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 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.
Tip
Check whether your retirement fund has a properly constituted board of trustees. Members have the right to choose at least half of the trustees.