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Pension Funds Act (Act 24 of 1956)

Board Notices

Directive PF No. 3 : Surplus Apportionment Schemes and Nil Returns (Sections 15B, 15E, 15F, 15J and 15K)

Section I : General Information relating to Surplus Apportionment Schemes and Nil Returns

 

INTRODUCTION

 

(1) Section 1 of the Act defines actuarial surplus as follows:

 

"actuarial surplus", in relation to a fund which is—

(a) subject to actuarial valuation, means the difference between—
(i) the value that the valuator has placed on the assets of the fund less any credit balances in the member and employer surplus accounts; and
(ii) the value that the valuator has placed on the liabilities of the fund in respect of pensionable service accrued by members prior to the valuation date together with the value of the amounts standing to the credit of those contingency reserve accounts which are established or which the board deems prudent to establish on the advice of the valuator;
(b) exempt from actuarial valuation, means the difference between—
(i) the fair value of the assets of the fund less any credit balances in the member and employer surplus accounts; and
(ii) the sum of the values of the amounts standing to the credit of all the accounts held for individual members, whether contributory or paid-up, plus the value of any other liabilities plus the amounts standing to the credit of any investment reserve account set up to facilitate the smoothing of fund return credited to member accounts and such contingency reserve accounts which are established or which the board deems prudent to establish:

Provided that, for the purpose of quantifying the actuarial surplus in terms of section 15B, the surplus utilised improperly by the employer in terms of section 15B(6) shall be added to the difference calculated in paragraph (a) or (b), as the case may be.

 

(2) Every registered fund that commenced prior to 7 March 2002 must perform a surplus exercise and such funds cannot be exempted from this requirement.

 

(3) All registered funds reflecting an actuarial surplus at SAD are required to submit a surplus apportionment scheme and funds with no actuarial surplus must submit a nil return as required in terms section 15B(11) of the Act.

 

(4) Where funds were previously valuation exempt, such exemptions expired as at the first financial year-end or fund anniversary following 7 December 2003 (refer to Regulation 36 of the Act). Such funds are therefore accordingly required to submit an actuarial valuation report in terms of section 16 of the Act as at this date.

 

(5) The SAD of any fund cannot precede 7 December 2001.

 

(6) A statutory actuarial valuation report as at the SAD must be submitted before, or together with a surplus apportionment scheme or nil return.

 

(7) A fund must submit its surplus apportionment scheme or nil return to the Registrar within 18 months of its SAD. In terms of section 37(3) of the Act, the Registrar may impose a penalty for the late submission thereof. Furthermore, the Registrar may exercise further remedies as outlined in section 15K(1), read with section 15B(10), of the Act.

 

STATUTORY ACTUARIAL VALUATION AS AT SAD

 

(8) Form C1/D1 of the abbreviated nil return is deemed to be acceptable as an actuarial valuation report for purposes of a nil return, provided that the fund complies with the prescribed conditions set out therein and the Registrar is satisfied with the contents thereof. This principle may be extended to abbreviated bulk returns.

 

(9) Valuators should take note of the requirement to be consistent in respect of valuation bases applied both in relation to different funds and over time.

 

(10) Valuations should be performed in line with any standards set by the Registrar for the determination of actuarial surplus at the SAD, as well as the establishment of contingency reserve accounts in line with Regulation 35 of the Act.

 

(11) The Registrar requires the inclusion of an analysis of the change in surplus (or deficit) since the previous statutory valuation in the report submitted as at the SAD.

 

(12) In the case of Defined Contribution funds, in order for the Registrar to assess whether interest or bonus distributions were reasonable or whether actuarial surplus was distributed in line with actual returns, a table should be included in the valuation report indicating the rates of return actually earned on the assets of the fund as well as the rates of interest declared. (Also refer to para. 21 below).

 

(13) Pension increases granted must be disclosed and appropriately motivated in the valuation report in line with the established pension increase policy of a fund.

 

CONTINGENCY RESERVE ACCOUNTS

 

(14) In terms of Regulation 35 of the Act, the establishment and magnitude of any contingency reserve account by a fund—
(a) must be motivated by the valuator in the relevant report on the statutory actuarial valuation; and
(b) may be rejected by the Registrar, where the Registrar is not satisfied with any such motivation.

 

(15) The contingency reserve account, included by a valuator, should contain a reasonable estimate of the likely costs of the surplus apportionment.

 

SURPLUS APPORTIONMENT SCHEMES & NIL RETURNS

 

(16) The board of a fund has the right to advance the SAD where the exemption expired prior to the financial year-end or scheme anniversary following 7 December 2003.

 

(17) Where the expiry of valuation exemption occurs earlier than the financial year-end or scheme anniversary following 7 December 2003, the board may elect to perform the surplus exercise at this date rather than the date specified in regulation 36 (section 15B(1)(b) of the Act).

 

(18) The relevant prescribed forms are contained as Annexures to this Directive. Applicants are required, as far as is possible, to adhere to the prescribed formats and not deviate from them when submitting surplus apportionment schemes or nil returns.

