The Private Pension Schemes Act and Its Rationale
The Private Pension Schemes Act (Act 15 of 2012) (the “Act”) was proclaimed by Proclamation No. 41 of 2012 with effect from the 1st November 2012.
The Act governs Private Pension Schemes (“PPS”) which are the subject matter of this article. The Act repeals the Employees Superannuation Fund Act and Regulation 5 of the Income Tax Regulations under which the PPS were operating so that all schemes registered under the repealed legislations are deemed to have been set up under the Act.
The pension system in Mauritius can be said to be a three-tier system and consists of:
(i) the basic retirement pension which is unfunded and paid by the Government out of the Consolidated Fund every year on universal basis;
(ii) the National Pension Fund and the National Savings Fund which are compulsory and funded systems. They cover employees from the private sector who, on retirement, get a lump sum or a monthly allowance or both; and
(iii) the voluntary public sector and private sector pension schemes which are both funded systems and which are specialized for either Civil Servants, Members of Parliament, employees of parastatal bodies, local authorities or the Sugar Industry.
The voluntary private sector pension system was, before the promulgation of the Act regulated in a fragmented way by a number of legislations and was subject to various approving and supervisory bodies such as the Registrar of Associations, the Mauritius Revenue Authority and the Financial Services Commission (the “FSC”). During the second reading of the Private Pension Schemes Bill in Parliament, the Vice-Prime Minister, Minister of Finance and Economic Development highlighted the fact that as at then, there were some 1500 PPS in existence which were approved by the Mauritius Revenue Authority under Regulation 5 of the Income Tax Regulations 1996. All these PPS covered more than 100,000 employees with funds estimated at more than Rs 34 million. Out of the 1500 PPS, only 49 were registered with the Registrar of Associations under the Employees Superannuation Fund Act 1954.
This fragmented regulatory framework provided very little control over the promoters and sponsors of those schemes, the service providers and the pension schemes managers. With a greater life expectancy and aging Mauritian population leading to greater dependency on pensions for a living, those PPS were expected to grow in terms of the number of employees contributing to these schemes as well as the value of the funds involved. Thus, there was an urgent need for a single modern legislation which would on the one hand fill the legal vacuum which existed in the field of private pensions by ensuring effective supervision of the private pension and on the other hand provide for a single regulator which would regulate same.
The Act caters for both needs. It provides for a comprehensive and modern regulatory and supervisory framework for the operation of PPS in order to ensure the protection of members and beneficiaries and the soundness of such pension schemes. The Act provides that it is the FSC which is responsible for administration of the Act and thus the FSC is the single regulatory body for private pensions in Mauritius. Given that the definition of “superannuation fund” in the Income Tax Act includes a pension scheme licensed by the FSC, any private pension scheme licensed by the FSC set up for the benefit of employees will automatically be entitled to tax exemption and employers contributing will benefit from tax deduction as well, without the need of any further approval by the MRA.
THE PRIVATE PENSION SCHEME
A Pension Scheme is defined under the Act as being a scheme whether or not sponsored by an employer or several employers, which is regulated in Mauritius with the primary objective of providing pension benefits to beneficiaries.
A PPS is defined in the Act as a pension scheme, a foreign pension scheme or an external pension scheme and does not include a pension scheme which is specified in the Schedule to the Act.
The beneficiaries of a PPS are entitled to pension benefits in terms of the rules of a PPS. The pension benefit may be in the form of a pension, a compensation, gratuity or allowance payable to a beneficiary, and includes a retirement benefit, a death benefit, disability benefit or such other allowance as may be specified in the rules of the PPS.
A PPS may either be a trust, a foundation or such body of persons as may be specified in the FSC rules. A PPS to be able to operate in Mauritius will have to be licensed by the FSC, the regulator under the Act.
The Act addresses the following issues for which there was no specific statutory requirement before its promulgation:
(i) maintaining a proper funding level to secure scheme benefits;
(ii) ensuring safe custody of assets;
(iii) hiring qualified auditors, actuaries and custodians;
(iv) submitting regular reports to the Regulator;
(v) undertaking regular actuarial reviews; and
(vi) determining investment rules and asset diversification.
The regulatory framework which is proposed in the Act has the following main features:
(i) All providers of private pensions with a physical presence in Mauritius are covered by the Act;
(ii) The Act promotes a business-friendly but well regulated framework for supervising the private pensions sector. The governing bodies of these pension schemes have more accrued responsibilities;
(iii) Licensing criteria focuses on private pension schemes’ capacity to administer their activities, manage their assets, and mitigate financial risks;
(iv) Supervision of the schemes is risk-based with particular focus on those schemes which may be involved in risky transactions or having insufficient technical funding;
(v) FSC now has a range of additional monitoring and enforcement powers, including powers to perform on-site inspections, request any information, initiate third party reviews and request independent actuarial valuations. The scheme’s auditors and actuaries are required to report any major concerns to the FSC.
Rule 4 of the Private Pensions Schemes (Governance) Rules 2012 (the “Rules”) provide that a PPS must at all times be governed by a governing body whose members are suitably qualified to be appointed or elected.
The Governing Body is defined as:
(i) in the case of a trust, its Board of Trustees;
(ii) in the case of a fund registered under the repealed Employees Superannuation Fund Act, its managing committee; and
(iii) in the case of a Foundation, its Council;
Under the Act, the governing body of a PPS has as ultimate responsibility:
(a) the administration of the scheme;
(b) the management or investment of the assets of the scheme;
(c) ensuring adherence to the terms of the constitutive documents;
(d) the protection of the best interests of beneficiaries; and
(e) ensuring that the PPS fulfils its overriding objective to provide for pension benefits.
Then governing body of a PPS consists of at least 3 persons who are resident or incorporated in Mauritius and in the case of an external pension scheme, the governing body consists of at least 3 persons of whom at least 2 are resident in Mauritius. Subject to the foregoing, It is now possible, by virtue of the Private Pension Schemes (Governance) (Amendment) Rules 2013 for a service provider which is promoting a PPS to appoint such number of persons as it thinks fit to act as members of the governing body of the PPS.
The governing body needs to annually appoint from amongst themselves a Chairperson, a Vice-Chairperson and a contact person. The contact person, in the case of an external pension scheme is required to be a management company duly licensed under the Financial Services Act by the FSC.
The Private Pension Schemes (Investments) Rules 2013 which came into operation on the 31 January 2014 has as objective the protection of the interests of the beneficiaries of the PPS and also ensuring the strength of the financial services sector in Mauritius. The said rules henceforth impose on PPS the need to have a prudent investment policy.
The said investment policy shall provide for:
(a) a risk management process that identifies, measures and mitigates investment risks;
(b) a mechanism for ensuring that assets and liabilities are managed in a manner consistent with provisions of the relevant Acts, investment policy and investment management agreement;
(c) the process relating to investment decisions; and
(d) the procedure for the appointment of a pension investment manager.
As per the statistics received from the FSC, there are currently around 1009 PPS licensed by the FSC under the Act, out of which, 3 have been licensed by the FSC since the promulgation of Act.
It is to be noted that for the 1007 PPS which already existed prior to the promulgation of the Act, the FSC conducted due diligence exercises to ascertain whether they comply with the requirements of the Act before issuing them licenses under the Act.
The Mauritius Financial Centre in order to be competitive has to always develop new products, engage in financial innovation, diversify the market and adopt state-of-the-art legislation. The Act is one of such legislation which has been adopted and it is verily believed that this new product will enhance Mauritius as a reputable international financial centre.