Pension fund administrators may not survive new conditions

The proposed rules are in the form of a draft notice - issued by the pension fund regulator, the Financial Services Board - that is open for public comment until 6 September. They spell out revised conditions for being an approved pension fund administrator. These range from the departments of major investment banks to small, independent firms employing a handful of people. "The proposed rules seek to impose costly liquidity and reporting requirements that many smaller pension fund administrators will struggle to meet," says Drake.

Minimal amount of cash

For example, the regulator is looking to introduce a R3 million minimum capital maintenance requirement for administrators. They would also have to hold a minimum amount of cash or cash equivalents on hand equal to just over three months of annual expenditure versus the current minimum (which has been in place for some time) of about two months - an increase of 50%.

In addition, proposed quarterly reporting requirements would require administrators to collect vast amounts of information, much of which is not currently necessary for the running of their business. "This could be the end of the road for smaller administrators, who can simply not afford to retain capital or incur additional costs on the scale proposed," says Drake.

Consider insurance cover

"Those administrators able to handle the increased regulatory burden will simply pass the costs on to the pension funds, which in turn will pass them on to their members. Alternative methods that are more cost effective - such as requiring proof of insurance cover to the value of R3 million instead of requiring that the R3 million be held in cash - should be considered.

"These proposed conditions may have been drafted with good intentions, and may provide some protection to pension funds, but will also create a host of unintended consequences if passed in their current form. They urgently require a rethink," Drake concludes.