John Murphy, the Pension Funds Adjudicator, has dismissed the complaint of a pension fund member who approached his office with "unclean hands".
Naleen Jeram, of the adjudicator's office, says the complainant, a company director, ordered his fund to transfer his retirement benefits to a preservation fund, despite the fact that the rules of the fund did not permit this.
He then had a complaint arising from this unlawful transaction, but since he was effectively asking for an illegal contract to be enforced, his complaint was dismissed.
The complainant worked for Continental Linen and was a member of the company's provident fund. The provident fund was discontinued in May 1988 and members were moved to the Corporate Selection Retirement Fund. The complainant, who was then 65 years old, had reached the fund's retirement age and so became a deferred member of the fund.
He retired two years later at the end of March 2000. In terms of the rules of the fund, he was entitled to his retirement benefits as a lump sum or as an annuity.
However, he wanted to transfer his benefits to a preservation fund, with a view to minimising tax on the benefit, and gave instructions to this effect.
Despite the fund's rules only providing for transfers to a preservation fund by those who were withdrawing from the fund and not those who were retiring, the fund consented to the member's request.
There was, however, a delay of a few months between the time the complainant gave the instruction and the fund complied. In that time, the fund experienced a negative return and the complainant's benefit was reduced by about R40 000.
This was the subject of the complaint made to the adjudicator's office. But Murphy found it was unnecessary to make a ruling on the complaint, because "the complainant was well aware that the rules of the fund applicable to him did not allow for a transfer to a preservation fund. Nevertheless, he insisted on the transfer.
"The fund and its administrator were also aware that the retirement rule did not allow for such a transfer. Be that as it may, all the parties effectively entered into an agreement in terms of which the benefit was unlawfully determined under another rule to allow for a transfer to the preservation fund."
Murphy's ruling quotes two Roman law principles. The first states that no action which requires the enforcement of an illegal contract can be upheld in law and the second is a defence available to someone facing action for the recovery of performance, when the person bringing that action has "unclean hands" or conduct tainted with illegality.
Murphy ruled there was no need for him to determine whether or not the complainant was entitled to the money he lost during the delay of the transfer to the preservation fund, as the parties entered into an unlawful agreement. Based on these well-established Roman law principles, he was not prepared to uphold an illegal contract by granting the complainant any relief.
Jeram says the case once again highlights the importance of the rules of a pension fund, which are supreme and binding on all functionaries within the fund, including the board of management, the employer, the administrator and the members.
"It is imperative that all these people ensure that their conduct or actions fall within the ambit of the rules. Otherwise, they are in danger of entering into unlawful arrangements, which will not necessarily be enforced by the pension funds adjudicator," Jeram says.