FSCA: Two-Component System considerations for defined benefit funds

FSCA: Two-Component System considerations for defined benefit funds

• 23 August 2024
• Regulatory Compliance and Legislation
• South African Accounting Academy

The purpose of this communication is for the Financial Sector Conduct Authority (FSCA) to communicate to the retirement funds industry:

1. the preferred approach which will be considered best practice when applying the two-component system to defined benefit members, or members with a defined benefit underpin, to ensure consistency between funds; and
2. the need for approval of alternate methods of allocation of contributions.

For a defined benefit member, the application of the two-component system requires consideration of the pensionable service (as contemplated in the rules of that fund on or after 1 September 2024) that falls within each component and requires the conversion of service to an amount that the service is worth.

Click here to download Communication 27 of 2024 (RF):

https://www.fsca.co.za/Regulatory%20Frameworks/Regulatory%20Frameworks%20Documents/FSCA%20Communication%2027%20of%202024%20(RF).pdf

Relevance to Auditors, Independent Reviewers & Accountants:

• The new Pension Funds Amendment Act is yet another piece of legislation that your clients (who are pension funds) must comply with, and which you must assess compliance with.  If they don’t comply with the relevant laws and regulations, you have certain reporting obligations in terms of NOCLAR (NOn-Compliance with Laws And Regulations) – this could include reporting to management, qualifying your audit opinion, reporting a Reportable Irregularity, etc.
• As an auditor, independent reviewer and accountant, you need to consider your client’s compliance with the new Pension Funds Amendment Act.
• As legislation, regulations and tax law are continuously changing and evolving, it is of utmost importance for practitioners to keep abreast of any changes in so that they can continue to advise their clients accordingly.
• It is important to be aware of guidance issued by regulators, e.g. the FSCA on considerations that are specifically relevant to defined benefit funds.

Relevance to Your Clients:

• The Act requires pension funds to amend their rules, adjust their investment portfolios and prepare administrative systems for pension fund members to apply to access portions of their pension funds from 1 September 2024.
• As legislation, regulations and tax law are continuously changing and evolving, it is of utmost importance for individuals and pension funds to be aware of the latest changes that may affect them, e.g. the new two-pot retirement system.
• It is important to be aware of guidance issued by regulators, e.g. the FSCA on considerations that are specifically relevant to defined benefit funds.

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