Author: Gary Moore

Date: 11 July 2019

The Pension Funds Act, 1956[1] provides for the registration and regulation of pension funds.[2]

Pension funds must be registered under the Act before commencing pension-fund business.[3]

Anyone who contravenes[4] this requirement is guilty of an offence, and liable[5] to a fine of up to R10 million or imprisonment for up to ten years, or both.[6]

The Act states that the Minister of Finance may make regulations which[7] limit the extent to which[8] a pension fund[9] may invest in particular categories[10] of assets,[11] and which define the categories[12] of assets to which the limit applies.[13]

The Minister in 1962 made Pension Funds Regulations,[14] including one prescribing asset-spreading requirements.[15] The Minister substituted that Regulation in 2011.[16]

The 2011 Regulation[17] stipulates[18] that funds must hold only categories of assets mentioned in a Table,[19] and comply with limits in the Regulation.[20]

The Table specifies different asset categories and subcategories. It specifies, as categories of assets “Inside the Republic and foreign assets”:

Debt instruments;[21]

equities;[22]

immovable property;[23]

commodities;[24] and

hedge and private-equity funds.[25]

The Table limits to stated percentages the extent to which a pension fund may invest in each asset category and subcategory. The Regulation also limits the extent to which a fund may invest in combinations[26] of certain asset subcategories from different categories.[27]

Yet none of the asset categories, nor their subcategories, distinguish between domestic and foreign assets, or treat them differently, with two exceptions:

First, the Table lists, as subcategories of asset-category Cash, a balance[28] held with a “foreign bank” a or money-market instrument issued by a foreign bank, and stipulates for them a different investment limit from that for other Cash subcategories.[29]

Second, the Regulation states that a fund[30] must—

Perform a reasonable due-diligence investigation before investing in a “foreign asset”,[31] taking in account currency, country and other risks relevant to foreign assets;[32] and

understand the changing risk-profile of the fund’s assets over time, taking in account a comprehensive analysis of[33] foreign assets’ currency, geographic and sovereign risks.[34]

Importantly, the 2011 Regulation includes Subregulation 28(3)(i)), which states[35] that a fund’s foreign-asset exposure must not exceed—

The maximum allowable amount that a fund may invest in “foreign assets” as “determined by the South African Reserve Bank”; or

“such other amount” as “may be prescribed” (by the Registrar by notice on the official website  of the Financial Services Board[36]).

The Regulation defines a foreign asset as an asset “deemed foreign” by the Reserve Bank.[37]

The Pension Funds Act authorises the Registrar[38] to apply to court for the cancellation or suspension of the registration of a fund which has violated the regulations[39] wilfully and after notice from the Registrar.[40]

The Act[41] defined the Registrar as the Registrar of Pension Funds,[42] who was[43] the executive officer mentioned in the Financial Services Board Act, 1990[44] of that Board.[45]

To sum up, Subregulation 28(3)(i) states that a fund’s aggregate exposure to assets deemed foreign by the Reserve Bank must not, on pain of possible cancellation or suspension of the fund’s registration, exceed the amount determined by the Bank or such other amount as may be prescribed by the Registrar.

This violates the Rule of Law, in many respects:

First, the Minister’s 2011 Regulation, without authority in the Act, delegates to the Bank or Registrar the setting of a fund’s aggregate foreign-asset exposure. This violates the principle of the Rule of Law that Ministers must exercise powers conferred on them without exceeding the limits of those powers.[46] The Act authorises the Minister to make regulations that limit the extent to which funds may invest in particular categories of assets. It does not authorise the making of regulations which delegate that power to another person or body.

Second, the Regulation confers on the Reserve Bank and Registrar an unfettered power to limit a fund’s foreign-asset exposure. This violates the principle of the Rule of Law that questions of legal liability should[47] be resolved by application of law, not the exercise of discretion. The broader a discretion is, the greater the scope for subjectivity and arbitrariness, which is the antithesis of the Rule of Law. A discretion should be narrowly defined and its exercise capable of reasoned justification.[48] Delegated powers should be carefully defined.[49]

Third, the Regulation confers on the Bank an unfettered discretion to deem assets “foreign”. This too violates the principle that liabilities should not be resolved by discretion.[50]

Fourth, the Regulation is vague, in stipulating that a fund’s foreign-asset exposure must not exceed an amount “determined” by the Reserve Bank, without specifying the form or manner in which the Bank would determine the amount. This violates the principle of the Rule of Law that laws should be accessible and[51] intelligible.[52]

Fifth, the Regulation is confusing, in conferring on two different entities the power under the Regulation to limit a fund’s maximum foreign-asset exposure. This violates the principle of the Rule of Law that laws should[53] be clear and predictable.[54]

This vagueness and confusion are illustrated by how pension funds’ maximum foreign-asset exposure has recently been determined or prescribed:

In Feb 2018, the Minister in his Parliamentary Budget Speech announced a five-percentage-point increase in institutional investors’ offshore allocation limits for all categories[55] (retirement funds, long-term insurers and collective-investment-scheme management companies, and registered investment managers who invest offshore directly[56]).

