, guidance or a proposal on the suitability of any financial product or course of action as defined in the Financial Advisory and Intermediary Services (FAIS) Act. While care has been taken to present correct information, Alexander Forbes and its directors, officers and employees take no responsibility for any actions taken based on this information, all of which require advice. Please speak to your financial adviser for tailored advice based on your individual financial needs before you make financial decisions based on this information.

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The draft taxation laws amendment bill 20184

28 |

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The draft taxation laws amendment bill 2018

National Treasury has issued the draft taxation laws amendment bill 2018 (draft TLAB) for comment. It includes some of the proposed amendments announced in the 2018 national budget.

We will cover issues relevant to retirement funds in this section.

Annuitisation of retirement benefits from provident funds Implementation date: 1 March 2019 but may change

Current legislation states that, from 1 March 2019, provident fund members may have to buy an annuity from contributions made to their provident fund after 1 March 2019. The implementation of this requirement has been postponed a number of times for consultation at the National Economic Development and Labour Council (Nedlac).

No date changes have been included in the draft TLAB. The process of consultation at Nedlac is taking longer than anticipated. Government may introduce further legislative amendments related to the start date of 1 March 2019 once the Nedlac process is completed. This is expected to be no later than the end of October.

Industry bodies have pointed out the significant adverse consequences of not letting funds and administrators know sooner whether this will go ahead on 1 March 2019. This includes rule changes, administration system changes, payroll changes and communication requirements to members. Industry have requested that if this becomes law on 1 March 2019, the regulators allow a delayed implementation period.

Emigration benefit from a preservation fundImplementation date: 1 March 2019Members of a retirement annuity fund (RAF) can receive payment of a withdrawal benefit when a member stops being a tax resident as a result of emigrating from South Africa if that emigration is recognised by the South African Reserve Bank for the purposes of exchange control.

Expatriates can also withdraw a lump sum from their RAF when they leave South Africa at the expiry of the work visa that was granted in terms of the Immigration Act.

Currently, members belonging to pension or provident preservation fund are restricted from withdrawing their benefit when they emigrate from South Africa. This does not matter when the member has not exercised the once-off right to a withdrawal from the preservation fund before retirement. At any time, including on emigration, a member can take a withdrawal benefit. However, if a member has already taken one withdrawal, the member has no further access to the funds on emigration or leaving South Africa. One solution has resulted in artificial transfers from preservation funds to a RAF to make use of the access that was given to RAF members.

To promote a uniform approach, the draft TLAB proposes amending the definitions of ‘pension preservation fund’ and ‘provident preservation fund’ to allow members to withdraw their full lump-sum benefit when they emigrate from South Africa and that emigration is recognised by the South African Reserve Bank for exchange control or on repatriation on expiry of the work visas.

COMMENT

There was a request that this change be backdated to 1 March 2018 but National Treasury has confirmed the implementation date will be 1 March 2019.

Tax treatment of actuarial surplus between retirement fundsImplementation date: 1 March 2017

Employer contributions to a retirement fund for the benefit of an employee is a taxable fringe benefit. This also applies to a benefit provided by an associated institution if such benefit would have constituted a taxable benefit had it been granted directly by the employer. An associated institution includes an employer-established retirement fund.

This means that a transfer of actuarial surplus from one employer retirement fund to another employer retirement fund is a taxable fringe benefit in the hands of employees.

To address this unintended anomaly, surplus transfers or transfers within or between retirement funds of the same employer will not create a taxable fringe benefit for the employee.

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Tax treatment of transfers to pension and provident preservation fundsAfter reaching normal retirement age but before retirement dateImplementation date: 1 March 2019

Since 1 March 2015, ‘retirement date’ is triggered only when an election to retire is made by the member of the fund. A member can defer their retirement date after reaching normal retirement age but before retirement date by:

remaining a deferred retiree of the employer pension or provident fund

transferring from a pension or provident fund to a retirement annuity fund

Currently, transfers to a pension preservation fund and a provident preservation fund are excluded after normal retirement age. Only withdrawal benefits are allowed to be transferred.

The draft TLAB proposes to allow for transfers to a pension preservation or provident preservation fund on or after reaching normal retirement age but before retirement date.

The one withdrawal that applies to preservation funds before retirement date will not apply to amounts transferred after reaching normal retirement age in terms of the fund rules but before an election to retire.

Transfers from provident preservation funds to pension fundsImplementation date: 1 March 2018

The general rule is that a transfer of a benefit from one approved fund to another is an accrual event for tax purposes. However, a deduction is provided in the law which results in the amount transferred being untaxed.

The only exceptions to this principle are when a pension fund or pension preservation fund benefit is transferred to a provident fund or provident preservation fund. These transfers are not tax deductible.

However, a mistake exists in the law. No deduction is provided for a transfer from a provident preservation fund into a new employer pension fund.

It is proposed to allow a deduction from tax when a member transfers from a provident preservation fund into any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.

This also applies to divorce awards made to a non-member spouse which may be transferred to a fund chosen by the non-member spouse.

Transfers from public sector funds to private sector fundsImplementation date: 1 March 2018

Before 1 March 2018 a transfer of the pre-1 March 1998 amount from a public sector fund to a private sector fund was tax free. However, further transfers from the private sector fund to another private sector fund caused the member to lose the tax-free status of the pre-1 March 1998 amount.

From 1 March 2018, the Income Tax Act was amended to allow the tax-free status of the pre-1 March 1998 amount to be retained on the next transfer to another private sector fund, but not to any further transfers.

