Here are two articles from the South African Personal Finance dated 10 November 2001.

Please see the Personal Finance website for the full text including illustrations. To locate the articles search using the author's name or keyword.

1. Pepkor should act morally on fund surplus - Bruce Cameron
2. Pepkor's court battle to keep pension fund surplus hots up - Charlene Clayton

Pepkor should act morally on fund surplus

by Bruce Cameron

Late on Friday last week Personal Finance was being threatened with legal action in an attempt to prevent the publication of a report detailing how retail giant Pepkor, which comprises Shoprite Checkers, Ackermans and Pep Stores, wanted to get its hands on the almost R100 million surplus sitting in one of its retirement funds.

The threat came after we sent a draft of the report to the lawyers representing Pepkor for their comment so we could include Pepkor's side of the story in the report. It has often struck me in the past that the weaker the case, both morally and legally, the louder the lawyer will shout and bluster. Lourens van Staden, the lawyer representing Pepkor, would not initially listen to anything I said. He threatened us with legal action and slammed the phone down after we sent him the draft report. When we contacted him again, Van Staden eventually apologised and gave us the Pepkor side of the story, which we published.

The case is currently before the High Court in Cape Town. I spent some time at the court this week, listening to opening arguments, reading documents presented by both sides and discussing the issues with various participants.

While I am not qualified to judge the legal merits of the case, I find the fact that the case has come to court quite astounding. On moral grounds alone, Pepkor should have pulled back long ago and negotiated a fair and equitable settlement with its employees.

Judging by the size of the legal teams, huge amounts of money are going to be spent in attempting to ensure that Pepkor, and some more senior employees and pensioners of the subsidiary companies, will get their hands on the loot.

Much of the debate I listened to in court revolved around very technical issues about who did what and when, and whether or not they were entitled to do certain things in the first place.

Little of the argument, from the Pepkor side, was based on what was just, fair and equitable to the members of the funds involved in the case.

A little history: Back in 1992 there was a single Pepkor defined benefit pension fund serving the various operating companies of Pepkor. It was decided to create separate pension funds for each of the operating companies as the group was being run on a more decentralised basis.

New "daughter" defined benefit funds were created, which were funded to the extent of between 116 percent and 123 percent. The advice from the actuarial consultants at the time was a minimum of 110 percent funding.

This means that the assets exceeded the liabilities by more than the required 10 percent. But the assets of the "mother" fund at the time exceeded liabilities by 60 percent. So a significant surplus remained in the mother fund.

The remaining members of the mother fund were mainly employees of the holding company, Pepkor. There was no negotiation with ordinary fund members. Also, company appointed trustees were the only ones making the decisions.

Pepkor says one of the reasons why there was no negotiation was because the new funds were mirror images of the mother fund.

Pepkor, quite correctly, states that the law did not require negotiation or the appointment of member-elected trustees. But the law also did not prescribe that there should be no negotiation or no elected trustees.

In fact, many funds were already moving voluntarily in that direction. As I said at the beginning, it is the moral issues I am looking at, not the legal issues. That is the job of acting judge Owen Rogers, who is hearing the case.

Pepkor is trying to liquidate the mother fund and lay claim to the almost R100 million that is sitting in surplus in the fund, paying a golden handshake, from the surplus, to the remaining 14 members of the original fund to get those members to agree to drop all claims to the R100 million.

Interestingly, when the group decided to give members of the new daughter funds the choice of opting for defined contribution funds, the company did negotiate with the members.

What makes matters worse, in my mind, is that Pepkor is double-dipping into the surplus. It is laying claim to the surplus in the mother fund, and it has also been taking contribution holidays from the daughter funds, which have also built up surpluses.

In other words, the fund members contribute, but the employer does not. To be fair, Pepkor says it has brought pension payouts in line with inflation.

In the court case, the Financial Services Board (FSB) says that it wants to withdraw its permission to liquidate the fund because it was not given the full facts about the size of the surplus in the mother fund.

It also says another transaction, involving special benefit payments of almost R9 million to the more senior members of Pepkor, were transferred illegally from the mother fund to the daughter funds.

To get back to the morality of what is happening: Pepkor and the trustees of the mother fund must surely have been aware of a long, ongoing debate - and a number of court cases - about the distribution of surplus funds held by retirement funds.

The debate is multi-faceted, and centres on issues such as the source of the surplus and who owns the surplus. One court case established that a surplus is owned by the fund, not an employer.