The same day, the Reserve Bank’s Financial Surveillance Department[57] issued an Exchange Control Circular[58] advising authorised dealers of amendments to the Currency and Exchanges Manual for Authorised Dealers[59] that inter alia increased the permissible foreign exposure of retirement (pension) funds to 30 percent of retail assets under management.[60]

(The Financial Surveillance Dept issued the Currency and Exchanges Manual for Authorised Dealers in 2016,[61] and updates it as required.[62]

(The Currency and Exchanges Act, 1933[63] enables the President[64] to make regulations i.r.t. matters relating to[65] currency.[66] He made Exchange Control Regulations,[67] which state—

A person[68] may not buy[69] foreign currency[70] other than from an authorised dealer;[71] and

an authorised dealer must not buy[72] foreign currency[73] except for purposes[74] determined by the Treasury.[75]

(The Manual contains the permissions and conditions applicable to foreign-exchange transactions which authorised dealers may undertake o.b.o. their clients.[76]

(The Exchange Control Regulations empower the Minister to delegate powers[77] conferred by the Regulations on the Treasury[78] to anyone.[79] The Minister delegated[80] those powers[81] to the Reserve Bank[82] (to its Financial Surveillance Dept, avers the Bank[83]).)

It is evident that the Reserve Bank’s Financial Surveillance Dept increased foreign-portfolio limits for retirement (pension) funds, long-term insurers and collective-investment-scheme management companies, and registered investment managers who invest offshore directly, under the Currency and Exchanges Act’s Exchange Control Regulations. The Bank did not determine an amount for purposes of Pension Funds Subregulation 28(3)(i).[84]

Subregulation 28(3)(i) states that a fund’s foreign-asset exposure must not exceed the maximum allowable amount that a fund may invest in foreign assets as determined by the Reserve Bank or “such other amount” as may be prescribed by the Registrar.

As to whether “such other amount” has been prescribed by the Registrar,[85] the Board in Feb 2018 issued a “Regulation 28” information circular by the Registrar,[86] which stated that “Based on the [Reserve Bank’s] Exchange Control Circular” retirement funds may “therefore now” acquire foreign portfolio investments up to the revised limit of 30 percent.[87]

This violates the Rule of Law in further respects:

Sixth, the objectives of exchange controls and prudential limits differ.[88] The Registrar should not determine a prudential pension-fund limit based on exchange-control laws. That violates the principle of the Rule of Law that Ministers must exercise powers for the purpose for which they were conferred on them.[89]

Seventh, Subregulation 28(3)(i) (in stating that a fund’s foreign-asset exposure must not exceed the amount determined by the Reserve Bank, “or such other amount as may be prescribed” by the Registrar) implies incorrectly that the Registrar may determine an amount more lenient than exchange controls allow. That violates the principle that laws should be clear.[90] Where two laws regulate the same thing, the stricter one will apply.[91]

The Financial Sector Regulation Act, 2017[92] amended the Pension Funds Act in 2018[93] to state that references in the Pension Funds Act and Regulations[94]

To the Registrar or Financial Services Board, must be read as references to the Financial Sector Conduct Authority established by the Financial Sector Regulation Act;[95]

To a matter being prescribed, must be read as referring to it being prescribed by Conduct Standard[96] i.t.o. that Act.[97]

The Financial Sector Regulation Act provides that—

A regulation made[98] i.t.o. the Pension Funds Act[99] remains in force for that Act’s purposes, but may be amended[100] by a Conduct Standard made by the Financial Sector Conduct Authority[101] i.a.w. the Pension Funds Act;[102]

a Conduct Standard may authorise the Financial Sector Conduct Authority or the Reserve Bank to make “determinations”[103] for the purposes of the standard.[104]

The latter provision of the 2017 Act (that a Conduct Standard may authorise the Authority or Reserve Bank to make determinations for purposes of the standard) does not cure Regulation 28(3)(i)’s deficiency in having delegated, without Pension Funds Act authority, to the Bank or Registrar the setting of a fund’s foreign-asset exposure. The 2017 Act’s provision does not state that it also applies retrospectively to the existing Pension Funds Regulations.

