Words on wealth: understanding the challenges of retirement fund benefit disbursement

Martin Hesse

I believe there should be increased efforts by regulators and the financial services industry to reduce delays by retirement funds and their administrators in disbursing benefits to members or transferring benefits to another fund. The longer a fund sits on money that should be disbursed or transferred, the longer it receives the administration fees on that money. 

In terms of the Pension Funds Act and the rules of the fund, a retirement fund has to finalise a payout to a member or effect a transfer of benefits “within a reasonable time” of receiving instruction from the member.

If the member has died, the process is more involved, because the fund needs to consider dependants not necessarily named on the beneficiary form when distributing the benefit, which would typically be part retirement savings and part group life insurance payout. In death-benefit cases, the time limit is a year.

Individual payouts on resignation are typically done within about three months, but the files of the Pension Funds Adjudicator are full of cases where payouts have taken inordinately longer than that.

The introduction of the two-pot system last year and the subsequent deluge of savings-pot withdrawal applications forced many funds to streamline their processes for cash withdrawals. Over time, it will only be savings-pot withdrawals that funds will have to contend with, as withdrawals of vested benefits on resignation will eventually fall away.

However, it is when individuals want to voluntarily transfer savings from one fund or one provider to another that unwarranted delays persist, in my view. Transfers are governed by Section 14 of the Pension Funds Act, which requires approval from the Financial Sector Conduct Authority (FSCA), among other things.

You would think that transferring savings in a preservation fund or retirement annuity (RA) from one provider to another could be accomplished within a week or two. But no. It can take six months or longer, according to financial advisers I have spoken to.

Draft notice

So it was with some optimism that I read of the FSCA’s recent decision, via a draft notice, to exempt retail RA and preservation fund transfers from the requirements of Section 14(1) of the Act. The notice is open to input from the retirement industry until June 5.

The problem with the legislation is that it applies equally to full-scale transfers of the collective assets of one occupational fund to another or the amalgamation of such funds as it does to an individual in a retail RA or preservation fund transferring his or her savings to a similar fund offered by another provider.

Section 14(1) ensures that collective transfers or amalgamations are correctly, carried out under the watchful eye of the registrar to ensure that actuarial valuations are correct, the funds are in a sound financial state, and that the rights of all members of the relevant funds regarding their retirement benefits are respected.

The FSCA notice states that, pursuant to section 14(9) of the Pension Funds Act (which gives the FSCA the power to exempt a transaction from the provisions of section 14), the FSCA exempts retail fund transactions involving amalgamations or transfers from the requirements of section 14(1) of the Act insofar as the transactions relate to: 

• Transfers between retirement annuity funds; 
• Transfers between preservation funds; or 
• Transfers from a preservation fund to a retirement annuity fund.

The notice says the exemption is subject to the following conditions, among others:

• Retail funds keep proper records of all such transactions; 
• The assets and liabilities are transferred within 180 days of the effective date of transfer;  and 
• Any assets transferred must be increased or decreased with the fund return from the effective date until the date of final settlement. 

Although the notice provides for 180 days for the transfer to be effected, I am hoping that, with fewer hurdles to clear, providers will process transfers more expeditiously. Let’s wait and see.

Financial advice

You are likely to undertake this type of transfer on advice from a financial adviser, in which case it is worthwhile to consider the following points by Momentum in a trustee newsletter:

• The most important question to ask is: will I be better off in retirement after moving my money? “The promise of better returns shouldn’t be the only consideration – the only thing you should be focusing on is your investment goal and if you’re on track to achieve that goal,” Momentum says.
• You will not be taxed on the transfer, although there could be costs, and in some instances, penalties or cancellation fees, involved. All costs must be disclosed to you by the adviser.
• No initial financial adviser fee is allowed to be charged on transfer. However, the adviser may charge an ongoing annual advice fee on the investment, depending on your fee agreement.

You can turn to the Pension Funds Adjudicator if your retirement fund is taking an unreasonably long time to transfer or pay out your savings. Go to www.pfa.co.za.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE