Defined benefit retirement funds will not be put at risk when the law changes towards the end of the year to allow employers, in negotiation with employees, to remove part of the large surpluses that exist in many funds.
This assurance given by Peter Milburn-Pyle, the chief actuary of the Financial Services Board, follows a warning published in Personal Finance by Cyril Ginsburg, the chief executive of consulting actuaries, Ginsburg Malan & Carsons, that the removal of the surpluses could be dangerous if there was a sudden and sharp stock market correction.
Ginsburg pointed out that there was a real threat in Britain where not only had companies been allowed to remove surpluses but they had also lost a tax incentive.
Ginsburg said a vicious circle could be created when company balance sheets were stimulated by the withdrawal of surpluses which would increase profit margins, followed by a sharp market correction.
This would mean the value of the investments held by the pension fund could be reduced below the level required to meet benefits.
The company would then have to top up the assets retarding its balance sheet, which in turn could push the stock market lower if this happened over a wide spread of companies.
Milburn-Pyle says that this danger does not exist in South Africa because the Financial Services Board will have controls in place before any withdrawals of retirement fund surpluses are allowed to take place.
"The controls will ensure that an actuarial valuation of a fund after withdrawal of the surplus assets will reflect a strong position, even in the event of a subsequent stock market setback.
"We would never have lent our support to any arrangement that had the potential to put fund member rights in danger."
Milburn-Pyle says the change in legislation to allow the withdrawal of surpluses from retirement funds will benefit both fund members and employers.
He argues that one of the reasons employers have been tilting towards defined contribution funds is because of the build up of surpluses.
If employers are given access to fund surpluses under proper controls, they would be encouraged to retain defined benefit funds.
Employers would be able to use these surplus funds in more productive ways.
Milburn-Pyle says the controls that the FSB will apply will improve benefits by "way of inflation-proofing of pensions and significantly boosting the withdrawal benefit payable on resignation".
In terms of the proposed controls employers will have to negotiate the terms of the withdrawal of a surplus, and this is expected to result in a trade off with members receiving better benefits.