There is a strong presumption against a statute operating retrospectively to validate what was previously invalid.[105] A statute will[106] be construed as only applying prospectively, in the absence of a clearly expressed contrary intention by the legislature.[107]

If the pension-funds policy is that there need be no stricter foreign-asset limits than those allowed under exchange-control laws, Subregulation 28(3)(i) can be deleted.[108]

 

[1] Pension Funds Act 28 of 1956.

[2] And their incorporation and dissolution, and matters incidental thereto. Pension Funds Act, Long title.

A pension fund is—

an association established to provide annuities or lump-sum payments on retirement to members or former members or on their death to their dependants; or

a business carried on under a scheme established to provide annuities or lump-sum payments on retirement to persons who belong or belonged to a class for whose benefit the scheme was established or on death to their dependants; or

an association or business carried on under a scheme established to administer and invest, o.b.o. beneficiaries, benefits that became payable pursuant to a member’s employment on the death of two or more members of a pension fund,

and includes any such association or business which is or may become liable for payment of any benefits provided for in its rules, whether or not it continues to admit members, or collect contributions from or on their behalf.

Pension Funds Act s 1(1) svv “pension fund” read with “pension fund organisation” pars (a), (b), (c) et in fin.

[3] Pension Funds Act s 4(1)(b).

[4] Or fails to comply with.

[5] On conviction.

[6] Pension Funds Act s 37(1)(a).

[7] Inter alia.

[8] And the amount which.

[9] Pension Funds Act s 1(1) svv “fund”, “pension fund” and “pension fund organisation”.

[10] Or kinds.

[11] And prescribe the basis on which the limit shall be determined.

[12] Or kinds.

[13] Pension Funds Act s 36(1)(bA).

[14] Pension Funds Regulations, Govt Notice R98 of Jan 1962 (in Gazette 162 of 26 Jan).

[15] Pension Funds Regulations reg 28 (Asset spreading requirements).

[16] Pension Funds Regulations reg 28, as substituted by Govt Notice R183 of 4 Mar 2011 (Gazette 34070).

[17] Pension Funds Regulations reg 28, as substituted by Govt Notice R183 of 4 Mar 2011.

[18] Inter alia.

[19] Pension Funds Regulations reg 28 Table 1.

[20] Pension Funds Regulations reg 28(3)(a).

[21] Pension Funds Regulations reg 28 Table 1, item 2.1.

[22] Pension Funds Regulations reg 28 Table 1, item 3.1.

[23] Pension Funds Regulations reg 28 Table 1, item 4.1.

[24] Pension Funds Regulations reg 28 Table 1, item 5.1.

[25] And other assets not referred to. Pension Funds Regulations, reg 28 Table 1, item 8.1.

[26] So-called overarching limits. National Treasury, 23 Feb 2011. “Explanatory Memorandum on the final Regulation 28 that gives effect to Section 36(1)(bB) of the Pension Funds Act 1956”. Pt 3 (asset limits) §3.1 (general). Gazette 34070 of 4 Mar 2011.

[27] Pension Funds Regulations reg 28(3)(f)(i)–(iv), (g)(i) and (ii), and (h).

[28] Or deposit.

[29] Pension Funds Regulations reg 28 Table 1, item 1.2.

[30] And its board.

[31] Or contractually committing to invest in a third-party-managed foreign asset.

[32] Pension Funds Regulations reg 28(2)(c)(vi).

[33] Inter alia.

[34] Pension Funds Regulations reg 28(2)(c)(viii).

[35] Pension Funds Regulations reg 28(3)(i).

[36] Pension Funds Regulations reg 28(1) sv “prescribed”.

[37] For the Reserve Bank’s “reporting purposes”. Pension Funds Regulations reg 28(1) svv “foreign asset”.

The Bank’s Financial Surveillance Dept defines foreign assets for exchange-control purposes  as the sum of foreign-currency-denominated assets and Rand-denominated foreign assets. Reserve Bank: Financial Surveillance Dept: Currency and Exchanges Manual for Authorised Dealers, B.2 (capital transfers): (H) South African institutional investors: par (iii)(k).

The exchange-control regulations state:

A resident who is or becomes entitled to sell or procure the sale of a foreign asset shall make or cause to be made a declaration of such foreign asset to the Treasury or an authorised dealer, stating when and how the asset was acquired, where it is held and whether and to what extent it is held in cover for any foreign liability;

A foreign asset i.r.o. which a declaration has been made shall not be sold, transferred or otherwise disposed of without the Treasury’s permission, and i.a.w. such conditions as it may impose;

The latter does not impose an obligation on anyone i.r.o. a foreign asset i.r.o. which the Treasury has exempted him.

Exchange Control Regulations made under Currency and Exchanges Act, 1933 (Govt Notice R1111 of 1 Dec 1961) reg 7(1), (2) and (3), read with Orders and Rules (Govt Notice R1112 of 1 Dec 1961) par 6.

[38] Pension Funds Act s 1A(1) and s 1(1) sv “Authority”.

[39] Pension Funds Act s 1(1) svv “this Act”.

[40] Pension Funds Act s 27(2)(a).

The court may cancel the fund’s registration or suspend it for such period it thinks fit, and attach to such cancellation or suspension any conditions it thinks desirable, or make any other order it thinks desirable in the circumstances. Pension Funds Act s 27(3).

[41] At the time.

[42] Pension Funds Act s 1(1) sv “registrar”, as substituted by Financial Services Board Act 97 of 1990 s 29 and sched (laws amended).

[43] Pension Funds Act s 3, as substituted by Financial Services Board Amendment Act 41 of 1992 s 9.

[44] Financial Services Board Act 97 of 1990.

[45] Financial Services Board Act s 13(1)(a).

[46] The Rt. Hon Lord Bingham of Cornhill KG, Sixth Sir David Williams Lecture, Centre for Public Law, Univ of Cambridge, 2006, “The Rule of Law”, sixth sub-rule.

[47] Ordinarily.

[48] Bingham, “The Rule of Law” (supra), second sub-rule.

[49] International Congress of Jurists. The Rule of Law in a Free Society. New Delhi, 1959. Conclusions. “The Executive and the Rule of Law”, cl 1.

[50] Bingham, “The Rule of Law” (supra), second sub-rule (ibid).

[51] As far as possible.

[52] Bingham, “The Rule of Law” (supra), first sub-rule.

[53] As far as possible.

[54] Bingham, “The Rule of Law” (supra), first sub-rule.

[55] The special allocation to African investments would rise to ten per cent. 2018 Budget Speech, 21 Feb 2018, p 23. M Gigaba, Minister of Finance.

[56] See Reserve Bank: Financial Surveillance Dept: Currency and Exchanges Manual for Authorised Dealers, B.2 (capital transfers): (H) South African institutional investors: par (i)(a), (c), (e).

[57] The Bank’s exchange-control department was renamed its Financial Surveillance Dept in 2010. South African Govt. “Financial Surveillance Department.” 30 Jul 2010. https://www.gov.za/financial-surveillance-department .

The Financial Surveillance Dept continues to administer exchange controls. Currency and Exchanges Manual for Authorised Dealers, p 12 (legal context).

[58] Reserve Bank, Financial surveillance department: Exchange control circular 7/2018 (21 Feb): South African institutional investors (increase in foreign-portfolio limits).

[59] See Currency and Exchanges Manual for Authorised Dealers, B.2 (capital transfers) (H) (South African institutional investors) pars (iii)(a) and (iv)(a) read with pars (i)(a) and (ii)(c)(aa).

[60] Institutional investors also qualified for an additional 10 percent African allowance.

[61] Inter alia, replacing the existing exchange-control rulings and manual. Reserve Bank: Financial Surveillance Dept: Exchange control circular 7/2016 (29 Jul): Replacement of exchange-control rulings and manual with two currency-and-exchanges manuals and two guideline documents.

[62] The Manual has been subject to over 30 revisions. Currency and Exchanges Manual for Authorised Dealers, p 2 (version control sheet).

[63] Currency and Exchanges Act 9 of 1933.

[64] Interpretation Act 33 of 1957 svv “Governor-General”, “State President”, “President”, read with Constitution  Act 201 of 1993 s 232(1)(c)(i) and 1996 Constitution s 241, Sched 6 (transitional arrangements) item 3(1)(c).

[65] Or affecting or having any bearing upon, directly or indirectly.

[66] Or banking or exchanges. Currency and Exchanges Act, 1933 s 9(1).

[67] Exchange Control Regulations ( Govt Notice R1111 of 1 Dec 1961).

[68] Other than an authorised dealer.

[69] Or borrow.

[70] Or gold.

[71] Except with Treasury permission. Exchange Control Regulations, reg 2(1).

[72] Or borrow or receive.

[73] Or gold.

[74] or on conditions.

