Here are two articles from the South African Personal Finance dated 24 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. Surplus gates open for first slow trickle - Bruce Cameron
  2. Murphy scolds pension industry for lawlessness - Charlene Clayton

Surplus gates open for first slow trickle

by Bruce Cameron

The opening of the sluice gates for claims against the estimated R80 billion in retirement fund surpluses is about to happen. The long-awaited retirement fund surplus distribution legislation has been approved by Parliament, and now only awaits the signature of the State President before becoming law.

However, the process of distributing the surplus in funds could take up to three years, according to one of South Africa's top pension lawyers, Rosemary Hunter of legal company Edward, Nathan & Friedland.

The legislation has widespread implications, particularly for employers who have "inappropriately used" a surplus in the past. Hunter predicts that some elements could be challenged in the Constitutional court.

Hunter, speaking at a meeting of the Principal Officers Association in Johannesburg, says that trustees will have to follow a step-by-step process in allocating any part of a surplus to stakeholders, including employers.

The legislation also states that members of funds are entitled to minimum benefits. These are:

  • The bringing of pension payments into line with inflation since a member's retirement; or if the fund cannot afford that, to the extent that it can from its investment returns; and

  • The payment of top-ups to members who received unfair withdrawal benefits on leaving a fund, dating back to January 1, 1980.

    Hunter says in calculating whether you received an unfair benefit as a member of a defined benefit fund, you are entitled to receive the greater of:

  • A fair value equivalent of your accrued deferred pension - in other words how much money would be required to fund your pension based on the amount of time you were a member of the fund; or

  • The value of your contributions, less expenses, plus investment returns, plus vested employer's contributions, plus the same interest.

    For a defined contribution fund you should receive the full value of your individual account within the fund, plus a pro-rata share of any investment reserve account, any member surplus account, and any contingency reserve accounts that the trustees decide to include.

    The minimum benefits apply to all early withdrawals, whether they were the result of dismissals, resignations, retrenchments or transfers.

    If a fund is liquidated after minimum benefits have become payable, then members have certain rights:

  • If a fund is not valuation exempt and there is a short-fall in the amount required to fund minimum benefits, the employer sponsoring the fund must make up the shortfall; and

  • If the fund is valuation exempt the minimum reserve values may be proportionally reduced.

    In calculating a surplus, any surplus improperly used by an employer must be added to the actuarial surplus. Unless approved by members and/or trade unions beforehand, improper use includes:

  • Additional benefits paid to executives and not to ordinary members;

  • The excess cost of granting past pensionable service for selected members with insufficient transfer values;

  • The cost of "medical aid subsidy" compensation pensions, or increased pensions used by employers as incentives to pensioners to forgo company contributions to a medical scheme;

  • Contribution holidays taken by employers, where the surplus was used to cover employer contributions to the retirement fund between the date on which the surplus legislation comes into effect, and the surplus apportionment date.

  • Hunter says that funds will have to go through a number of steps before coming to a decision about what to do with a surplus. These include:

  • The appointment of a "former member representative" to keep an eye on what happens, and to draw up a report on the distribution scheme;

  • The identification of former members who left the scheme since January 1,1980. They will be entitled to adjustment of benefits paid to minimum reserve value (less amounts paid), plus nett investment return since exit - unless there is not sufficient surplus, in which case they will all receive proportionally less.

  • The adjustment of pensions; and

  • The board of trustees, taking the history into account, must equitably split the remaining surplus between former members, existing members, and the employer.

    The trustees will have to decide whether to increase benefits or transfers to members and former members; whether to allocate funds to a member surplus account; whether to meet expenses that could reduce the share of contributions going to retirement funding; and/or to improve benefits for former members.

    Only member-elected trustees may vote on the use of assets in member surplus accounts.

    The share of the surplus due to an employer, after corrections for any improper use of the surplus, must go into an employer surplus account.

    Any balance in an employer surplus account may be used as directed by the employer, with consent from employer-appointed trustees. The money may be used for:

  • Contribution holidays;

  • Compensation for loss of post-retirement medical aid subsidies;

  • Meeting expenses otherwise payable by an employer;

  • Making retirement benefits improvements for categories of members chosen by an employer;

  • Paying an employer in order to help it avoid retrenchments. This can be done if 75 percent of members agree, after they have had full disclosure of information and reasonable opportunity to consider it; and/or

  • Paying the employer on liquidation, unless the employer has already been liquidated.

