Pension fund law needs to be changed to give defined benefit pension fund members fairer withdrawal benefits when they lose their jobs, Professor John Murphy, the pensions adjudicator, says.
His comment comes in the handing down of a key complaint made by Basil Kransdorff, a former senior employee of chemicals company, Sentrachem.
Kransdorff has featured large in the minds of many people involved in the retirement fund industry for some years. For a number of years he has been conducting a massive one-person letter writing campaign against the unfairness of withdrawal benefits given to members of many defined benefit pension funds when they resign or lose their jobs.
Some of the withdrawal benefits have and still are as low as your contributions, plus one or two percent.
Kransdorff has had his day in court, so to speak, with Murphy handing down a 15 400 word ruling on his case, which involved the Sentrachem Pension Fund and his former employer, Sentrachem Limited, which retrenched him in 1996 as a result of the group selling off the division of which Kransdorff was manager. Murphy says Kransdorff's complaint was narrowed down to three issues:
* Did Kransdorff receive the benefit to which he was entitled in terms of the rules of the pension fund;
* Was the amount paid as a withdrawal benefit fair and reasonable; and
* Was Kransdorff entitled to any additional withdrawal benefit by virtue of his employment contract?
Kransdorff's withdrawal benefit of R265 292 was based on the fund rules, which stated he was entitled the greater of the member's reserve value, or double the contributions made by the member, plus eight percent. Kransdorff was paid the reserve value, being the greater of the two amounts.
He felt the actuarial methods used to calculate his reserve value were incorrect and that the full employer's contribution, plus growth, should be added to give him a benefit of R476,324.95, some R210,000 more than he was paid.
However, Murphy found that Kransdorff did receive the benefit to which he was entitled in terms of the rules and that the method applied by the actuary in calculating the benefit was fair and reasonable. But against this Murphy says "reform of the law is obviously necessary", adding that unfair withdrawal benefits could contravene the constitutional right to property.
In 1991, only 21 percent of funds surveyed allowed employer contributions to be included in early leaver benefits. Murphy could not say whether a greater number of funds have improved their rate of interest, or include a part of the employers contributions in the early withdrawal benefit, but "there are encouraging signs that some funds have heeded the call to improve early withdrawal benefits".
"Further reform seems unavoidable and the question is whether it should come about in a structured fashion through generally applicable legislation, or piecemeal, in an ad hoc fashion, by means of adjudication.
"Legislation is likely to be the more efficient means of resolving the problem."
Murphy says it is a matter of concern to most early job leavers that few funds make any explicit allowance for any part of the employer contributions to be included in the early leaver benefits.
"An adjustment of withdrawal benefit levels is certainly called for", but, Murphy says, "it would be a great pity to undermine such a proven and valuable instrument (as a defined benefit pension scheme) by misplaced and, at times, irrationally zealous claims of entitlement to fund assets by members who have limited understanding of the financing of the scheme.
"Members are entitled to defined benefits. They have no right, in the ordinary course of events, to the assets of an ongoing scheme."
Murphy is also concerned about the wide discretion exercised by actuaries in reaching valuations. He says rules of pension funds need to be tightened up to at least show what method is being used by an actuary. And greater explanation should be given to members about how withdrawal benefits, even when they are fair, are calculated.
This must be done with sufficient clearness and with safeguards allowing members to check that the policy or applicable standards have been applied in their individual case. Failure to do so, will open the rules to challenge on the grounds of unreasonableness or unconstitutionality.
However, Murphy says, even when less than the actuarial reserve is paid, you have to recognise that the defined benefit fund is modelled on a particular financial matrix, which contemplates penalties on withdrawal and a predetermined probability of a certain percentage of withdrawals before retirement.
But in an environment where increased job mobility is the norm, the equity of pension fund members ending up with decayed withdrawal benefits is questionable, especially where the pension fund has closed membership and sits with a huge surplus.
The lesson to be learned by actuaries and fund administrators is that the failure to define entitlements with greater certainty and in a predictable manner will lead to disputes and litigation and, more often than not, the costs are likely to be borne by the fund.