[75] Exchange Control Regulations, reg 2(2)(a).

[76] Currency and Exchanges Manual for Authorised Dealers, p 13 (introduction).

[77] And functions.

[78] Defined as the Minister or a departmental official acting on his authority by virtue of the division of work in that Department. Exchange Control Regulations, reg 1.

[79] Exchange Control Regulations, reg 22E(1).

[80] With exceptions not relevant.

[81] And functions.

[82] Orders and Rules under Exchange Control Regulations (Govt Notice R1112 of 1 Dec 1961) par 2.

The Currency and Exchanges Act empowers the President to provide, in his regulations i.r.t. any matter relating to currency, for the empowering of specified persons to make Orders and Rules for those purposes. Currency and Exchanges Act, 1933 s 9(5)(a).)

[83] Specifically, to the Governor and/or a Deputy Governor of the Bank, and to the head and officials of its Financial Surveillance Dept. Reserve Bank: Home: Regulation and supervision: Financial surveillance and exchange controls. https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/Pages/Financial%20Surveillance%20and%20Exchange%20Control-Home.aspx .

[84] Stating that a fund’s foreign-asset exposure must not exceed an amount determined by the Bank, or such other amount as may be prescribed by the Registrar.

[85] I.e., the Financial Services Board’s executive officer.

[86] The circular was signed by the Deputy Registrar.

The Deputy Registrar exercised delegated powers of the Registrar. Pension Funds Act s 3(3), as substituted by Financial Services Laws General Amendment Act 45 of 2013 s 3.

[87] And an additional 10 percent i.r.o. investments in Africa. Financial Services Board. Information Circular PF 3 of 2018 (23 Feb). “Pension Funds Act, 1956: Regulation 28: Increased foreign portfolio investment limits.”

(See also FSB Bulletin 2017/18 Quarter 4, p 15 (Financial Sector Conduct Authority).)

[88] National Treasury. Final Regulation 28 with Explanatory Memo and Matrix of Comments received on 2 Dec 2010 draft regulation. Gazette 34070, 4 Mar 2011, p 45 (anonymous comment).

[89] Bingham, “The Rule of Law” (supra), sixth sub-rule.

[90] Bingham, “The Rule of Law” (supra), sixth sub-rule.

[91] S v Barnard 1971 (1) SA 474 (C); SA Shore Angling Assoc v Min of Env Affairs 2002 (5) SA 511 (SE).

[92] Financial Sector Regulation Act 9 of 2017.

[93] W.e.f. 1 Apr 2018. Financial Sector Regulation Act s 290 read with Sched 4 (amendments and repeals) sub tit Pension Funds Act. Gen Notice 169 of 2018 (Gazette 41549 of 29 Mar) par (h).

[94] Pension Funds Act s 1(1) svv “this Act”.

[95] Pension Funds Act s 1A(1) (relationship between Act and Financial Sector Regulation Act) read with s 1(1) sv “Authority” and Financial Sector Regulation Act s 1(1) svv “Financial Sector Conduct Authority” and s 56.

[96] Or prudential standard (as the case may be).

[97] Pension Funds Act s 1A(4)(a) read with s 1(1) svv “conduct standard” and Financial Sector Regulation Act s 1(1) svv “conduct standard” and s 106.

[98] And in force immediately before the date on which this provision comes into effect.

[99] Financial Sector Regulation Act s 1(1) svv “financial sector law” and Sched 1 (financial sector laws).

[100] Or revoked.

[101] Financial Sector Regulation Act s 1(1) svv “responsible authority” read with s 5(1) and Sched 2 (responsible authorities).

[102] Financial Sector Regulation Act s 301(3) (savings).

[103] I.a.w. procedures defined in a standard.

[104] Financial Sector Regulation Act s 108(2)(a).

[105] S v Mhlungu and others 1995 (7) BCLR 793 (CC) par [65] per Kentridge AJ (Chaskalson P, Ackermann and Didcott JJ concurring), in dissent (regarding interpretation of the legislation concerned).

[106] Generally.

[107] National Director of Public Prosecutions v Basson [2002] 2 All SA 255 (A) par [12] per Nugent AJA (Hefer ACJ and Scott, Streicher and Mpati JJA concurring).

[108] The Conduct Authority could still issue pension-funds information circulars, but informing of changes to funds’ permissible foreign-asset exposure under exchange-control laws, without referring to Regulation 28.

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Gary Moore

Gary Moore BA LL.B. (Witwatersrand) LL.M. (UC London) is a South African lawyer and Senior Researcher at the Free Market Foundation.

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