The way in which the legislation was drafted is ambiguous in that it potentially contemplates more than one transfer being permitted. The draft TLAB proposes to clarify that it applies only to one transfer out of the private sector fund.

Deduction for contributions to retirement funds must be proportionately incurred between South Africa and foreign sources Implementation date: 1 March 2018

Any allowable deductions permitted in section 11F (the 27.5% retirement fund deduction) and section 18A (charitable donations) must be deemed to have been incurred proportionately in respect of taxable income derived from sources within and outside South Africa.

The deduction under section 11F and section 18A must be allocated in relation to the taxable income from sources within and outside South Africa before taking into account any deduction in terms of those sections.

This is still a draft bill and the public is invited to submit comments. We await the bill to see whether any of the provisions have changed.

Policyholder protection rules 5

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ALEXANDER FORBES

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What the new policyholder protection rules require for group risk schemes

In trying to align the insurance industry with the principles of Treating Customers Fairly (TCF), and to give effect to the principles introduced by the new Insurance Act, National Treasury has released the revised policyholder protection rules (new PPRs). The new PPRs primarily deal with:

■ insurance products ■ product performance ■ acceptable service ■ post-sale barriers

The purpose of the new PPRs is to guide short-term, long-term insurers and intermediaries dealing with insurance products and related services to:

■ provide customers with less complex products that are good value

■ ensure fair treatment of the ultimate beneficiaries of those insurance products

The scope and application of the new PPRs has been widened and will now apply to group risk insurance schemes.

Parties to a group risk policy

In a typical group risk benefit scheme, both approved and unapproved, the following parties are the main stakeholders:

■ Retirement fund (the initiator) or employer ■ Intermediary who is responsible for sourcing cover and conducting rebroke

■ Insurer who provides group cover ■ Individual employees who have employer-owned policies and their beneficiaries

■ Individual members who have fund-owned policies and their beneficiaries

In a group risk scheme, no direct interaction exists between members and an insurer. Traditionally, an insurer relies on retirement funds (for fund-owned policies) and employers (for employer-owned policies) to communicate with members. Both retirement funds and employers are regarded as policyholders for the purposes of this arrangement. In some instances, insurers rely on third parties, such as intermediaries and agents, to communicate and disseminate any information regarding group risk policies. This is despite that members and their dependents (and not retirement funds or employers) are the ultimate beneficiaries of the group risk cover.

Policyholder protection rules

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Rules 1.1 to 1.10

The principles of Treating Customers Fairly (TCF) are an integral part of the new PPRs and the definition of ‘policyholder’ has now been extended to include members or individual employees. The responsibility of ensuring that members are treated fairly at all times lies directly with an insurer. The fair treatment of policyholders (including members) encompasses the following outcomes:

■ Policyholders are confident that they are dealing with an insurer where the fair treatment of policyholders is central to the insurer’s culture.

■ Products are designed to meet the needs of identified types, kinds or categories of policyholders.

■ Policyholders are given clear information before, during and after the time of entering into a policy.

■ Any advice given to policyholders is suitable and takes their circumstances into account.

■ Products perform, as insurers have led policyholders to expect and the associated service is both of an acceptable standard and what they have been led to expect.

■ Policyholders face no unreasonable post-sale barriers to change or replace a policy, submit a claim or make a complaint.

TREATING CUSTOMERS FAIRLY

6 YS TOWA

TCF

The new PPRs are closely aligned to the TCF outcomes-based framework as described above, with the provisions extending beyond just the traditional policyholder to include the employee on a group scheme or members of a retirement fund.

TCF is an imperative, which is embedded in our consulting approach and advice framework in formulating appropriate risk solutions for employees on a group basis. Understanding the gaps and affordability, which does dictate the nature and extent of the benefits that can be offered, is the starting point providing a suitable solution.

The above approach will help in providing evidence of the approach undertaken to the insurer to demonstrate compliance. The ultimate responsibility to ensure that all stakeholders are treated fairly at all times rests with the insurer.

The insurer must have arrangements in place with the policyholder that facilitates and supports the provision of the above requirements.

The Treating Customers Fairly principles

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ALEXANDER FORBES

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Communication

The new PPRs expressly require insurers to make every effort to communicate directly with members. This could include communication about the nature of risk products the insurer offers, the extent of cover, the acceptance or rejection of claims, premium reviews and adjustments.

The exception to this requirement is when an insurer can demonstrate that, considering the nature of the fund or group scheme, it is not reasonably practicable for them to communicate directly with members. The onus lies with an insurer to prove this and once proven, an insurer will be able to outsource this responsibility to third parties. Third parties could include intermediaries, administrators of retirement funds and employers.

An insurer remains responsible for any responsibility delegated to third parties to facilitate, including the communication requirement. Therefore, for intermediaries or any other third party to fulfil this responsibility on behalf of the insurer, the following two conditions must be met:

1 It must not reasonably be practicable for an insurer to communicate directly with members.

2 There must be a proper outsourcing arrangement (agreement) in place.

As the intermediary to the schemes, Alexander Forbes will, in agreement with the insurers, communicate to the policyholders, including:

■ members of a group scheme through a retirement fund ■ employees on an employer group scheme

The explicit detail of information that must be included will be in terms of the regulations and agreed to with the insurers. The content will be standardised so that there are not different reporting standards depending on the insurer that the business is placed with. Communication covers all aspects with the members and includes:

■ Onboarding

Suitable information regarding benefits must be provided to new members

■ During membership

Confirmation of the benefit offering and an overview of the policy terms and conditions are provided yearly.

