The Consumer Protection Act

The Consumer Protection Act

The Consumer Protection Act (CPA) became fully effective on 31 March 2011 and will impact retirement funds significantly. The CPA affects all transactions between funds, members and service providers; funds and service providers must therefore incorporate consumer protection principles in their procedures and principles.

The Registrar of Pension Funds has to date not requested for exemption, and the CPA therefore also applies to retirement funds. The provisions of the Pension Funds Act would therefore need to be brought in line with the CPA. The industry is awaiting clarity from the Registrar on this matter.

The CPA applies to funds both as “consumers” and as “suppliers”. However, as entities with assets or turnover above R2 million are excluded from the definition of “consumers”, most retirement funds will only be “suppliers”.

The CPA’s Impact on Retirement Funds

Some important issues that Funds should comply with are set out below:
Contracts: all transactions between a fund and its service providers/members constitute a contract. The CPA requires that consumers (fund members) must understand what they are purchasing and how much it will cost. Contracts must comply with a number of requirements.

• Plain language: fund rules, standard member documents and fund communication must be in clear, simple language appropriate for the members’ education level. This will be challenging, particularly in relation to Fund rules. It is not clear yet whether this will require fund documentation to be provided in the members’ home languages.
• Disclosure requirements: any limitation to the fund’s liability or risk, any indemnity required of the member and any acknowledgement of fact by a member must be in plain language and conspicuously brought to the member’s attention.

Documents: The plain language and disclosure requirements extend to member benefit statements, section 14 transfers and member investment switches. A written record of all these transactions must be provided to the members including specific details prescribed in the CPA

Interpretation: All documents prepared by the fund must be interpreted to the benefit of the member. This would include fund rules, standard documents such as benefit statements and complaints from members

Fund benefits: these may not discriminate unless this benefits members or justifiable groups of members e.g. disabled members.

Marketing Material: this may not contain misleading information, misrepresentations or unsubstantiated claims. Members may refuse marketing material, to opt out or to block any direct marketing at no cost to themselves. Funds must have clear rules on when members can be contacted.

Waiver of member rights: Funds cannot ask members to waive any right, assume any obligation or waive any fund liability on terms that are unfair, unreasonable or unjust. This may impact on members’ annuity options at retirement, as well as transfers to other funds or unclaimed benefit funds

Right of choice: The CPA gives members the right to select suppliers. This affects fund limitations on annuity choices at retirement and possibly on member
investment choices.

Complaints and forum shopping

Members may lodge complaints where their rights under the CPA have been infringed/threatened or where prohibited conduct has occurred. These consumer rights may be enforced through a number of forums including the Pension Funds Adjudicator. There is a concern that this provision will result in forum shopping by consumers and members, leading to inconsistent rulings. There is also no requirement for a member to exhaust the fund’s internal complaint resolution mechanism first.

Penalties for non-compliance

Non-compliance with an order of the National Consumer Commission or Tribunal may result in:

• Fines payable to the National Revenue Fund
• Compensation for the complaining member
• Imprisonment of up to 12 months or (up to 10 years for a breach of confidence)

The National Consumer Tribunal may impose penalties of up to 10% of the fund’s turnover in the previous year or R1 million.

SARS RF 1/2011: Conditions for Preservation Funds

Retirement Fund (RF) Notes issued by the SARS are binding on all funds, unlike General Notes (GN). On 1 March 2011 SARS issued RF 1/2011 which replaces RF1/98. RF 1/2011 is effective from 30 September 2010. This Note sets out additional conditions for pension preservation funds and in summary provides that:

• Members who exit a pension fund before retirement can now take part of their pre-retirement withdrawal benefit as cash and transfer the balance to a pension preservation fund. They will still be allowed to take one cash withdrawal from that pension preservation fund before retirement
• Benefits from a pension or pension preservation fund cannot be split among different pension preservation funds, when transferred. Benefits may now only be transferred to one pension preservation fund or one pension preservation plus one retirement annuity fund
• Transfers from a preservation fund to retirement annuity funds are allowed. These transfers will not be treated as the member’s one permissible cash withdrawal
• The rules of all pension preservation funds must be amended before 31 October 2011 to incorporate the provisions of this Note, or their tax approval will be removed.

The Pension Funds Act requires all funds to appoint a valuator and submit a valuation to the Registrar every three years. In terms of the previous Regulation 2, funds that met certain criteria could be exempted from submitting a valuation every three years and from having a valuator. Such exemption applications had to be submitted every three years.

FSB Board Notice 61: Valuation exemptions

On 25 March 2011, the FSB issued Board Notice 61 of 2011, dealing with valuation exemptions. The Board Notice applies to all valuation exemption applications submitted on or after 1 April 2011 and replaces Regulation 2 of the Pension Funds Act.

New Valuation Exemption Requirements

The Board Notice stipulates Funds need to apply for valuation exemption only once more (at their next application date after 1 April 2011); thereafter the exemption will remain in force indefinitely. Under Regulation 2, only the valuator was required to sign the exemption application. In terms of the Board Notice, the Valuator, the Trustees and the principal officer must now sign the application.

The Board Notice sets out new criteria which may prevent funds from obtaining valuation exemption. Funds with one of the following will not be exempt from valuation:

• a contingency reserve account that could have a negative balance (other than a processing error reserve account)
• an investment reserve account
• compliance failure with 15B of the Act (ie have not submitted a surplus scheme or a nil return to the Registrar)
• a statutory valuation at surplus apportionment date not accepted by the Registrar (unless the fund was previously exempt from valuation)

In order to qualify for valuation exemption, the Board Notice provides that the fund’s valuator must certify that the fund meets the following conditions:

• All members of the fund other than pensioners are entitled to a defined contribution benefit
• The liabilities of the fund do not exceed the value of the members’ individual investment account; if yes, the excess must be fully insured with registered insurers
• No pensions are paid from the fund; at retirement pensions are fully secured through annuity policies purchased from a registered insurer
• All reserve accounts are covered by the rules of the fund
• The value of assets equals or exceeds the value of the liabilities at individual member level and at the fund level
• The fund’s assets are appropriate, taking into account the liabilities of the fund (ie the benefits payable)
• The method used to allocate returns to members’ individual accounts is based on sound principles.

Reminder for employers: fringe benefit tax to be levied on employer policies

The Taxation Laws Amendment Act 2010 provides that employer-owned, unapproved Group Life Assurance (GLA), dread disease, income replacement (PHI) and key man policy premiums are all to be added to employees’ taxable income and taxed as fringe benefits. The effective date of the above changes is 1 January 2011. However, the amendments apply for each employer from the start of the employer’s new financial year commencing on or after 1 January 2011.