New draft legislation is on the drawing boards that will set out, once and
for all, how your retirement fund trustees may use a surplus that has built
up in your retirement fund for your benefit and for the benefit of your
employer.
Previous draft amendments to the Pension Funds Act two years ago were thrown
out following objections from the trade union movement, Cosatu.
Jeremy Andrew, chief actuary of the Financial Services Board (FSB), says
Finance Minister Trevor Manuel has facilitated discussions between the FSB
and Cosatu and several points of disagreement have been ironed out. If the
FSB can agree on all the issues with Cosatu within the next few months,
revised draft legislation will be ready for distribution to stakeholders, he
says.
The long-awaited Tek case judgment, which was delivered by the Appeal Court
last week, failed to deal with the surplus debate in general, but relied on
a strict interpretation of the rules in the Tek Corporation`s (now renamed
Plessey Corporation) pension fund specifically.
The Tek court case was initiated by fund member Roy Lorentz, who asked the
High Court to order the trustees of the pension fund to transfer a share of
the surplus to the provident fund to which he and many other former members
had transferred to. Lorentz wanted the provident fund to use the surplus to
enhance benefits to members.
The High Court judge made some significant rulings to the benefit of
retirement fund members, but some of these were overruled in the Appeal
Court.
What the Appeal Court did spell out is that:
* Your employer does not have an unfettered right to decide how surplus
assets in your pension fund are to be used;
* Your employer can take a contribution holiday;
* You do not have a right to demand that a surplus in your fund be used to
improve benefits due to you; and
* You do not have an automatic right to part of the surplus in the fund when
you transfer from one fund to another.
It has now become urgent for the matter to be dealt with by way of
legislation and in fact, the Appeal Court judge in the Tek case, Mr Justice
Marais, has called for legislation.
"Much as the pension industry may wish to have this court decide the many
issues which can arise in that connection (what can legitimately be done
with a surplus), the court is not at large to do so and must confine itself
to the specific problems which arise in this case," the judge said.
The need for legislation is given added impetus because of two cases before
the FSB`s Appeal Board, which is independent of the FSB and may overrule
decisions of the Registrar of Pensions. Both cases deal with the
repatriation of surplus assets to the employer, once all the obligations of
the fund have been satisfied. If your employer can repatriate a surplus on
liquidation of your fund, it could open a floodgate in many of the defined
benefit funds in South Africa.
Right now, your employer cannot actually take money from the surplus out of
your retirement fund. So far, employers have been benefiting from the
surplus only by way of a contribution holiday.
A potential problem is that many defined benefit funds are sitting with
relatively few active members and large surpluses. This is because many
members transferred to the new defined contribution funds, where members
carry the investment risk, and pensions have been outsourced by the purchase
of annuities from insurers.
Generally, the members left behind are so few that the cost of giving them a
matching guarantee elsewhere is modest.
The residual surplus could then be repaid to the employer if the FSB loses
these cases, and none of the surplus would be used for the benefit of those
members who transferred to defined contribution funds or to insurers.
There will be no safeguards to ensure fair treatment of members, past and
present, Andrew says.