Pension Funds Adjudicator John Murphy has unearthed an extra R88 million surplus in one of the country`s big pension funds, calling into question the actuarial profession`s practices about disclosing the true value of surpluses.
He has also called for an explanation from the Actuarial Society of South Africa.
Murphy's decision underlines your right to accurate information about the current financial position of your retirement fund.
Many retirement funds are undergoing restructuring and members have important decisions to make about their future.
In the Langeberg Foods Pension Fund case, Murphy found that the board of trustees "failed to take all reasonable steps" to ensure that the pensioners' interests were adequately protected when the fund was restructured in 1997.
That year it changed from a defined benefit to a defined contribution fund and each pensioner was given the choice of staying with the fund or transferring out of the fund by buying a pension from Sanlam.
Pensioners were offered sweeteners such as a 10 percent increase in their pension and a 13th cheque to move to Sanlam. They were given about three weeks in which to make a decision.
The switch to a defined contribution fund effectively involved a distribution of the surplus which had built up in the Langeberg Foods Pension Fund.
The pensioners understood that an amount of R39 million would remain in the fund after the transfer - in reality, it turned out to be R127 million.
Murphy says that accurate information about the true surplus in the fund at the transfer date was a pre-requisite to the pensioners making a proper choice.
Also, the Registrar of Pensions, who has to approve all transfers between pension funds, "would very likely have refused to certify the scheme as reasonable and equitable" had he been told what the true surplus was.
The fact that pensioners did not know the true value of the surplus meant they could not assess their chances of sharing in the surplus in future through increased pensions or other benefits if they chose to remain in the fund.
A total of 247 members transferred out of the fund to Sanlam on the assumption that 33 percent of the surplus was being allocated for their benefit, with 40 percent allocated to the active members and 38 percent kept in reserve, mainly for the purpose of a "contribution holiday" by the employer.
In the end 75 percent went into the reserve account, 14 percent went to the active members and the pensioners only got 11 percent of the surplus.
"There is no getting away from the fact that had the pensioners known that 75 percent of the surplus was to remain in the fund, many might very well not have transferred out of the defined benefit fund.
"Also if they knew about it, they may have held out for a more generous offer before transferring", Murphy says.
He adds that the Alexander Forbes actuary appointed by the fund, Faffa Knoetze, ought "reasonably" to have known the true value of the surplus.
In his defence, Knoetze argued that the pensioners had sufficient information to make an informed choice, that the time they had to exercise their option was short but adequate, and the surplus position of the fund was irrelevant to the choice the pensioners had to make.
As a result he did not try to estimate the amount of money that was transferred to the fund's reserve account, which in any case would have been "meaningless" because the value of the fund's assets would change according to movements in the share and bond markets.
But Murphy has criticised both the trustees and Knoetze for not conforming to the Pension Funds Act which requires that the transfer of money from one fund to another must be reasonable and equitable, recognise the rights of all involved and meet the benefit expectations of the members of the fund.
In a 39-page decision handed down at a hearing before the Pension Funds Adjudicator in Cape Town, Murphy has ordered the pensioners and the fund to negotiate a reasonable settlement.
He has also referred the case to the Actuarial Society of South Africa because Knoetze's failure to disclose the variation of R88 million between the interim and final valuation "raises general questions about professional ethics", he says.
He has asked the society for advice on whether Knoetze complied with best practice and whether or not actuaries should be obliged to disclose current information about the value of a pension fund where a transfer to another fund is involved.
The chief actuary of the Financial Services Board has also been asked for expert advice on the effect on the fund if Murphy orders the fund to pay over an additional amount from the surplus for the benefit of pensioners who transferred out of the fund.
Russell Behrens, chairman of the Board of Trustees of the Langeberg Foods Pension Fund, says the trustees will carefully consider the effect of the additional R88 million on the position of all interested parties at a meeting to be held shortly.
Blignault Gouws, president of the Actuarial Society of South Africa, says he notes with concern the comments of Murphy about the actuarial profession and the matter will be investigated.