The debate about who is entitled to the surplus in many of the retirement funds is raging on and will be the subject of much discussion at the annual meeting of the Pension Lawyers Association of South Africa this month.
There is currently a court judgment which raises the issue of ownership of the surplus of a fund, and pending legislation. This is not stopping some employers from trying to get their hands on the extra funds before either the court case is decided in a higher court or the legislation is approved by Parliament.
You may remember that some months back I wrote about the PG Group putting a gun to the heads of its pensioners in the way they forced them to make a choice on accepting an increase in pensions (taken from the pension fund surplus) to agree to fund their own medical aid contributions in the future.
Well this scheme is now being refined by the PG Group and a number of other companies who are now attempting to get active defined benefit fund members to switch to defined contribution schemes.
Substantial shares of fund surpluses (as much as 50 percent on top of the accrued value of fund members) are being used as a lure to defined benefit members to switch to defined contribution funds on condition that they fund their own medical aid contributions in retirement.
These early attacks on the surplus of funds are being made before proper agreements on the division of the surpluses have been negotiated.
These companies are using what could possibly be money to which the members are entitled to bribe them into accepting what could in the end be to their detriment. If the Financial Services Board (FSB) is not prepared to suspend the practice then employee bodies should take action.
The position of the FSB is that a surplus in a fund belongs to the fund as all the assets are registered in the name of the fund.
Chief actuary of the FSB, Peter Milburn-Pyle, says the question is not who owns the surplus in a fund but "who is entitled to benefit from this surplus?"
There are four parties he says who are potentially entitled to benefit from the surplus in a fund. These parties are the current contributing members, pensioners, deferred pensioners, and employers.
Milburn-Pyle says that before any decision is made to divide a surplus or to take a contribution holiday, fund trustees should take note of the source of a surplus.
Surpluses, he says, arise from many areas including good investment performance, poor withdrawal benefits for members in the past and well below inflation rate increases to existing pensioners.
However, a surplus could also come from a one-off situation such as the sale of an asset. This one-off windfall could however hide an underlying, on-going problem in the liabilities of a fund which could have an impact a number of years later, long after the surplus has been distributed.
Members should ensure that their trustees establish the exact reasons for a surplus before any decision is taken on a surplus.
Milburn-Pyle argues that an employer's obligation in a defined benefit fund is to ensure that the assets of the fund are kept in balance with the liabilities (the amount that will be needed to pay for pensions). This is normally done conservatively with assets under-valued and liabilities over-stated.
If excess assets develop, Milburn-Pyle says, these can then logically be accessed indirectly by an employer, by taking a contribution holiday or a contribution deduction.
If a contribution holiday is approved, the FSB has no interest in how the company spends the money that would otherwise have gone into the fund be it to fund a medical liability or anything else.
As far as the payment of an inducement from surplus goes, Milburn-Pyle says that the FSB does not insist that any sweetener be paid from a surplus to encourage members to switch from one type of retirement fund to another.
This, he says, is a matter for the employer and employees.
In my view he is is absolutely correct, but this means that employee organisations should get activated and get proper negotiations underway when any proposals are made on how to deal with retirement fund surpluses.