The government entered the debate and instructed the FSB to draft legislation to allow for the equitable distribution of surpluses. The FSB did so. After years of negotiation between organised labour and business, the legislation finally arrived in Parliament this year.

The essence of the legislation is that all the stakeholders - that includes the employer and employees who are members of a fund - have a claim on any surplus in that fund, and that the division of the surplus should be negotiated.

A number of funds, including one of which I am proud to say I am a member-elected trustee, have seen employers follow the correct route. The employers ensured they had elected trustees in place, even though there was no such legal requirement, and they made every effort to negotiate a fair settlement - again, even though there was no legal requirement to do so.

Negotiating a fair settlement is extremely difficult and complex, but it can be done.

What astounds me is that with all this going on, Pepkor and the mother fund trustees do not seem to have asked themselves whether what they were doing was morally correct, or just and fair to all the initial members of the mother fund.

I would say the trustees have been found to be more than wanting. Why should shareholders be the main beneficiaries? The company contributions and particularly those of its employees to the funds were not an investment with the objective of providing profits!

I challenged Pepkor director and chairman of the board of trustees, Jimmy Fouche, this week on these moral issues and he had little to say, apart from using the very debatable argument that if a fund goes into deficit it would be the company that would have to make up the shortfall.

The argument is debatable for a number of reasons, not least because part of the surpluses have arisen from unfair benefits being given to members who left before retirement.

Another argument, that Pepkor cannot stop the case because it has been brought by the FSB, also does not hold water. If the fund trustees halted the liquidation process and gave a commitment to negotiate a settlement, I am sure the FSB would withdraw its case to have its earlier decision set aside.

Pepkor should initiate an out-of-court settlement immediately, and deal with the surplus distribution in a proper manner that is fair to all stakeholders, including members.

Pepkor's court battle to keep pension fund surplus hots up

Article from the South African Personal Finance - 10 November 2001

by Charlene Clayton

The end of the first week in the important case involving a surplus of almost R100 million in the Pepkor Pension Fund, saw some serious allegations being made by the Financial Services Board about Pepkor and its various retirement funds.

In the case before the Cape high court, the FSB and the Registrar of Pension Funds allege that Pepkor is trying to get its hands on the surplus, while former members did not get a fair share.

The FSB gave permission to the Pepkor Pension Fund to unbundle into three daughter funds in 1994. This left the fund with a large surplus of just over R91 million, no active members and only 14 pensioners.

The FSB wants its earlier approval for the unbundling reversed because, it states, the fund's levels after the unbundling were misrepresented.

"The applications (for the transfer of money to the daughter funds) was approved by the Registrar without appreciating the incorrect statement about the funding level," the FSB said in its opening address.

The FSB says the fund was unable to explain what it intended to do with the surplus, if it was not planning to transfer it to the Pepkor company.

"The Registrar accordingly concluded that the unbundling was a deliberate attempt to accumulate asset for eventual payment to Pepkor."

The FSB is also asking the court to order one of the daughter funds to repay to the mother fund more than R9 million because, it alleges, the money was transferred without the necessary permission of the Registrar of Pension Funds. This money was to fund early retirement benefits for senior executives, the FSB alleges.

The original fund now has 14 pensioner members left. They have been offered a lump-sum settlement equal to ten times their annual pension benefits in return for ceding to Pepkor their rights to the surplus.

The FSB alleges that the agreement with the pensioners is illegal under the Pension Funds Act.

One of the FSB's amended requests to court this week - that the liquidator of the Pepkor Pension Fund should be responsible for drawing up a surplus distribution plan - was turned down by the judge because there is no precedent. However, the FSB's intentions remain that the original transfer to the daughter funds be reversed, and that additional amounts be paid to the daughter funds for members who did not get a share of the surplus.

The FSB is not against Pepkor receiving a share of the surplus - it just wants fair distribution to all.

According to their documents, Pepkor and the funds dispute the authority of the Registrar to ask the court to overturn its earlier decision. It also denies many of the allegations. Pepkor and the pension funds:

• Deny that the unusually large surplus to be paid to Pepkor in terms of the draft liquidation account was accumulated irregularly;

• Deny that they failed to submit full and complete information to the Registrar concerning the unbundling;

• Deny that they had not disclosed all material facts to the Registrar concerning the unbundling, or that the facts disclosed were not correct;

• Deny that the consent of the Registrar was required for the transfer to one of the daughter funds;

• Deny that this transfer was for the benefit of certain executives;

• Deny that members who transferred out of the Pepkor Pension Fund received less than their share; and

• Deny that the agreement with the pensioners was illegal.