■ Renewals and rate changes

Communication must be sent to members to reflect the revised rate and the effect of this on:

1 the allocation to retirement savings where the cost is deducted from the retirement fund contribution

2 take-home pay depending on whether this is a decrease or increase in the rate for an employer-owned policy

■ Rebrokes

Result of the rebroking exercise and confirmation of the rates, details regarding any change in the insurer and comparative overview of the changes where there are any material changes

■ Medical requirements

Communication is currently provided through the intermediary for the medical request to the member. With the Protection of Personal Information Act requirements, this may change with the insurer dealing directly with the affected individual. The overall aim is to make this interaction as easy as possible.

■ Claims

Detail is discussed under the claims management framework.

The employer and trustees would need to facilitate the distribution of the information to the members. Evidence of this would need to be provided to the insurer’s satisfaction for compliance purposes. As highlighted, standardising the approach and ensuring that we cover all bases with the insurers in our communication will streamline the process and also help in comparing one offering to the next.

Data protection

To communicate meaningfully with members, insurers will require certain information about those members from retirement funds or employers. At the very least, this information should include members’ names, identity numbers and their contact details (email addresses and cellphone numbers, if available).

By its very nature, this information is personal and is subject to the Protection of Personal Information Act (POPIA). In this regard, the new PPRs require an insurer to have an effective data management framework in place. Again, where personal information of members is assigned to third parties, it is the insurer’s responsibility to conduct due diligence on those third parties to ensure compliance with its (an insurer’s) data protection responsibility.

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The data protection management framework envisaged in the new PPRs should include appropriate strategies, policies, systems, processes and controls relating to the processing of personal information of members.

Schedules are currently provided on a monthly basis to the insurers to ensure that the correct levels of cover are in place. These do not currently extend to the level of information as set out in the legislation now. It is understood that not all members will have email addresses or cellphone numbers so information will be limited to what is available. Insurers have already started requesting this information. Requests for the additional information will be sent to the retirement funds and employers to ensure that the requirements are met.

The data framework also deals with the transfer of data between the various parties, namely the fund, employer, intermediary and insurer. All parties must ensure that POPIA is upheld at all times.The PPRs allow an insurer to make direct contact with members, but only if the communication is about the group risk offering that they insure. In terms of POPIA, they may not use the data for any other purpose other than the purposes as stipulated in the agreement entered into with the retirement fund or the employer.

The above rules have prompted reviews of insurers’ data frameworks to also help with the reporting requirements to the Financial Sector Conduct Authority (FSCA) as and when required.

Premium reviews

All premium reviews, including the frequency of premiums and the increase in profitability margins, must be set out in a group risk policy. Any review of a premium payable under the policy must:

■ balance the interests of the insurer and the reasonable benefit expectation of policyholders and members

■ be justified■ for policies with investment and risk component, take

into account the reasonable benefit expectation of the policyholders or members in respect of both components

If a premium review exercise is likely to lead to an increase in premium, an insurer must timeously inform the policyholder in writing. Where the premium review leads to a premium increase, ‘an insurer must take reasonable steps to afford policyholders alternatives (such as the options to terminate the policy, reduce the policy benefit or enter into an alternative policy) to mitigate the impact of the increase on the policyholder’.

Alexander Forbes maintains an agreement with insurers to provide renewals at least three months before the renewal date. This affords a timeous review of the rate and gives the board, management committee and employer sufficient time to rebroke the schemes to test the competitiveness of the rates provided. We will continue with this approach to interrogate the rate increase and review the overall pricing of the schemes. The yearly communication to members will be updated and distributed to the policyholders for record purposes as outlined in the communication overview.

Claims management

The rules require an insurer to establish, maintain and operate an adequate and effective claims management framework to ensure fair treatment of policyholders and claimants. Once established, the claims management framework must be reviewed regularly. The insurer’s board of directors must allocate responsibilities of handling claims to adequately trained and experienced employees.

In addition, an insurer must establish an internal process of claims decisions escalation and review. If an insurer has made a decision to accept, repudiate or dispute a claim or its quantum, the insurer must notify the claimant in writing within 10 days of making such decision. Where a claimant makes further submissions in line with an insurer’s claims escalation or review process, an insurer has up to 45 days to make a decision and to communicate its decision to the claimant. Where a claimant fails to institute legal action against a decision of an insurer for a period of three years, prescription applies.

In addition, once a claim has been instituted, an insurer is required to communicate with claimants and policyholders. In addition, an insurer must put appropriate reporting processes in place to ensure compliance with any prescribed requirements for reporting claims information.

Aside from reviewing and providing an appropriate claims management framework, the insurer is also liable for communicating directly with claimants and providing them with specific information at various stages. The claimant can provide consent to the insurer to deal via the policyholder. For instance, the employer helps a disability claimant beyond the claim initiation stage.

Complaints management

The rules require an insurer to establish, maintain and operate an adequate and effective complaints management framework to ensure fair treatment of complainants. Such complaints management framework must be reviewed regularly. The board of directors of an insurer must allocate complaints management to adequately trained and experienced employees. Furthermore, the rules provide for complaints escalation and review process.

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Rule 18.5 requires an insurer to classify complaints into the following categories, among others, those relating to:

■ the design of a policy or related services■ information provided to policyholders■ policy performance

This must clearly appear on complaints management reports that an insurer must submit to relevant authorities.

An insurer is also required to communicate with the complainant from the time that it receives or becomes aware of a complaint until it is finalised or resolved. An insurer’s complaints management framework must include ‘non-reportable’ complaints.

