The Conduct Standard prescribes the conditions with which a smoothed bonus policy must comply in order to meet the definition of “default investment portfolio” as defined in the regulations in terms of the Pension Funds Act. The Conduct Standard was published on 9 October 2020 and funds concerned must comply therewith within 9 months of such publication date.

To be eligible as a default investment portfolio, a smoothed bonus policy must comply with the following criteria:

  • A formulaic approach must be established to calculate and determine bonus declarations, both vested and non-vested. Among others, such approach must limit the smoothing period by spreading any excess bonus stabilization reserve over a period not exceeding 24 months   (temporary deviations are allowed in exceptional circumstances, subject to prior notice to the       FSCA), and must have a long-term funding level target not exceeding 105%;
  • Any management actions that may be taken by the insurer to reduce the risk in the policy must be properly disclosed and documented;
  • The charge relating to any guarantee provided in terms of the policy must be commensurate with the risk and be separately disclosed;
  • The insurer will only be allowed to apply a market-value adjustment in pre-determined circumstances;
  • No disinvestment penalties may be levied by the insurer.

The asset allocation in the smoothed bonus policy must remain within the strategic asset allocation that has been disclosed and must comply with the asset spreading limits set out in regulation 28 of the Pension Funds Act. Where a material change

in the strategic asset allocation is being considered, full disclosure must be made to all stakeholders, and the FSCA must be notified beforehand of the intended change and the reasons therefor.

An insurer that provides a smoothed bonus policy to a fund as part of a default investment portfolio must ensure that the fair treatment of the fund and its members are achieved in relation to the policy.

In the Statement supporting the Conduct Standard, the FSCA noted that:

  • The limitations being imposed on the smoothed bonus portfolios will result in portfolios which smooth less and over shorter periods, which could lead to more volatile returns for members.
  • Trustees will need to follow a more onerous process, should they opt to include a smoothed bonus policy in their default investment strategy. This will result in more effort, as well as more checks and balances being required.
  • Insurers wishing to have their smoothed bonus policies included in funds’ default investment portfolios will have less flexibility during the smoothing process. This may have an impact on the cost of any guarantees provided.

This newsletter provides information of a general nature and does not constitute advice in respect of a particular client