Speaking to delegates, FSCA Commissioner Unathi Kamlana commented on industry-specific issues and also gave an overview of the Authority’s approach to regulating retirement funds.

For the past year and a half, the FSCA and the financial industry alike have had to adapt to new ways of regulation as a result of the Covid-19 pandemic.

The Covid-19 pandemic and its impact on the industry within the broader macro-financial context

According to Kamlana, there are several key lessons that have come from this period, especially as a large number of funds experienced financial distress. Referencing a 2020 FSCA survey which revealed that nearly 47% of Retirement Funds were in financial distress due to Covid-19, Kamlana said this has unleashed extensive questions about structural considerations around retirement systems and arrangements.

These Funds were approached by employer and employee alike in desperate search of relief. Smaller Funds bore the biggest brunt of the pandemic, with the most pleas for relief coming from the manufacturing and services industries. This disproportionate economic impact on various sectors of the economy, Kamlana explained, was a reflection of the early approaches adopted to manage the pandemic. Further, the sharp increase in liquidation cases brought before the FSCA in 2020, indicated the stress placed on employers by the pandemic.

This raises questions like, should countries consider early access to retirement savings in order to assist members in dire financial need? Should there be some form of compellation over emergency savings? Or, will employers continue to provide retirement funds as a condition of employment, considering that South Africa does not legislatively compel participation in a retirement fund?

Kamlana's advice is that South Africa should aim higher in improving the retirement system, whose areas of weakness were easily identifiable and in need of preservation, coverage, and governance. South Africa, ranked 31^st out of 43 countries in the 2021 Mercer 13^th Annual CFA Institute Global Pension Index Report, gets a “C” according to the adequacy, sustainability, and integrity criteria. The UK and Australia were rated “B” and the Netherlands an “A”. The report classifies the South African retirement system as one with “good features, but also major risks and/or shortcomings”. In grading terms, a “C” means a relatively average or mediocre outcome.

South Africa has a two-bucket system that the National Treasury has been contemplating to help improve the country's retirement system, allowing people to withdraw some of their retirement savings before retirement while also preserving savings.

According to the feedback received, these new proposals have been warmly welcomed across the spectrum and will likely continue to enjoy overwhelming support. “As the FSCA, we also remain supportive of this important work done by the National Treasury. Our view is that it will yield improved outcomes for retirement savings in South Africa as well as assist in achieving a replacement ratio of at least 75% - given that only 6% of working South Africans are expected to retire comfortably, that is, with a 75%income replacement ratio,” reflected Kamlana.

Governance: The G in ESG

On the key area of Governance, Kamlana stressed the importance of high caliber leaders within the retirement fund space and their obligation to put the interests of members first, treat them fairly and build confidence in the retirement savings sector. To achieve this, the sector needs high levels of competence and integrity across the value chain of activities involving trustees, administrators, asset managers and lawyers. “Members of retirement funds deserve no less and we owe it to them and their families to ensure that they have decent savings to enter retirement with. It’s kind of the whole point! We should have this as a foundational preoccupation when we elect trustees and appoint service providers in order to ensure that we are entrusting the right people with these lifetime savings!”

Kamlana, further encouraged Principal Officers and Trustees to use the various mechanisms available to them to inform the Authority whenever there was evidence of possible and suspected misdemeanours being carried out within a Fund.

ESG - Capital with a Conscience

The Commissioner was even more passionate when addressing Environmental, Social, and Corporate Governance (ESG) matters. He shared his approval of the International Organisation of Pension Supervisors’ (IOPS) guidelines on ESG, that state that ESG-related factors may have a direct, and potentially substantial, financial impact on the savings and well-being of pension fund members, particularly in the longer term.

Acknowledging the efforts and progress made by the FSCA and the industry in adhering to the IOPS guidelines on ESG, Kamlana noted the need to apply due diligence according to a global standard. “We should consider all the relevant risk factors that could possibly have a negative or positive impact on financial returns. ESG factoring does not mean that you ignore or relegate financial return to a secondary priority. It does not mean neglecting your fiduciary duty to members. It does not mean charitable investments. It just means Capital with a Conscience.”

Arrear Contributions

The adverse effect of the Covid-19 pandemic on retirement funds is as a result of contributions having had to be reduced or suspended, upon agreement between employees and employers. Kamlana reminded employers about the important obligation to honour their commitments, contribute and pay-over deductions into their respective retirement funds, unless the agreement between employees and AP employers was to the contrary. Kamlana sighted that failure to do so, is a criminal offence in terms of the PFA and that it can result in the management of a company being held personally liable. “The FSCA is currently finalising a conduct standard that will assist both funds and the Regulator in protecting workers and members more effectively. However, even with the implementation of this standard, the onus will still rest on the fund to take the lead and pursue such arrear contributions with delinquent employers. On our part, we will ensure compliance with the new standard as the Regulator and take appropriate regulatory action independently and without fear, favour or prejudice as required by the FSR Act,” he said.

Transformation

On transformation and inclusion, Kamlana said: "We should continue implementing strategies which ensure that trustees and leaders of retirement funds become active owners who call out any lack of diversity and inclusiveness amongst the boards and workforce of companies they invest in. Research shows that entities with diverse boards and leadership, including gender balance, tend to ultimately make better informed decisions which lead to success.”

In closing, Kamlana expressed confidence in the FSCA and the sector, saying: “The FSCA is ready to assist the Financial Sector Transformation Council and all the partners to establish a dedicated transformation scorecard that will outline achievable objectives and practical timelines. Our commitment to the industry includes continuing to navigate the conditions brought about by the Covid-19 pandemic, working together towards the attainment of sustainability, good governance and transformation through clearly defined strategies steered by ethical leadership.”