Alden Bianchi’s Post

These past few days have been devoted the 1965 Report of the President’s Cabinet Committee on Private Pension Plan Regulation. In total, the Committee issued 11 recommendations, three of which I flagged as significant--vesting, funding, and the regulation of pension investments. Yesterday’s post examined vesting. Today I’ll turn to funding. Funding of pension benefits seems to be a proverbial no-brainer. In the absence of funding, insolvency risk is ever present. What good is a pension promise that relies on the employer’s solvency, particularly in struggling industries or times, for the benefit to be realized? Nevertheless, prior to the enactment of ERISA, employers were generally free to pay pensions “out of pocket,” despite that there were some rudimentary funding rules for “tax-qualified” pension plans. Under the Revenue Acts of 1938 and 1942 funding was required in an amount sufficient to cover current service liabilities and the interest charge on other unfunded components of accrued liabilities. Throughout the Committee deliberations, opposition to a funding requirement loomed large. The Committee’s labor representatives worried about the cost to existing plans and the retardation of the creation of new plans. (The Committee itself conceded that the passage of the funding proposal might raise the cost of plans more than ten per cent.) The Committee's management representatives were perennially hostile to any government curbs on its right to contract. They also worried about the need for flexibility. Should funding be required, they wanted to be able to contribute more during good years and less in lean years. Despite the objection of both unions and management, the Committee endorsed a minimum funding requirement under which accrued benefits (for current and past service) must be funded over a 25-year period. It was a start. While the path from the Committee report to ERISA remained less than clear, funding was now enshrined as a policy requirement. If broad-based pension reform was to pass, it would include a funding requirement. 

The National Assembly passed the Pension Funds Amendment Bill, 2024 yesterday. It will now be sent to the President to be signed into law. Background The Bill proposes amendments to the Pension Funds Act (and certain public sector laws) to make provision for the 2 Pot Retirement System commencing on 1 September 2024. Concern I'm not sure how many of you have worked through this Bill in detail, but I want to talk about the amendments which directly impact on the deduction of maintenance orders from members benefits. The Bill amends section 37D by - a) inserting a new sub-section which specifically includes reference to interim maintenance orders granted in terms of Rule 43 of the High Court Rules as well as Rule 58 of the Magistrate’s court rules; and b) inserting a new section 37D(3)(aC) enabling a fund to deduct a lump sum in respect of future maintenance. I am comfortable with (a) - this has been confirmed in case law in any event (as in, that Rule 43 maintenance orders can also be deducted from a member's benefit in terms of section 37D). Point (b) is problematic though. As we know, section 37A(1) of the Pension Funds Act specifically limits instances in which a fund may deduct amounts from a member’s pension benefits. Section 37D sets out the limited instances in which a fund may make a deduction from a members benefit – which includes maintenance orders. Section 37D(1)(d)(iA) specifically states that a registered fund may deduct any amount payable in terms of a maintenance order as defined in section 1 of the Maintenance Act. Section 26(4) of the Maintenance Act (set out in Chapter 5 of the act) specifically makes provision for the enforcement of a maintenance order against benefits to which a retirement fund member is entitled. The problem is that chapter 5 deals with maintenance orders which are in default. It does not deal with amounts which will become due in the future. Put differently: only once a maintenance order remains unpaid can the claimant approach a maintenance court for a warrant of execution against pension benefits. The proposed insertion of amounts due in respect of future maintenance therefore does not align with the Maintenance Act, which leads to legal uncertainty that may prejudice members. Alas, the Bill has now been approved. So it remains to be seen how this anomaly will be dealt with.

SOUTH AFRICA PRESIDENT SIGNS NEW PENSION BILL INTO LAW: WAY FORWARD WITH TWO-POT SYSTEM The President of the Republic of South Africa has signed the Pension Funds Amendment Act 31 of 2024 which marks a milestone in the administrations of retirement savings in the country. The new Pension Funds Amendment Act amends: Pension Funds Act of 1956, Post and Telecommunications-Related Matters Act of 1958, Transnet Pension Fund Act of 1990, Government Employees Pension Law of 1996, and also Compliments the Revenues Laws Amendment Act, 2024 (Act No. 12 of 2024), which was signed by the President on 11 June 2024. WHICH ASPECTS? TWO-POT SYSTEM The Act is: 🖊 to provide for the introduction of the savings withdrawal benefit; 🖊 to provide for the appropriate account of a member’s interest in the savings, retirement and vested components;  🖊 to provide for deductions that may be made RATIONALE OF THE NEW CHANGES The Act ushers a new retirement savings regime, aka “two-pot” system The Same levels of Savings will be split into two “savings pots”. One-third of retirement contributions will be deposited into a savings component. Savings in the One-third pot will be available for withdrawal at any time before retirement. Members will unconditionally withdraw from the savings component without having to cease employment or having to resign. Two-thirds of the contributions will be channeled into a retirement component, (Pot 2/3), which will be housed within the current retirement component. Assets will be preserved till retirement when it will be available on retirement in the form of an annuity. WHAT VERITY EXECUTIVE CONSULTANTS WILL DO FOR YOU 🖊 We will critically interrogate your compliance infrastructure; pension fund rules, policies and procedures, literature etc 🖊 Align/Amend your rules and policies with the relevant provisions of the Act, 🖊 Train your staff to administer the new compliance infrastructure 🖊 Make presentations to you pension contributors to enable total understanding. 🖊 Adjust the investment portfolios 🖊 Prepare administrative systems for pension fund members to apply to access portions of their pension funds from 1 September 2024. CONTACT US ON: paralegal@verityexecutiveconsultants.co.za Visit our website: https://lnkd.in/dJqHNgWj for more information on paralegal services.

SOUTH AFRICA PRESIDENT SIGNS NEW PENSION BILL INTO LAW: WAY FORWARD WITH TWO-POT SYSTEM The President of the Republic of South Africa has signed the Pension Funds Amendment Act 31 of 2024 which marks a milestone in the administrations of retirement savings in the country. The new Pension Funds Amendment Act amends: Pension Funds Act of 1956, Post and Telecommunications-Related Matters Act of 1958, Transnet Pension Fund Act of 1990, Government Employees Pension Law of 1996, and also Compliments the Revenues Laws Amendment Act, 2024 (Act No. 12 of 2024), which was signed by the President on 11 June 2024. WHICH ASPECTS? TWO-POT SYSTEM The Act is: 🖊 to provide for the introduction of the savings withdrawal benefit; 🖊 to provide for the appropriate account of a member’s interest in the savings, retirement and vested components; 🖊 to provide for deductions that may be made RATIONALE OF THE NEW CHANGES The Act ushers a new retirement savings regime, aka “two-pot” system The Same levels of Savings will be split into two “savings pots”. One-third of retirement contributions will be deposited into a savings component. Savings in the One-third pot will be available for withdrawal at any time before retirement. Members will unconditionally withdraw from the savings component without having to cease employment or having to resign. Two-thirds of the contributions will be channeled into a retirement component, (Pot 2/3), which will be housed within the current retirement component. Assets will be preserved till retirement when it will be available on retirement in the form of an annuity. WHAT VERITY EXECUTIVE CONSULTANTS WILL DO FOR YOU 🖊 We will critically interrogate your compliance infrastructure; pension fund rules, policies and procedures, literature etc 🖊 Align/Amend your rules and policies with the relevant provisions of the Act, 🖊 Train your staff to administer the new compliance infrastructure 🖊 Make presentations to you pension contributors to enable total understanding. 🖊 Adjust the investment portfolios 🖊 Prepare administrative systems for pension fund members to apply to access portions of their pension funds from 1 September 2024. CONTACT US ON: paralegal@verityexecutiveconsultants.co.za Visit our website: https://lnkd.in/dJqHNgWj for more information on paralegal services.

Public sector pension funds amendments published Monday, March 11, 2024 The National Treasury has published the proposed amendments to various pieces of legislation governing public sector pension funds. “The amendments provide the necessary legislative amendments required to effectively implement the two-pot retirement system changes in public sector funds,” National Treasury said on Monday. The proposed amendments relate to the Government Employees Pension Law, 1996 (Proclamation 21 of 1996), Post and Telecommunications-related Matters Act, 1958 (Act 44 of 1958) and Transnet Pension Fund Act, 1990 (Act 62 of 1990). “The proposed amendments insert certain definitions to provide for the introduction of the savings withdrawal benefit; to provide for the appropriate account of a member’s interest in the savings, retirement, and vested components and to provide for deductions that may be made by the funds. “These amendments seek to align pension laws across all sectors to ensure that pension funds can amend the fund rules and implement the two-pot retirement system on the effective date of 1 September 2024,” National Treasury said. The amendments to the public sector pension laws will be proposed for inclusion in the Pension Funds Amendment Bill [B3—2024], which is currently under consideration of the Standing Committee on Finance. Parliamentary hearings on the Pension Funds Amendment Bill will be held on 12 March 2024, including these public sector pension laws amendments. https://lnkd.in/eNVXpMDR

Released in 1965, the final Report of the President’s Cabinet Committee on Private Pension Plan Regulation was a watershed event on the way to the enactment of ERISA. This is the report that was previously ordered by President Kennedy. It was issued in final form by his successor, President Lydon Johnson. The Committee was staffed by people with no small amount of influence. The Chair was Secretary of Labor Wirtz and members included the Secretary of the Treasury, Secretary of Health, Education and Welfare, the Director of the Budget Bureau, the Chairman of the Board of Governors of the Federal Reserve System, and the Chairman of the Securities Exchange Commission. The Commission identified as the key features of pension reform, vesting, funding, and the regulation of pension investments—none of which were politically popular. The committee nevertheless pressed ahead. The most significant of the Committee’s recommendations included proposed amendment to the tax code. The Committee's justification for federal intervention was their conception of private pension plans as a supplement to Social Security. They also cited the federal tax treatment of “qualified” plans, which cost the government at least one billion dollars in revenues each year. To assure the soundness of the plans and to implement effective federal control, the Committee recommended that that pension plan qualification requirements be beefed up. This included amending the Internal Revenue Code to add regulatory standards relating to vesting, and funding, among others. Perhaps most notable is the Committee’s embrace of the “worker security of pensions.” No longer were pensions to be measured merely by their benefit to employers; instead, the focus was on the retirement security and dignity of the worker. I will turn to the particulars of the Committee’s recommendations in the coming week.

My latest opinion piece on how our pension system impacts our state’s fiscal health. Pension policy has an important, but often hidden, impact on the finances of state governments. Data from the latest OPERS’ Actuarial Valuation Report confirms the system is over 101% funded and currently holds over $75 million more than promised benefits. Maintaining a solvent pension system is crucial for safeguarding our budget against unfunded liabilities, ensuring long-term fiscal health, and allowing for sustained investment in vital public services and programs. #statefinance #publicpolicy #pension #FiscalResponsibility #budget #stategovernment https://lnkd.in/gnnyZGz4

👴 What is Auto Enrolment?? Auto-enrolment is a new retirement savings system for employees that will be introduced in early 2025. This is a government initiative targeted at over 800,00 people that do not already have a pension scheme in Ireland. This is critically important to the Irish economy- because of the aging population- that all workers even those on small incomes start savings for their own future retirement. Certain criteria has to be met to be automatically enrolled -You are aged between 23 and 60 -You are not currently part of a pension plan -You earn €20,000 or more per year Some considerations to make 1) Auto enrolment RESTRICTS ACCESS to your pension until Normal Retirement age, unlike OCCUPATIONAL PENSION SCHEME that ALLOWS EARLY ACCESS after leaving work. 2) LIMITED CHOICE of investment funds & NO ADVISORY services, Making informed investments requires options & guidance 3) Contributions are deducted automatically from your NET PAY instead of your GROSS PAY, so you wont benefit from Tax relief. Setting up your own pension plan grants you freedom to - Access to a wide range of investment funds & expert advice to make decisions based on your individual retirement needs and goals -Access your pension funds prior to Normal Retirement age, if required -Benefit from diversification of fund choice.

Are the Pension Funds under-funded? Exploring an aspect of group influence that has been little studied: the role interest groups play on the inside of government as official participants in bureaucratic decision-making. The challenges for research are formidable, but a fuller understanding of group influence in politics requires that they be taken on. Here we carry out an exploratory analysis that focuses on the bureaucratic boards that govern public pensions. These are governance structures of enormous financial consequence for state governments, public workers, and taxpayers. They also make decisions that are quantitative (and comparable) in nature, and they usually grant official policymaking authority to a key interest group: public employees and their unions. Analysis suggests that these “interest groups on the inside” do have influence—in ways that weaken effective government. Going forward, scholars should devote greater attention to how insider roles vary across agencies and groups, how groups exercise influence in these ways, how different governance structures shape their policy effects, and what it all means for our understanding of interest groups in politics. Another basic feature of pension politics is that public workers and their unions have incentives to support the chronic underfunding of their own pensions. Due to state statutes, constitutions, and judicial decisions, pensions promised by state politicians are backed by strong legal protections almost everywhere; and public workers thus know they will eventually get what they are promised even if their pension plans are currently underfunded. Indeed, because full funding on a regular schedule would be tremendously costly for state (and local) budgets— crowding out other services, forcing higher taxes, making the true costs of pensions painfully transparent to citizens —public workers and their unions have incentives to prefer that their pension plans be underfunded. Underfunding enables the fiscal illusion that pension benefits are much less expensive than they really are. If public workers and their unions want increasingly generous benefits in future years, they need to convince the public that these benefits are not costly to provide. At the same time, underfunding keeps employee contributions to their own pension funds at low levels; and by keeping contributions by their employers down, they are freeing up public money for other government services, keeping public workers employed—and providing funds for their own salaries and raises. Quoted from open sources.

🚨 State and Local Pension FY 2022 Update🚨 In a new The Hoover Institution, Stanford University publication, Joshua Rauh and I provide an update on state and local pension funds as of fiscal year 2022. Some of the highlights: * Unfunded liability remains understated ($1.572 trn vs $5.120 trn based on market values) * Investment returns were negative 3.2% in fiscal year 2022, underperforming assumed discount rates by approximately 10%. * Employer contributions increased substantially, with the contribution rate as of payroll rising from 26.9% in 2021 to 28.3% in 2022--partly due to pandemic-related relief * Assumed discount rates remain elevated despite continuing downward trend See the full paper: https://lnkd.in/gCcRT2DW