Anglo American closes its defined benefit SA pension fund
More than 2 000 pensioners affected.
Anglo American. Picture: Gallo Images
Anglo American has advised pensioners that it will close the Anglo American Corporation Pension Fund (AACPF).
The AACPF is the defined benefit fund that employees of Anglo’s Johannesburg Corporate Office were members of. The fund has been closed to new members for almost two decades after the company introduced a defined contribution pension fund. The AACPF has no contributory members and is primarily a pensioner fund.
The closure will affect 2 030 pensioners and five employees who have retained their past service in the AACPF.
Against the background of the ageing profile of the AACPF, the Anglo Corporate Division of Anglo Operations (AOPL) has decided to close the fund, but the benefits to which pensioners were entitled will be protected, an Anglo American SA spokesperson told Moneyweb.
The spokesperson said Anglo’s Johannesburg Corporate office, as well as the nature of the work deemed to be core to its business has changed, and its staff numbers reduced significantly in recent years in response to changing economic factors and a new organisational structure.
AACPF pension benefits will continue to be payable to members of the fund for the next three to four decades.
“A possible closure of the fund now will see members benefiting from its currently strong financial position, in particular from the fund reserves,” the person added.
With defined benefit funds, employers effectively promise to pay employees a guaranteed pension for life, which is usually based on the employee’s earnings history, age and years of service. In a defined benefit environment, the employer carries the risk that markets don’t perform in line with expectations or that workers live longer than anticipated. The global increase in longevity has meant that many international employers have had to inject additional funds into these vehicles in order to meet future promises. As a result, there has been a largescale conversion to defined contribution funds, where members carry the investment as well as the longevity risk.
According to Olano Makhubela, divisional executive for retirement funds at the Financial Sector Conduct Authority (FSCA), there are currently 1 614 active retirement funds registered, of which 190 are defined benefit funds.
But Anglo’s 2017 Annual Report suggests that its local defined benefit pension plan is in surplus and that the value of its pension plan assets is currently sufficient to cover the benefits that will have to be paid. The excerpt below shows that the funding level of its local defined benefit plan is roughly 117%, after accounting for the surplus restriction.
This suggests that the decision is not a function of current financial pressure on the fund, but that it is rather related to its local downsizing and concerns about future sustainability.
“There is continued unpredictability of future investment returns and the challenges this may bring to the Fund’s cash flow requirements to meet pension payments, increasing at around inflation, over the next three to four decades,” the spokesperson said.
“The Company will be unlikely to continue to attract the necessary dedicated, skilled and experienced administrators and Trustees required to understand and manage a defined benefit fund in-house as it currently does given the reduced size of its fund membership. However, the major insurers have these skills in their businesses.”
While the closure of the fund may fuel concerns that future benefits could be negatively affected, and that the insurer’s actuaries may not have the personal interests of the pensioners at heart to the extent that member-elected trustees do, Anglo said there was no reason for concern.
During consultation, the trustees suggested that the fund’s full solvency reserves and part of the employer surplus should be allocated to pensioners on transfer to an insurer that will provide identical benefits to those that pensioners currently have in the AACPF and that an enhancement should be considered.
The trustees have proposed the purchase of annuities that will target CPI increases (this is also the case with the AACPF) and to buy each pensioner an annuity that guarantees payment of future pension payments by way of the purchase of a personal insurance policy from an insurer.
“Following a tender and thorough governance and selection process, Momentum has been chosen as the Insurer.”
The distribution of the full solvency reserve and some of the employer surplus from the fund is equal to a total boost of 15% of pensioners’ current pension entitlement. There is also a possibility that there could be a further once-off increase of 2% to 7%, in addition to the 15% enhancement.
“However, given current poor investment returns, some or all of the possible additional increase may be used to purchase a guaranteed increase for the next two or so years rather than including it all in the initial enchanced pension,” the spokesperson said.
The trustees are of the view that this proposal will be to the advantage of pensioners and the company has agreed to the proposal.
