What the pension funds’ legal victory means

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Pension funds have been legally challenging the prescriptive Regulation 35(4) addition to the Pension Funds Act (PFA) around actuarial surpluses and contingency reserve accounts for years.

A watershed ruling by the Supreme Court of Appeal (SCA) in Bloemfontein on November 2 represents a positive upshot for pension funds in South Africa and could see members benefitting from billions of rand in unclaimed funds.

Pension funds have been legally challenging the prescriptive Regulation 35(4) addition to the Pension Funds Act (PFA) around actuarial surpluses and contingency reserve accounts for years.

Now a trio – Hortors Pension Fund, Southern Sun Group Retirement Fund and the Vrystaatse Munisipale Pensioenfonds – have won their respective cases on the matter, which were heard jointly at the SCA in August.

The court ruling allows them to use this money in other ways if they can’t find the member.

This followed the funds initially losing in the Gauteng High Court, with applications to secure an order declaring Regulation 35(4) invalid being dismissed. The Hortors application was against the Financial Sector Conduct Authority (FSCA) as the first respondent and the minister of finance as the second respondent.

The Southern Sun Group Retirement Fund’s case was against ‘the Registrar of Pension Funds and Others’ while Vrystaatse Munisipale Pensioenfonds’s case was against ‘the Minister of Finance and another’.

Johan Esterhuizen, a partner in the pension funds department at law firm Shepstone & Wylie, represented Hortors. He tells Moneyweb that the SCA decision is of “great significance” for the pension funds industry as the regulation in question has been a bugbear for over a decade.

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“The [regulation] change came as far back as 2001, but only became an issue in later years,” he says. “When older pension funds could not find certain members, this regulation called for their portion to go into contingency reserve accounts. However, pension funds have been questioning what happens to the money if there have been exhaustive steps to find such members over several years.

“Regulation 35(4) essentially meant this money [actuarial surpluses] stays in contingency reserve accounts in perpetuity,” he adds.

“The consequence of the SCA’s recent judgment is that this regulation has now been found to be invalid [as it is beyond the finance minister’s power and not in accordance with the Pension Funds Act 24 of 1956] and thus is unenforceable,” notes Esterhuizen.

He says this means pension fund boards are now empowered to decide how such funds can be used, including using a portion to pay top-up benefits to other members or even offering a ‘contribution holiday’ to current members.

“This can run into billions of rand [between the various pension funds] but different funds can opt to do different things … The critical thing is that pension funds will still be liable if members that previously could not be traced do come forward. The liability never goes away,” he adds.

“Pension funds will need to keep a reasonable amount in contingency reserves, but the SCA ruling means that pension fund boards are not disallowed from taking money out of contingency reserve accounts … Such a move will still need to be approved by relevant authorities, like the FSCA,” he points out.

“We have clarity at long last on the issue … It has been something the pension fund sector has wanted certainty on for a long time. The question around actuarial surpluses and contingency reserve accounts has been asked by many funds over many years,” Esterhuizen says.

The Batseta Council of Retirement Funds for South Africa (Batseta) is happy about the watershed ruling on the issue.

“Batseta welcomes the judgment of the SCA,” CEO of the council Anne-Marie D’Alton said in response to a Moneyweb query. “The judgment is also [a] testament that South Africa’s judicial system is healthy and [is] still working well.”

“The board of trustees of a retirement fund has a fiduciary duty to care for the financial affairs or wellbeing of the fund and its members. The judgment clarifies and solidifies the decision-making and discretionary powers of the boards of trustees as the custodians of retirement fund saving,” she noted.

D’Alton said the judgment also ensures that employers of defined benefit (DB) funds – especially closed funds that guarantee an employee a specific income level at retirement – can meet their obligations as promised.

“The most important impact is that it makes DB funds more solvent. It also allows [pension] funds to use the funds to benefit members in various ways enabling a fund to pay bonuses [or] increase fund credits or risk reserves,” she added.

Despite the ruling, D’Alton said Batseta does not believe it fully settles the matter.

“Unclaimed benefits are a blot against the retirement fund industry. [They] will continue to present challenges. It is a legacy matter plagued by issues of poor record-keeping, lack of member communication, and [lack of] awareness by dependents that such benefits exist,” she pointed out.

“Innovative solutions are required to ensure that members or beneficiaries can be traced and, in the event that they cannot be traced, that the community at large benefits as a whole,” she said.

In a note published on November 6, commercial law giant Bowmans hailed the judgment as “a substantial step in the right direction”.

The memo (written by Deirdre Phillips , Graham Damant and David Geral) said the ruling “goes a long way to resolving the long-standing problem of unclaimed benefits being locked up in funds where there is no realistic possibility of them ever being claimed”.

However, the firm warned of the potential impact of the promulgation of the new Conduct of Financial Institutions Act (CoFI).

“It appears that the [SCA] victory may be short lived if CoFI comes into effect in its current form next year as is currently planned,” said Bowmans.

“It is worth noting … that what funds may do with unclaimed benefits post promulgation of the CoFI Act is yet to be seen.”

The group pointed out that the second draft CoFI Bill was published on September 29 for public comment by October 30.

“The CoFI Bill contains significant proposed changes to the PFA, including inserting section 37A(5) to the PFA [to be renamed the ‘Retirement Funds Act’]. The proposed new section reads ‘unclaimed benefits may not be reduced or utilised for any other purpose by a fund’ … An unclaimed benefit is like any other benefit and could include unclaimed surplus benefits,” it explained.

“The ‘other purpose’ referred to in the proposed section 37A(5) is not clear, however, it could be argued that if section 37A(5) comes into effect [in its current form], that funds will not be entitled to utilise unclaimed surplus benefits for the benefit of former members who have been traced, irrespective of the fact that a fund may be of the view that it would be highly unlikely that a beneficiary will come forward to claim the benefit,” Bowmans added.

With regards to CoFI, D’Alton said Batseta hopes policymakers will take into consideration the principles set out in the SCA judgment.

“The consultation process on the CoFI Bill is still underway and Batseta will comment on it. However, should a centralised unclaimed benefit fund be established it will be prudent to ensure that it is managed by an independent governance structure,” she said.

“Alternative and innovative ways should be investigated to ensure that untraced members, beneficiaries, and communities’ benefit through sustainable investments that supports economic development in South Africa.”

This article was republished from Moneyweb with permission

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