Communication to policyholders will incorporate the complaints management process and the relevant contacts if the policyholder wishes to lodge a complaint with the insurer or the ombudsman.

Termination

If an insurer intends terminating a group scheme, the new PPRs require that an insurer gives the policyholder and all members of the group scheme, as well as the FSCA, at least a month’s written notice of the intended termination. If termination is initiated by the policyholder, the insurer must notify the FSCA in writing as soon as reasonably possible after becoming aware of the proposed termination.

Before entering into a group scheme policy with a policyholder, an insurer must determine if it is a replacement policy or a completely new policy. If it’s a replacement policy, and in the event that this new replacement group scheme policy is going to offer more or equally favourable terms and conditions, an insurer must provide members of the group scheme with any information that:

■ could reasonably be expected to affect the rights and obligations of the member

■ such member may require to make an informed decision in relation to their benefits

If an insurer is unable to determine whether the replacement group scheme policy will provide equally favourable or more favourable terms and conditions to the members, they must obtain consent from each of the members.

As highlighted, it is Alexander Forbes practice to provide schemes with the renewal rates and terms at least three months prior to the renewal date. This is to allow sufficient time to conduct rebrokes, where applicable, in terms of the service level agreement and the result of the renewal. Therefore, any action that is required can take place before the renewal date.

Any termination of cover as a result of an extensive exercise is supported by the relevant replacement policy disclosures. This sets out the revised requirements in line with the new PPRs, as well as the standard comparative overview of terms and conditions, rates, level of benefits and so on.

Alexander Forbes will support the requirements to ensure that information is provided in line with what the insurers need to comply with legislation. Standardised communication to cover all bases will be formulated to ensure compliance with the relevant changes.

All communication will be in plain language to ensure that policyholders understand and are familiar with the content of the policies and benefits.

Other important rules

Disclosures An insurer must make prescribed disclosures to policyholders at three stages:

■ Before a policy is entered into

■ After a policy is entered into

■ On an ongoing basis

All disclosures made to policyholders must be in plain language, not misleading and clear and readable.

Record keeping An insurer must ensure that records or information in relation to policies is retained for a period of five years from termination.

Replacement policy details will be provided to the policyholder to ensure that there is an understanding of the benefit offering.

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Financial Sector Charter6

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How does broad-based black economic empowerment apply to retirement funds?

From 1 December 2017, an amended financial services sector code (code) was issued by the minister of the Department of Trade and Industry (dti). The code is issued in terms of the Broad-Based Black Economic Empowerment Act (BBBEE).

The amended code refers to retirement funds and service providers to retirement funds, which is the focus for this Hot Topics workbook.

Purpose of the financial sector code

The code was initially released in 2012. The code aims to actively promote a transformed, vibrant and globally competitive financial sector that:

■ reflects the demographics of South Africa■ provides accessible financial services to black people ■ directs investment into targeted sectors of the economy

The code consists of various statements. Each statement has its own objectives and principles.

Entities need to measure themselves against these statements when completing their scorecards.

Entities the amended code applies to

The code applies to: ■ long-term insurers■ short-term insurers■ re-insurers■ retirement fund administrators■ intermediaries ■ brokers■ asset managers■ consultants ■ administrators

It doesn’t apply on a compulsory basis to retirement funds but it applies on a voluntary basis to the top 100 funds in South Africa, including umbrella funds. Although the code refers to ‘large’ funds, there is nothing presumably preventing smaller funds from compiling a scorecard.

Voluntary dispensation for top 100 funds

The amended code says that many aspects of BBBEE are not relevant to funds. However, funds play a critical role in the South African economy given that they consist of R4 trillion of individual savings.

Funds also play a role in the transformation of the financial sector in that funds can consider:

■ BBBEE in appointing suppliers and service providers■ environmental, social and governance criteria in

investment decisions

Given the above transformation and economic imperatives, the code suggests that funds measure themselves yearly against certain aspects of the BBBEE scorecards.

Proposed disclosures by large funds

The aspects that the code says large funds can focus on are:

1 Preferential procurementThis aspect will score the spend by funds on empowered suppliers (including 51% black-owned and 30% black-women-owned suppliers) as a percentage of the total measured procurement spend .

2 Management controlThe management control score will measure voting rights of black board members, black female board members and, if applicable, the number of black officials and management involved in the fund.

Financial Sector Charter

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The scorecard for retirement funds

The code has many statements in it, for example Statement FS100: The general principles for measuring ownership. Each statement has their own objectives and principles and sets out what needs to be measured and the formula for doing so. Funds will need to measure themselves against the relevant statements when completing their scorecards. In general, the formula for measurement appears to be the compliance percentage divided by target percentage, multiplied by the number of points allocated.

The retirement fund scorecard is replicated below.

Retirement fund BBBEE scorecard

Element Scorecard Public disclosure Code series reference

Ownership Not applicable Recommended FS100

Management control 20 Recommended FS200

Skills development and trustee education

Not applicable Recommended FS300 or FS500

Preferential procurement 80 Recommended FS400

Empowerment financing, enterprise and supplier development

Not applicableAccess to financial services

Socioeconomic development

Total 100

It is suggested that funds should not be measured on the following:

■ Ownership since trustees have little or no control over member demographics

■ Empowerment financing, enterprise and supplier development

■ Access to financial services ■ Socioeconomic development

Other aspects the top 100 funds should report

Funds should also report on the following, which are not specifically included in the scorecard for scoring purposes:

■ Proportion of fund liabilities attributable to black male members and black female members

Funds typically do not keep record of the race or gender of the members, so this will create additional administrative work and cost for funds

■ Accredited SAQA-approved training spent on trustees, principal officers and other fund officials, including quantum, average spend per individual, number of individuals trained and examples of training interventions

It is not clear if training, other than through SAQA, is acceptable

■ Member education initiatives, including number of members and amount spent

This does not specify that the training should be based on the race or gender of members

Annual scorecard reporting

■ The reporting that funds submit should include a narrative on the BBBEE score achieved and future plans for improving the score.

