On 8 June 2020, the Financial Sector Conduct Authority published three draft conduct standards for public comment to be made by 31 July 2020.
The purpose of the draft conduct standards is to regulate the:
- conditions for living annuities in an annuity strategy;
- communication of benefit projections to members of pension funds; and
- conditions for investment in derivative instruments for pension funds.
Conditions for living annuities in an annuity strategy
The Draft Conduct Standard requires boards of pension funds to only include a living annuity in their annuity strategy if the annuity strategy ensures that more protection is afforded to the members as compared to the case where a member makes a specific choice to participate in a living annuity based on their own circumstances and research.
Pension funds will be required to measure and monitor the sustainability of income of a living annuity in the annuity strategy by considering the continued payment of a particular income over the lifetime of a pensioner where the income payments increase in line with a targeted percentage of inflation. The Conduct Standard outlines recommended and maximum drawdown rates for the living annuities included in the annuity strategy, which must be communicated to members.
Communication of benefit projections to members of pension funds
This Draft Conduct Standard seeks to provide consistency in the manner in which pension funds provide member projection statements by regulating the frequency at which these are to be provided to members as well as the content to be included. The purpose of providing these statements is to ensure that the expectations of members are managed and also to influence members’ behaviour in managing their benefits.
Pension funds will be compelled to provide benefit projection statements to members when a member joins the pension fund, on an annual basis subsequent to joining, and provide a pre-retirement withdrawal statement that will illustrate the impact of preserving retirement savings until retirement.
The draft Conduct Standard provides methods for both defined contribution funds and defined benefit funds on what the projected benefit should be based on and the assumptions to be taken into account.
Conditions for investment in derivative instruments for pension funds.
Pension funds who wish to invest in derivative instruments will be required to adopt and implement risk management policies to manage and mitigate the risks of derivative instruments and the contribution of these risks to the overall risk profile of the fund’s investment portfolio.
This draft Conduct Standard seeks to restrict the use of derivative instruments by regulating when and why a pension fund may invest in a derivative instrument. The Conduct Standard provides restrictions in that the pension fund can only invest in derivative instruments where the counterparties, defined as juristic persons with whom the pension fund executes a derivative transaction, are specifically identified by the FSCA.
The Conduct Standard will require pension funds to ensure that the calculation of assets referred to in regulation 28 includes the effective economic derivative exposure. Compliance with the limits set out in regulation 28 are netted off against the effective economic derivative exposure where the reference asset of the derivative instrument is identical or similar to the other assets held by the pension fund.