    Before the money can be used:

  • Members must be given details of a surplus distribution scheme, and they must be given 12 weeks to object;

  • 75 percent of members must approve the distribution scheme;

  • The board of trustees must address all complaints and get the approval of the Registrar of Pension Funds before distribution can take place.

    The registrar will require fund to refer matter to a special tribunal if:

  • The trustees have been unable to achieve 75 percent support;

  • There are complaints which have remained unresolved; or

  • The registrar is not satisfied that scheme is reasonable and equitable.


    Murphy scolds pension industry for lawlessness

    by Charlene Clayton

    John Murphy, the Pension Funds Adjudicator, has lambasted the pension fund industry and companies for the lawlessness which abounds in the retirement funding sector.

    A recent case before Murphy demonstrated the extent of this lawlessness - the adjudicator found that Sage Life had been running an illegally amalgamated pension fund on unregistered rules for the past three years.

    Murphy says this is indicative of an alarming trend in the pension industry which resorts to legal self-help when the regulatory topography becomes too cumbersome.

    This is something that clearly annoyed the Appeal Court when it handed down its decision in a case involving Old Mutual's payment of pension fund money to two businessmen instead of to the fund involved itself.

    The Appeal Court heard that a practice existed in which the rules and registered status of a fund could be altered by an employer without any formal notice or registration of the amendment. The court heard this was because of inordinate delays at the Pension Funds Registrar's office which was said to be understaffed.

    In this case, the Appeal Court took Old Mutual to task saying that Old Mutual's reliance on a so-called practice in the registrar's office, which allowed rule changes to take effect before registration, was misplaced.

    In the case before Murphy, the Sage Schachat Pension Fund and the Sage Group Limited Staff Pension Fund were collapsed into the Sage Life Limited Staff Pension and Life Assurance Scheme, following rationalisations within the Sage group. It was common knowledge that the Sage Schachat fund had a far bigger surplus than the other two and thus had a more favourable financial status.

    Two pensioner members of this fund - Archibald Nicol and Ronald Small - complained to the adjudicator that they would lose out because, in the absence of specific rules ring-fencing the fund's surplus, the Schachat fund would effectively cross-subsidise the other two funds.

    Nicol and Small asked Murphy to put them back in the position they would have been in if the funds had not been merged.

    On investigation, the assistant adjudicator, Karin MacKenzie, found that the three funds had been operating as one since December 1998. Money had been transferred from two of the funds into the third fund without the permission of the Registrar of Pension Funds, who has to approve and certify a transfer between funds. The transfer certificate is a requirement under the Pension Funds Act.

    "Until such approval is granted it [the new scheme] cannot come into being and the legal position is that the funds are still three separate legal entities, no matter what may be occurring in practice," she says.

    MacKenzie also found that the merged fund was operating under rules which had not been approved by the Registrar of Pension Funds and that the board of management of the fund was not lawfully constituted. The Pension Funds Act requires that fund members have the right to appoint at least half the members of a board of management whereas the Schachat fund's rules allowed the employer to appoint the entire board of management.

    MacKenzie says she did not get the impression that there was any bad faith on the part of Sage in the creation and premature implementation of a single scheme.

    "It may even be that Sage was motivated by the best of intentions to benefit the staff as a whole by unlocking the surpluses for the general advantage of all members who could have received enhanced benefits as a result."

    However, the Registrar had refused to certify the scheme because of the issue at the very heart of the complaint - the effect of the scheme on the reasonable benefit expectations of the Schachat fund members.

    As a result, she says, Nicol and Small are entitled to relief and to the restoration of their fund's financial status as it was prior to the unlawful merger.

    Murphy has ruled that the Schachat fund still exists in its own right and that a re-election of the board of management must be held within three months so that it is properly constituted in terms of the Pension Funds Act.

    Sage Life, in conjunction with the newly elected board of management of the Schachat fund, must appoint an actuary to investigate and report on the financial position of the fund. Sage Life must bear the costs of the investigation.

    Lastly, Safe Life has been ordered to make good any shortfall in the financial position of the Schachat Fund which may have resulted from the unlawful merger and must bear any costs in restoring the fund to its pre-merger financial state.

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