■ An annual report must be submitted by the funds to the Financial Sector Charter Council (council).

■ The council may also rely on public surveys for feedback. ■ If funds don’t make sufficient disclosure then consideration will be given to revising this dispensation.

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The retirement fund scorecard is then analysed in more detail containing the specific rating factors for each item as set out below.

Retirement fund detailed scorecard

Management control scorecard

Description Points Target

Board and executive management participation 20

Exercisable voting rights of black board members as a percentage of all board members

8 50%

Exercisable voting rights of black female board members as a per-centage of all board members

4 25%

Principal officer and executive and senior management if applicable 8 50%

Preferential procurement scorecard Points Target years 1 to 3

Target years 3 and above

BBBEE procurement spend from all empowering suppliers based on the BBBEE procurement recognition levels as a percentage of total measured procurement spend

35 75% 80%

BBBEE procurement spend from empowering suppliers who are QSEs or EMEs based on the applicable BBBEE procurement recognition levels as a percentage of total measured procurement spend

10 15% 25%

BBBEE procurement spend from empowering suppliers who are at least 51% black owned based on the applicable BBBEE procurement recognition levels as a percentage of total measured procurement spend

25 15% 25%

BBBEE procurement spend from empowering suppliers who are at least 30% black women owned based on the applicable BBBEE procurement recognition levels as a percentage of total measured procurement spend

10 7.5% 12.5%

Further clarity requested from the council

Alexander Forbes has sought further clarity from the council on several matters.

Alexander Forbes has asked the council what their expectations and processes are in terms of the voluntary submissions by the Top 100 retirement funds in relation to:

■ Which criteria are used to determine the top 100 funds? Do they include government funds?

■ Is it only compilation and publishing or is a submission required?

■ If submitted, what are the timing, frequency and format of such submission?

■ What is the process to be followed in submitting (for example, electronic)?

■ Can funds complete their own scorecards? ■ Whether any certification or audit is required on the scorecards that funds complete, given that the various suppliers would be ‘certified’?

Once we get further details on which funds are affected and how and when the reports need to be submitted, we will be providing guidance to affected funds.

In the meantime, funds who are likely to be in the top 100 should consider how they will go about completing the scorecard and start gathering the necessary information. Initial guidance Trustees to do basic analysis and determine if the fund is likely to be in the top 100. In the absence of further guidance from the council, Alexander Forbes suggests using assets and membership size as criteria in this assessment.

■ Trustees to decide whether a service provider will be appointed to assist in the completion of the retirement fund scorecard.

■ Decide on a budget. ■ Obtain BBBEE compliance certificates from all the fund’s appointed service providers.

■ Complete the scorecard. ■ Trustees to approve the scorecard. ■ Submit the completed scorecard to a certification agent, if required, and the council.• Address any queries raised by the certification agent

and the council.• Submit plans to the council to address any areas of

the fund that need rectification.

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Protection of Personal Information Act7

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What is the current status of the Protection of Personal Information Act?

Certain sections of the Protection of Personal Information Act (POPIA) (act) have been implemented and the information regulator has been appointed.

However, there is still much to be done before the rest of POPIA is implemented. For example, the administrative employees and processes need to be established at the regulator’s office and regulations to the act need to be issued for public comment.

Once the rest of the act is implemented, we will have 12 months to be fully compliant with POPIA.

At this stage, it appears that the earliest full compliance would be required would be in 2020.

Protection of Personal Information Act

Different stakeholders under POPIA

We’ve spoken before about the fund and its participating employers being responsible parties under POPIA and services providers, including administrators, being operators under POPIA.

The responsible party must comply with POPIA and more specifically the eight conditions for lawful processing of personal information.

The responsible party must decide why the personal information is being processed and how to process it.

POPIA contains eight principles summarised below, which need to be complied with, although there are exceptions when a responsible party does not have to comply with these principles.

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1 Accountability The responsible party is accountable for compliance under the act.

2 Processing limitation The responsible party may only process personal information if the processing is adequate, relevant and not excessive, taking into account the purpose for which they are processing it.

3 Purpose specification The responsible party must collect personal information for a specific purpose, and the data subject must be aware of that purpose.

4 Further processing limitation

Responsible parties may only use personal information for another purpose other than the original purpose if that other purpose is compatible with the original purpose.

5 Information quality The responsible party must take reasonable steps to make sure the personal information is complete, accurate and not misleading and is updated.

6 Openness The responsible party must take reasonable steps to notify the data subject of certain information, such as:

■ the information being collected ■ the purpose for which the information is collected ■ whether the supply of information is voluntary or mandatory ■ the consequences of failure to provide information ■ any particular law that applies ■ whether there has been unauthorised accessing, processing, erasure or deletion of their personal information. The responsible party has to notify the information regulator is there is a breach.

7 Security safeguards The responsible party must have measures in place to protect the personal information from damage, loss and unauthorised destruction, processing and access.

8 Data subject participation

Data subjects can ask what personal information is held about them and can ask for access and changes to their personal information.

Access to information

Currently funds are exempt from compiling and submitting manuals in terms of section 51 of the Promotion of Access to Information Act (PAIA) until 31 December 2020.

