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What is a Pension Fund?
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What is a Provident Fund?
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What is a Retirement
Annuity?
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What is a Preservation Fund?
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What
is an Umbrella Fund?
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What is the difference
between an Inclusive and an Exclusive Fund?
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Is the Fund an Asset of the
Employer?
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Who is accountable to
the Registrar for the accounts of the Pension Fund?
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What are the duties of
the Principal Officer?
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What constitutes
Eligibility?
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Can Employees who
do not wish to become members of a Fund, refuse to join?
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How does the Constitution affect
the eligibility of Employees to join a Fund?
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Can a Person be a
Member of more than one Fund with the same Employer?
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Can Members withdraw
from the Fund without leaving the Company?
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Who may be a Members of an
Employers Fund?
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Can Temporary Staff or
Part-Time Employees be Members of a Fund?
WHAT
IS A PENSION FUND?
A
pension fund is a fund set up by an employer for the
benefit of its employees. The object of this fund is to
provide annuities or pensions for the members (employees)
upon their retirement, or to provide lump sum benefits for
the dependants of such members upon death of the members.
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WHAT
IS
A PROVIDENT FUND?
A
provident
fund is a fund set up by an employer for the benefit of
its employees. The object of this fund is to provide a
cash lump sum benefit for the members (employees) upon
their retirement, or to provide lump sum benefits for the
dependants of such members upon death of the members.
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WHAT
IS
A RETIREMENT ANNUITY FUND?
A
retirement annuity fund is set up by an administrator or
insurer for the benefit of individual investors. The
object of this fund is to provide annuities or pensions
for the members upon their retirement, or to provide lump
sum benefits for the dependants of such members upon death
of the members. No employer/employee relationship is
therefore required.
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WHAT
IS
A PRESERVATION FUND?
A
preservation fund is a pension or provident fund to which
a member's paid-up pension or provident fund benefits
respectively can be transferred in certain instances. It
not only preserves the member's accrued tax status, but
generally also allows the member one withdrawal prior to
retirement.
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WHAT
IS
AN UMBRELLA FUND?
An
umbrella pension or provident fund is a single fund,
established and managed by a retirement fund
administrator, to which any employer or group of employers
can apply for membership as a participating employer.
One
advantage of an umbrella fund is that the employer joins a
fund which is already registered and approved and has an
established board of trustees.
Also,
no rules need to be drawn up for each employer, as a
master set of rules already exists, which governs all
participating employers. Variations applicable to each
participating employer known as "special rules"
are issued to each participating employer.
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WHAT
IS
THE DIFFERENCE BETWEEN AN INCLUSIVE AND AN EXCLUSIVE FUND?
An
inclusive fund is a defined contribution fund where the
administration fees and costs of insured benefits are
deducted from contributions and not charged separately. As
death and disability costs increase with age, the portion
of the contribution available to fund retirement benefits
therefore reduces.
An
exclusive fund, on the other hand, is one where the
above-mentioned costs are separate from the portion
available for investment; consequently the entire
contribution is allocated to retirement provision.
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IS
THE FUND
AN ASSET OF THE EMPLOYER?
In
terms of section 5 of the Pension Funds Act, a registered
fund is a separate body corporate capable of suing and
being sued in its own name. As it is a separate legal
entity from the sponsoring employer, it cannot form a part
of the assets of the employer. As a result, should
insolvency of the employer occur, the assets of the fund
cannot be used to liquidate the company's debt. If the
principal employer was declared insolvent, the fund could
still continue for the remaining participating employers
(assuming that there were any and they were not part of
the insolvency). If there were no remaining employers it
would make practical sense to liquidate the fund although
this is not a legal requirement.
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WHO
IS ACCOUNTABLE TO THE REGISTRAR FOR THE ACCOUNTS OF THE
PENSION FUND?
The
principal officer is the responsible official accountable
to the Registrar and may, for example, represent the fund
in litigation.
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WHAT
ARE
THE DUTIES
OF THE PRINCIPAL OFFICER?
Every
Umbrella or freestanding fund must appoint a
Principal Officer in terms of section 8 of the Pension
Funds Act. It must be noted that this requirement is in
addition to that of a board of trustees which must be
appointed. The Registrar must be notified of the
appointment of the principal officer within 30 days of the
appointment.
The
Principal Officer will be in a position of trust and the
associated duties will be generally determined by the fund
rules and the Pension Funds Act including: -
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the
signature and submission of rule amendments;
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the
submission of annual financial statements to the
Registrar;
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the
signature of all fund documents to be submitted to the
Registrar;
-
the
furnishing of prescribed information to fund members.
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WHAT
CONSTITUTES ELIGIBILITY?
The
trustees or employer in consultation with the employees
have to formulate who is eligible to join the retirement
fund. This must be decided in such a way as to comply with
the requirements for approval detailed in the definitions
of "pension" and "provident" funds
contained in the Income Tax Act. The rules of the fund
will not be approved by the South African Revenue Service
if the classes of eligible employees have not been laid
down in the rules. Some of the criteria for eligibility,
which must be objectively determinable, and must not be
unfairly discriminatory in terms of the Constitution,
could be:
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Status
(e.g. monthly paid employees, weekly paid employees or
executives only)
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Length
of service (e.g. staff who have been employed for at
least 6 months)
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Salary
limit, (e.g. staff who earn over R15 000 per annum)
The
important point is that once an employee complies with the
eligibility criteria, membership of the fund is compulsory
and a condition of the employee's employment.
