One of the hottest debates in the retirement fund industry - the right to a
surplus built up in your retirement fund - came to a head late yesterday.
Appeal Court judge Mr Justice Marais handed down a landmark ruling in what
is commonly known as the Tek case, which is widely regarded as the test
case of who is entitled to surpluses which have accumulated in many funds
around the country - you or your employer.
The judge partially upheld an appeal against a judgment delivered in the
Johannesburg High Court in July 1997.
The ruling will be important to you if you belong to a traditional defined
benefit fund, where surpluses have accumulated for various reasons.
It also has consequences for you if you are planning to, or have moved,
from a defined benefit fund to a defined contribution fund, where you carry
the investment risk.
Pension lawyers were last night pondering the consequences of the judgment
and held different views on whether or not the issue of rights to pension
fund surpluses has finally been resolved.
Pension lawyer, Kobus Hanekom, says the judge stopped short of stating
whether members are entitled to a portion of the surplus.
The judge said that although members are entitled to such things as
periodic increases in pensions, it was too bold a step to say members are
entitled to anything more than their right.
Rosemary Hunter, a pension lawyer with Edward Nathan and Friedland, says
the Appeal Court ruling spells out that as a member of a fund you do not
have a quantifiable claim to surplus assets - you are simply entitled to
have your fund`s trustees make appropriate decisions about how the surplus
must be used.
But she says your employer also does not have an unfettered right to decide
how the surplus assets in a pension fund are to be used.
But your company can, in appropriate circumstances, benefit from the
surplus in your fund by taking a contribution holiday.
In saying this, the Appeal court judge "has remedied one of the
unfortunately harsh features" of the High Court`s rulings, which stated
that your employer may only take a contribution holiday to the extent to
which it has over-contributed to the fund.
Hunter says this approach could be counter-productive because it could
drive employers away from defined benefit funds.
Other conclusions that can be drawn from this latest court case are:
* Your trustees have a fiduciary duty to you as a member;
* Your employer must act in good faith to ensure the objectives of the fund
are met. For example, if your trustees propose a pension increase using the
surplus, your employer cannot simply veto the proposal, because it may mean
that your employer has to resume contributions to the fund;
* You do not have a right to demand that the surplus in your fund be used
to improve benefits due to you;
* There is automatic right to a portion of the surplus in the fund when you
transfer from one fund to another. For example, from a defined benefit fund
(which is surplus) to a defined contribution fund. The judge says it will
depend on the circumstances of the transfer;
* Your fund cannot hide behind the fact that just because the Registrar of
Pension Funds approved the transfer of money from one scheme to another (he
has to approve all funds before the money can be transferred) that this is
the correct decision. The trustees take the decision to move funds and they
must take these decisions properly.
Hunter says pension funds, members and trustees now have greater clarity
about the rights and duties of trustees and employers regarding surplus
assets.
The judgment properly puts the trustees of funds in the driver`s seat and
warns them to exercise their discretionary powers for the purposes for
which they are intended - to meet the objectives of the fund and not to
please either the employer or the members, Hunter says.
Hanekom, who is with Sanlam Employee Benefits, says the Appeal Court ruling
does not help the industry resolve the problem of surpluses in funds,
because it relies on a strict interpretation of the rules of your fund.
When actuaries designed the rules of defined benefit schemes they neglected
to make sure the rules reflected their intentions. The result is that the
rules governing surpluses in retirement fund are, in most cases, not clear.
The funds` rules by themselves are not enough, so what is left now is for
retirement fund members, their employers and trustees to thrash out a
solution. Or the government has to lay down guidelines via legislation.