A section 51 PAIA manual includes contact details of the fund, categories of records held by the fund and details on how someone can request access to a record held by the fund.

The responsibility of PAIA will move from the Human Rights Commission to the POPIA information regulator.

We don’t yet know if or when the exemption for funds will continue. In the meantime, here is information that funds need to be aware of in the event that the exemption for funds is removed.

What do the draft regulations say that a POPIA information officer needs to do with a PAIA manual?

POPIA says that information officers need to comply with any prescribed duties.

Duties for information officers have been included in the draft POPIA regulations, released for public comment in September 2017.

In this workbook, we will unpack three suggested action items for funds to consider.

A fund’s action list should be added to and amended over time, as further information becomes available, for example regulations to the act are issued or the POPIA information regulator issues guidance notes.

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An information officer must ensure that:

a manual for the purpose of the Promotion of Access to Information Act and the act is developed, detailing:

• the purpose of the processing• a description of the categories of data subjects

and of the information or categories of information relating thereto

• the recipients or categories of recipients to whom the personal information may be supplied

• the planned trans-border or cross-border flows of personal information

• a general description allowing preliminary assessment of the suitability of information security measures to be implemented and monitored by the responsible party

the manual referred to in paragraph (d) is available:

• on the website of the responsible party• at the office or offices of the responsible party for

public inspection during normal business hours of that responsible party

The information officer, or a person designated by them, can on request of any person provide copies of the manual to that person on payment of a fee determined by the responsible party, which may not be more than R3.50 a page.

What does POPIA say about PAIA?

The fund must keep a section 51 PAIA manual up to date which deals with all processing of information.

An individual can ask a fund, free of charge, whether the fund holds personal information about them.

An individual can request from a fund, for a reasonable fee, a description of the personal information held about them and details of all third parties that have had access to that personal information.

The individual can request the personal information be corrected.

The provision of information can be refused on the grounds allowed for under the PAIA.

Information officers in terms of POPIA

Every fund will need to have an information officer.

What does the act say the duties of an information officer are?

The duties of an information officer:

■ Encourage the trustees to comply with the eight conditions for lawful processing of personal information.

■ Deal with requests made to the trustees under POPIA. ■ Work with the information regulator if there is an investigation into the trustees or the fund.

■ Ensure compliance by the fund with POPIA. ■ Comply with any other duties and responsibilities which may be prescribed.

What are the duties of an information officer in the draft regulations?

An information officer must ensure that:

■ a compliance framework is developed, implemented and monitored

■ adequate measures and standards exist to comply with the conditions for the lawful processing of personal information

■ preliminary assessments are conducted ■ awareness sessions are conducted about POPIA, its regulations, codes of conduct or information obtained from the regulator

■ internal measures are developed with adequate systems to process requests for information

■ a manual for the purpose of PAIA and POPIA is developed

We have through industry bodies raised comments on the above draft regulations, for example who must conduct a preliminary assessment and when that must be done? We will inform funds once these regulations are final. Further regulations are also expected to be issued for comment this year.

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Who can be an information officer?

There is no guidance in the act as to who should be an information officer. Alexander Forbes’s view is that the fund’s principal officer is an appropriate choice.

The regulator’s office has suggested that an information officer should be a high-level person at the body. We have an informal view from the regulator’s office that the position of the information officer can’t be outsourced but certain of their functions could be delegated to a third party, such as a fund’s existing service provider. Any functions that are delegated to a service provider should be set out in writing.

All information officers need to register with the POPIA information regulator. Guidelines still need to be provided on the regulator’s website as to what information is required for the registration but at the very least, they have said they will require the information officer’s name, position and contact details.

Updating contracts of employment

Retirement fund participation is just one of the many ways in which an employee’s personal information is processed.

This note is meant to provide some guidance to employers and is not meant to provide legal advice or labour advice nor be exhaustive of all factors employers need to consider. Each employer will need to consider their own unique circumstances in determining how they most appropriately manage their responsibilities under POPIA.

What are employees' rights?

At a high level, employees have the right for their personal information to be collected directly from them, subject to exceptions noted below, and for their personal information to be processed in terms of POPIA.

Collection

Employers must collect personal information about their employees directly from their employees, except where:

■ the information is public knowledge ■ the employee consented to collection from another source

■ collection from somewhere else does not prejudice the employee

■ collection from somewhere else is necessary• to comply with the law • to enforce legislation about the collection of tax• for court proceedings• to maintain the legitimate interest of the employer• compliance would prejudice the lawful purpose of

collection • compliance is not reasonably practicable in the

circumstances of a particular case

Employers can only collect the personal information they need, so the personal information collected must be relevant and not excessive.

Employers must collect personal information for a specific purpose, which the employee is aware of.

If an employer collects personal information via social media, the consent of the employee is not required for that collection. However, the employer will need the employee’s consent to process the personal information and the processing must relate to a legitimate purpose.

Processing

The actual processing of personal information must be adequate, relevant and not excessive.

Employees need to consent to their personal information being processed, unless the processing:

■ is required to carry out the actions of a contract which the employee is a party to

■ the processing complies with an obligation imposed by law on the employer

■ processing protects the legitimate interest of the employee

■ processing is necessary to pursue the legitimate interest of the employer

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1 Special personal information includes information about an employee’s religion, race, trade union membership, health, sex life, political persuasion, biometric information or criminal behaviour

what personal information they need about their employees

where they collect the personal information from

the various purposes for processing employees’ personal information

Employers need to carefully consider:

Employers process employees’ personal information from day to day. This includes information related to:

■ medical aid■ retirement funding ■ risk benefits■ leave records■ payroll■ training■ appraisals■ South African Revenue Services■ the Department of Labour■ the Department of Trade and Industry

Given this processing, employers could consider amending the contracts of employment they have with their employees. This is so that they don’t need to get employee consent every single time they process their employees’ personal information.

Issues that employers can include in contracts of employment are:

■ Explain what personal information, special1 personal information and processing mean in terms of POPIA

■ Give the employer permission to process any of the employee’s personal information for any purposes connected with their employment

■ The contract could provide a non-exhaustive list of reasons for processing, so that the employee understands the various purposes that would apply.

■ Ensure the employee agrees to provide accurate and up-to-date personal information to the employer

Employers can also ask employees to sign a consent form, confirming that they understand and agree to the changes in their contract of employment.

Contracts of employment

It is clear from the above requirements that collection of the personal information should be directly from employees and the processing of personal information should be done with employee consent in most instances.

Exceptions exist where employers could collect information and process it without the knowledge of the employees, for example court proceedings or to comply with South African Revenue Services requirements.

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Medical aid and healthcare8

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What’s happening on the medical aid and healthcare front?

There’s a lot happening in these areas at the moment, which individuals and employers ought to be aware of. Will medical schemes be affected by the twin peaks framework?

We’ve dealt with the Financial Sector Regulation Act and the two new regulators established for the financial sector industry – the Prudential Authority and the Financial Sector Conduct Authority – in a previous question.

One of the industries that the new regulators will have oversight of in the future is medical schemes and medical scheme administrators. This won’t happen straight away and is one of the transitional aspects included in the Financial Sector Regulation Act.

The functions of the Prudential Authority and the Financial Sector Conduct Authority in relation to medical schemes must be exercised by the Council for Medical Schemes with the concurrence of the Prudential Authority and the Financial Sector Conduct Authority until 31 March 2021.

Competition Commission market inquiry into the private healthcare sector

The Competition Commission (commission) has been conducting a market inquiry into private healthcare since January 2014. A market inquiry is a general investigation by the commission into the state, nature and form of competition in a market, rather than a narrow investigation of a specific conduct by any particular firm.

The inquiry was set up to investigate rising costs in South Africa’s private healthcare sector. The commission had reason to believe that there are features of the sector that prevent, distort or restrict competition. The commission looked into medical schemes, medical scheme administrators, doctors, hospital groups and brokers in the inquiry.

The commission issued a provisional report on 5 July 2018 and the deadline for comments on the report was 7 September 2018. The report runs to 484 pages with an additional 42 pages of recommendations. We have included a high-level summary of the findings and recommendations.

Medical schemes and medical scheme administrators

Findings

■ Limited competition ■ Failures in governance ■ Adverse incentives ■ Lack of transparency ■ Consumer confusion

Recommendations

Improved governance in schemes to place more pressure on:

■ administrators ■ alternative methods of care ■ introduction of base packages that are comparable across schemes

■ scheme officer remuneration linked to performance of the scheme

■ encouraging member participation at AGMs ■ increasing prescribed minimum benefits ■ implementing a compulsory risk adjustment fund for all schemes

Medical aid and healthcare

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Brokers

Findings

Interests of brokers and members not aligned.

Recommendations

Move to an opt-in basis where members choose their own broker, and schemes to report on broker fees transparently and separately.

Findings

Highly concentrated market with:

■ three main hospital groups ■ poor licensing regime for facilities ■ inadequate and inconsistent enforcement of rules by the HPCSA

■ lack of transparency in pricing

Recommendations

Introduce regulatory measures to:

■ ensure the rational use of health resources ■ govern the number and distribution of providers ■ standard reporting on performance and outcomes of doctors and facilities

■ ensure that a pricing structure is implemented by a new supply-side regulator for healthcare

National Health Insurance bill

The National Health Insurance bill was issued on 21 June 2018 and is open for public comment until 21 September 2018.

The bill aims to give effect to an inclusive, free, quality healthcare system run by the state. National Health Insurance (NHI) is a financing system that will make sure that all citizens of South Africa are provided with essential healthcare, regardless of their employment status and ability to make a direct monetary contribution to the NHI fund.

What will the NHI fund focus on until at least 2022?

The bill establishes the NHI fund and its associated governance and advisory structures. The NHI fund’s initial focus will be on funding critically-needed services for defined vulnerable groups, including school children, the elderly, mental health patients and cancer patients.

What benefits will be covered?

The bill provides no detail on the benefits that will be provided. These details are expected to be developed through a benefits advisory committee, which will be appointed by the minister of health and that will develop proposals for the NHI benefits over the next few years.

How is eligibility for NHI benefits at no cost provided?

Patients will need to follow the NHI’s referral pathways and use its contracted providers. Those patients who choose not to do so won’t be able to claim from NHI. Those patients will have to pay for their medical services directly or via medical schemes or other forms of health insurance.

How will the NHI be funded?

The bill provides no detail on the funding of the NHI system, as this is a function of National Treasury. However, we can assume that it will be funded by taxpayers.

The minister of health, Aaron Motsoaledi, has said that the changes in the system will ensure that the rich subsidise the poor and the healthy subsidise the sick: ‘NHI is going to be mandatory for health services, meaning once it’s law, all South Africans will need to contribute to it if Treasury rules that it is to be funded through contributions from the population. We don’t know what they’re going to rule but if it’s mandatory, it means you can’t opt out of it, just like the constitution.’