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CAN
EMPLOYEES WHO DO NOT WISH TO BECOME MEMBERS OF A FUND,
REFUSE TO JOIN?
In
terms of the Income
Tax Act, one must distinguish between two scenarios:
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Where
a new fund is instituted, all existing employees who
are eligible for membership must decide, within 12
months of inception of the fund, whether or not they
wish to become members. Should they decide not to
become members, once the 12 month period has expired,
they are permanently ineligible unless a special
concession is received from the South African Revenue
Service. This does not, however, mean that they are
ineligible to join any other fund which may be
instituted by the same employer. In some cases an
employer may offer a choice between membership of a
pension or provident fund.
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Where
an employee becomes employed by an employer who
already has a fund and is eligible to join, he or she
may not refuse to become a member. It is a condition
of approval of the fund by the South African Revenue
Service that membership of the fund be a condition of
employment for all eligible employees.
One
of the immediate consequences for an employer who does not
ensure that all eligible employees are in fact members of
the fund is that the South African Revenue Service may
withdraw the tax approval of the fund, which, in turn,
would mean that the tax concessions that the employer and
employees may use, will be lost.
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HOW
DOES THE CONSTITUTION AFFECT ELIGIBILITY OF EMPLOYEES TO
JOIN A FUND?
The
Constitution is aimed at creating a democratic, non-racial
and non-sexist South African society. This means that
where any law or practice is inconsistent with these
objectives, it will be regarded as unconstitutional and of
no force and effect.
The
implication of this for the retirement funds industry is
that members may be able to institute legal proceedings
against funds on the basis of unfair discrimination,
should the fund be discriminating unfairly against certain
employees.
In
many cases, funds provide different levels of benefits for
different classes of employees. This differentiation is
usually based on factors such as type of work, level of
seniority in the company and whether or not the member has
dependants, etc. The question whether or not this will be
unconstitutional in terms of an unfair discrimination
practice is an open question. Care should also be taken
not to contravene the provisions of the Labour Relations
Act.
A
fund allowing only women to be eligible for membership,
will be discriminating unfairly against men on the basis
of gender and will clearly be unconstitutional.
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CAN
A PERSON BE A MEMBER OF MORE THAN ONE FUND WITH THE SAME
EMPLOYER?
As
long as the employee is eligible, there can be membership
of as many funds as the employer might operate.
For
example, an employer might have a pension fund and decide
to institute a provident fund. The member might not wish
to transfer from the pension fund, but simply become a
member of the provident fund as well.
A
second or even a third fund could be instituted to
"top up" contributions to obtain the maximum tax
relief. These practices are perfectly legitimate.
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CAN
MEMBERS WITHDRAW FROM A FUND WITHOUT LEAVING THE COMPANY?
When
members are eligible and have joined the fund, they cannot
simply withdraw or retire from the fund. They have to
leave the service of the employer through resignation,
retrenchment or dismissal or retirement as provided for in
the fund's rules, before they are entitled to fund
benefits.
If
the members do withdraw from the fund without leaving the
company, the continued approval of the fund by the South
African Revenue Service will be jeopardised.
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WHO
MAY BE A MEMBER OF AN EMPLOYER'S FUND?
In
general, all persons who are employees can be members of
their employer's retirement fund. The exceptions to this
rule are:
The
reason for this is that both of the above categories are
not employees. They can belong to a long-term disability
income plan and an unapproved group life scheme and may
take retirement benefits in and can become member's of
retirement annuity funds in their own rights.
However,
the directors of incorporated partnerships found amongst
such professionals as accountants, lawyers, architects,
etc. can join a fund.
Irrespective
of the fact that a sole trader or partner cannot join a
fund, which has been set up for the firm, all other staff
may participate in the fund.
In
terms of the definition of "pension fund" in
section 1 of the Income Tax Act, employees who are
appointed as partners of a partnership can remain members
of the fund, but their benefits and contributions will be
based on the salary level enjoyed over the twelve months
before they became partners.
A
business trust, as long as it employs people, is capable
of instituting a fund in the same way as any other
employer. Furthermore, while it has never to our knowledge
been tested in law, it appears that the trustees of such a
trust may be members of the fund even where they are also
trust beneficiaries, as long as the necessary
employer/employee relationship exists.
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CAN
TEMPORARY OR PART-TIME EMPLOYEES BE MEMBERS OF A FUND?
The
law does not exclude temporary staff or part-time
employees, but generally this group has not joined funds
because of the high turnover in employment and the
resultant high costs involved.
In
most instances, fund administrators restrict membership to
permanent full-time employees. However, this practice is
changing, especially as far as part-time employees are
concerned, as they are demanding similar benefits to those
available to full-time staff.
It
must be noted that the definition of employee in the
Labour Relations Act does not distinguish between
full-time and part-time staff and as such, both should be
treated equally.
As
far as directors are concerned, however, it is a
departmental practice of the South African Revenue Service
that only full-time working directors can join a fund.
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