 

(19) Where a fund does not have an actuarial surplus as at SAD, a nil return, as required in section 15B(11) of the Act, must be submitted to the Registrar confirming this fact.

 

(20) Any values shown in the surplus submission that differ from the corresponding values shown in the actuarial valuation report as at the SAD must be clearly explained and reconciled with the values in the valuation report. Any tables presented in a surplus submission must be checked and should be sensible (e.g. the numbers must add up; all headings must be consistent with the actual figures quoted).

 

(21) Where a fund has utilised actuarial surplus following 7 December 2001 through bonus declarations or pension increases which are not consistent with established practices of such fund, this must be explained comprehensively as it could have amounted to an unauthorised distribution of surplus.

 

(22) In the case of improper use of surplus, detailed information must be included with the submission.

 

(23) Regulation 36 deals, inter alia, with the withdrawal of the valuation exemption status from all funds that were previously valuation exempt. As a consequence of the withdrawal, a recognised valuator is required to complete any document required of a valuator in relation to a surplus submission.

 

SURPLUS APPORTIONMENT AND SECTION 14 APPLICATIONS

 

(24) Applications for transfers in terms of section 14 of the Act are independent from submissions of surplus apportionment schemes or nil returns in terms of section 15B of the Act. The Registrar will only consider an application for a full transfer once the surplus apportionment scheme has been approved, or nil return noted in respect of the transferor fund.

 

(25) Until the transferor fund's scheme has been approved or nil return noted the Registrar will only consider the approval of a transfer of accrued liabilities.

 

SURPLUS APPORTIONMENT PROCESS IN RESPECT OF UMBRELLA FUNDS

 

(26) Each employer participating in an umbrella fund that has a surplus must submit a separate surplus apportionment scheme. A combined nil return may be submitted in respect of those participating employers that do not have any surplus to apportion, which combined nil return must clearly show the financial condition of each participating employer separately.

 

(27) An umbrella fund may submit a combined nil return in respect of all the participating employers on condition that such participating employers do not have the ability to accumulate surplus and that each participating employer complies with the requirements for valuation exemption as set out in Regulation 2, as amended.

 

(28) For an umbrella fund where a participating employer has the ability to accumulate surplus or where a participating employer is unable to comply with the requirements for valuation exemption as set out in Regulation 2, as amended, each participating employer is required to submit a separate scheme.

 

(29) After the completion of its surplus exercise (i.e. the Registrar has forwarded a certificate to the fund/sub-funds in terms of section 15B(9)(i) of the Act, or has noted a nil return for all sub-funds), each umbrella fund must submit a schedule to the Registrar, with the details of every sub-fund registered as at the SAD. The fund must confirm that the surplus exercise has been completed (as set out above) for all sub-funds and the board of the fund must certify this.

 

(30) Valuation exemption will be granted at a fund level provided the fund complies with the requirements as set out in Regulation 2, as amended, and the Registrar has received the schedule referred to in para. 29.

 

RETIREMENT FUNDS' UTILISATION OF THE FREE SHARES ACQUIRED THROUGH DEMUTUALISATION

 

(31) Any free shares that have been obtained as a result of the investment of the fund's assets, or the placement of insurance, with a mutual society which has demutualised, is regarded to be an asset of the fund.

 

(32) Unless such free shares had been allocated prior to 7 December 2001 to members and pensioners, it constitutes actuarial surplus.

 

STANDARDS FOR THE INFORMATION TO BE INCLUDED IN THE COMMUNICATION TO STAKEHOLDERS

 

(33) Section 15B(9)(d) of the Act requires that the employer, existing and former members be informed of the scheme for the apportionment of surplus in a manner which is clear and understandable, including inter alia details of the allocation of the actuarial surplus for the benefit of the various stakeholders, the Rand value of amounts of any actuarial surplus which it is intended to credit to the member surplus account and to the employer surplus account, respectively, and the Rand value of costs of any benefit improvements for members and former members. Subsection (i) permits the Registrar to prescribe standards for the information to be included in this communication.

 

(34) The communication shall set out the financial position of the fund prior to the apportionment, stating:
(34.1) The date of the valuation;
(34.2) The fair value of the assets;
(34.3) The actuarial value of the assets (where the fund is a defined benefit fund);
(34.4) The actuarial value of the liabilities, split between the major classes of beneficiary, namely "active members" (that is, those members who either contribute to the fund or in respect of whom the employer contributes to the fund), "pensioners" and "deferred pensioners";
(34.5) Any contingency reserve account balances and, where the fund is a defined contribution fund, the amount of any investment reserve account;
(34.6) The actuarial surplus which is to be apportioned;
(34.7) The method and assumptions used to determine the actuarial values of the assets and the liabilities;
34.8) A summary of the data, the benefits and the contribution rates used in determining the assets and the liabilities of the fund; and
(34.9) A summary of each instance in which surplus was utilised improperly as defined in section 15B(6), together with the current value of such surplus. The summary should further identify where the board will be applying to the Registrar for permission to exclude this use from the amount that will be added to the surplus to be apportioned, and provide the reason why the board feels that such amount should be excluded. The amounts that will be added to the surplus to be apportioned should be stated.