Suppliers (hospitals, doctors and so on)

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Medical Scheme Act amendmentsThe Medical Schemes Amendment bill was also issued for public comment on 21 June 2018 and is open for public comment until 21 September 2018.

Government objectives with the bill

Government has said that the purpose of this bill is to:

■ align with the NHI■ improve the regulation of the medical schemes industry■ align the regulatory framework to the changes that have

taken place over the past decade in the sector■ better protect beneficiaries ■ promote better access to private health funding

Government also wants a centralised database of everyone who is on medical aid, which will include all of their personal details and treatments.

The bill also aims to regulate medical aid tariffs. The minister of health wants uniform tariffs: ‘We cannot continue to run a system where people are paid differently for the same services,” he said.

Broker commission

Government has put forward a view that brokers should not be paid commission by medical schemes. The bill itself does not ban brokers or prohibit the payment of commission to brokers by medical schemes. However, additional regulation will be issued by the Department of Health, which may clarify these views.

In a country where there are 22 open medical schemes with 185 benefit options, what value do brokers provide to consumers, employers and members?

■ Advice to consumers of available healthcare services■ Advice and services about the introduction or admission

of members to a medical scheme■ Assist members in understanding, accessing and

enforcing their contractual and statutory rights once they are members of a scheme

■ Continuous financial services to members, which include handling member requests, assisting with lodging complaints and enquiries and instructions

■ Services to employers by conducting corporate needs analyses and comprehensive market reviews to advise on the most suitable medical scheme options available to employees.

Interestingly medical schemes have stated that the cost of administering non-intermediated consumers is higher for medical schemes, so brokers help control costs down.

Copayments

The bill indicates that medical schemes won’t be permitted to allow copayments where a member requires a treatment that is part of a basket of still-to-be-defined ‘mandatory benefits’ or ‘a comprehensive service package’.

However, it should be noted that currently, medical schemes aren’t allowed to have copayments for prescribed minimum benefit conditions.

It appears then that the copayment situation will stay the same, except that the prescribed minimum benefit definitions will be modified over time.

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Member WatchTM9

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Background

The Member Watch survey was initially released in 2006. Since 2013, the results were shared in the Alexander Forbes Benefits Barometer (https://www.alexanderforbes.co.za/research/benefits-barometer/books). The results were shown by economic sector and assisted trustees and employers to benchmark the benefits that were being provided, and where deemed necessary, make improvements to the benefit design of the fund or group insurance arrangements.

In 2018, the Member Watch insights were not included in Benefits Barometer so that this important information could be released as a standalone publication.

Member WatchTM

Alexander Forbes administers the institutional retirement benefits of close to one million South African employees. Member Watch analyses the data of these fund members to gain insights into the savings behaviour of the South African retirement fund member and the outcomes that these members can expect at retirement.

While other industry surveys ask questions to gauge industry trends, Member Watch gets to the heart of what is happening by analysing actual data.

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Why is Member Watch so important?

Millions of South African employees rely on the money saved in their employer’s retirement fund to provide an income in retirement. For many people, this is their only formal savings for retirement. Unfortunately, for many people, the money saved in their retirement fund is not enough to sustain them in retirement.

The hope is that trustees and custodians of retirement monies use the insights from Member Watch to: ■ inform their decision making around:

• the level of contributions being made to funds• the group insurance benefits • the investment options available to members

■ encourage members to preserve their savings when they change jobs to improve their pension outcomes

The information in the Member Watch is divided into economic sectors to help employers and trustees benchmark their benefit offering against employers in their sector. Importantly, the information is also able to inform members of the amount they should be saving to reach a reasonable benefit in retirement.

About the 2018 Member Watch

The 2018 Member Watch for the first time uses data from all the retirement funds that Alexander Forbes administers. This means that Member Watch has the biggest membership data sample of all the retirement fund surveys available in South Africa. The 2018 Member Watch covers just over one million members belonging to 2 030 employer clients.

Importantly, Member Watch 2018 shows insights, learnings and recommends actions – it doesn’t just show the data. The qualitative statistical data can be used by consultants to help trustees benchmark their fund against other funds in the same industry and recommend actions that trustees can take to improve the outcomes for members.

As the Member Watch research has been conducted since 2006, the trends over time can also be analysed. For example, we are to see the effect that regulatory change in recent years has had on member behaviour.

We look forward to discussing these insights at this year’s Hot Topics seminar. Pensions index

The information in the Member Watch ties in closely to the pensions index. This Index was launched in 2012 to illustrate the factors affecting benefits and to encourage action by fund members.

The pensions index took three hypothetical members who, on 1 January 2002, were aged 30, 40 and 50. At this date, each member had a projected pension that was 75% of the member’s salary before retirement at age 65. It was initially assumed that the members were contributing at 13.3%. The pensions index uses the Alexander Forbes Investment Committee (AFICC) return assumptions (median of the Large Manager Watch) and assumes typical salary growth of actual inflation plus 1% plus promotional increases. The annuity prices (cost of buying a pension) is determined by bond yields.

Each calendar quarter, Alexander Forbes recalculates the projected pension as a percentage of the member’s final salary.

The Pensions Index information will be incorporated into the 2018 Member Watch, providing a more holistic and integrated view of the retirement landscape and outcomes members are experiencing. The new Member Watch™, together with a LifeGauge analysis, provides trustees with even more information and insights when reviewing the benefit designs of their funds. This assists trustees in setting appropriate objectives and then monitoring the outcomes that members experience and improving on these outcomes.

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Notes:

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Notes:

ALEXANDER FORBES

Credits: Alexander Forbes Communications (production) | Getty Images (imagery)

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