 

(35) The communication shall identify the former members, by group and date of exit from the fund where appropriate, whom the board has excluded in the apportionment.

 

(36) The communication shall set out the relevant factors which the board has taken into account in determining the apportionment, including the financial history of the fund.

 

(37) The communication shall set out the result of the apportionment by class of beneficiary, identifying each class separately where the manner in which the apportionment will be applied or the relative amount of the apportionment will differ between classes, and differentiating between apportionments of actuarial surplus to members and to the employer:

 

Class of Beneficiary

Manner in which the apportionment will be applied

Amount of actuarial surplus utilised in this manner for this class of beneficiary

 

 

Out of amount apportioned to members and former members

Out of amount apportioned to employer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:

 

(1) The employer, active members, pensioners and deferred pensioners must be included as classes of beneficiary unless there are no beneficiaries in that class (for example, a provident fund in which there are no pensioners), Where former members are included, and the allocation to different tranches of former member according to date of exit differs, each tranche must be identified separately.

 

(2) Where the board excludes any class of potential beneficiary, this class should be included in the table with "nil" amounts of surplus allocated to them.

 

(38) The communication shall set out the projected financial position of the fund following the proposed apportionment, stating:
38.1. The fair value of the assets;
38.2. The actuarial value of the assets, where the fund is a defined benefit fund;
38.3. The actuarial value of the liabilities, after any benefit improvements envisaged in the scheme, split between the major classes of beneficiary, namely "active members" (that is, those members who either contribute to the fund or in respect of whom the employer contributes to the fund), "pensioners" and "deferred pensioners";
38.4. Any contingency reserve account balances, and, where the fund is a defined contribution fund, the amount of any investment reserve account;
38.5. The actuarial surplus split between:
38.5.1. the member surplus account; and
38.5.2. the employer surplus account.

 

(39) The summary of any statement by the valuator or where an independent actuary has been used, the summary of both the valuator and independent actuary, must be included. Where either the valuator or the independent actuary has qualified his or her opinion with regard to the scheme, such qualification must be included in this summary.

 

(40) A summary of any statement by the former member representative must be included, and where such statement is qualified, the qualification must be included.

 

ABBREVIATED BULK NIL RETURNS

 

(41) Bulk applications can be made in respect of underwritten funds in batches not exceeding 100 funds.

 

(42) In addition to the original application, the summary of results must be submitted electronically in an electronic format (e.g. a spreadsheet).

 

(43) The valuator certifying the application will be required to make a declaration in terms of section 15B(9)(b)(ii) of the Act on surplus utilised improperly as required in terms of section 15B(6).

 

(44) A valuator may sign off the bulk application form, provided that he confirms that he has been duly authorised by the relevant boards of the funds to act on their behalf.

 

(45) In addition, the prescribed Bulkform C must be attached to every application, and signed by a duly authorised official of the insurer stating that the insurer takes joint responsibility, together with the valuator, for the contents of the bulk application.

 

DISTRIBUTION OF AMOUNTS RELEASED FROM CONTINGENCY RESERVE ACCOUNTS AFTER THE SAD OR EFFECTIVE DATE OF A NIL RETURN

 

(46) Where the board determines, following approval by the Registrar of a surplus apportionment scheme or after the noting of a nil return, that an amount set up as at SAD or the effective date can be released 'from a contingency reserve account, such amount released creates future surplus and this surplus may be apportioned in terms of section 15C of the Act.

 

(47) Section 15C determines how "future surplus" may be distributed between the member and employer surplus accounts, and will be dealt with in terms of the rules, or, where the rules are silent, by a decision of the board taking into account the interests of all the stakeholders in the fund.

 

(48) Former members may be entitled to benefit from the distribution of actuarial surplus as at the SAD in terms of section 15B, but those former members who left prior to the SAD shall have no enforceable right to benefit from the distribution of any actuarial surplus that arises in the fund thereafter.

 

DISPOSITION OF AMOUNTS PAYABLE TO FORMER MEMBERS IN TERMS OF AN APPORTIONMENT SCHEME APPROVED BY THE REGISTRAR

 

(49) Even though the employer, existing members and former members of a fund acquire a right to be considered by the board of that fund for inclusion in the surplus apportionment, provided there is actuarial surplus to be apportioned at the SAD in terms of section 15B of the Act, any amount due to the employer, an existing member, or a former member, in terms of that apportionment scheme, accrues only when the Registrar has issued a certificate approving the apportionment scheme in terms of section 15B(9)(i).

 

(50) Funds should note that any benefit that becomes payable in terms of an approved surplus apportionment scheme must be dealt with in terms of the relevant tax legislation of SARS.