Pension Funds Second Amendment Bill: formal consideration

NCOP Finance

11 November 2001
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


12 November 2001

Chairperson: Ms Mahlangu

Relevant documents:
Pension Funds Second Amendment Bill [B 41B - 2001]
FSB response to submissions by BSA and COSATU (included in the minutes)
FSB response to drafting proposals submitted by COSATU (Appendix 2)

The Financial Services Board took the Committee through the public comments that were made and gave their response thereto. Three amendments were agreed to. The Bill was put before the Committee and adopted. The DP abstained from voting.

Mr Andrew (FSB) took the committee through proposals made in the public hearings and the comments the FSB had made in response. All the points that are bolded are the submissions made at the hearings. After going through the FSB document, Mr Andrew asked the Committee to make three amendments.

Proposed Amendments
Mr Andrew then said that he wanted to propose three amendments to the Bill.

- In 15B(6)(d) after the phrase 'of actuarial surplus which' insert 'the registrar is satisfied'. This strengthens the clause because now the registrar must be satisfied that the surplus was indeed used improperly before it is excluded for the surplus to be apportioned.
- In 15B(10) provision will be made that a person appointed in terms of 15B(3) can also refer the scheme to the board. This gives more protection to the rights of former members.
- In 15J(3)(d) the phrase 'will be retrenched' be deleted because it was included by mistake. This is merely a technical amendment.

Ms Botha (DP) said that she was not convinced that it was so easy to track down all the former members. Secondly the member wanted to know why the public sector is excluded and finally she wanted a comment on the constitutionality of the retrospectivity provision.

Mr Ralane (ANC) asked if it is a priority to get the Bill through now because he feels the concerns of labour are not addressed.

Mr Andrew said that members of funds currently have no rights therefore the Bill is a priority. When it is enacted they will have rights and be protected. The views of labour and the Business South Africa are far apart and the Bill is a compromise.

Responding to Ms Botha, Mr Andrew said that he knows that there are funds that have electronic records that do go back 20 years. This is not always the case but an extensive advertising and search campaign will not have to be done for all funds.

On the inclusion of the public service, he said that it fell outside the ambit of the Pensions Fund Act but there were steps to bring it under this Act.

In responding to Ms Botha's question on retrospectivity, he said that the determination of the surplus utilised improperly is the only real instance of retrospectivity. Mostly, retrospectivity merely relates to who participates in the surplus.

Ms Botha commented that the use of the surplus might be improper but it does not mean that it was illegal.

Mr Andrew replied that that it was lawful but the governance behind the decisions are questionable. At the moment there is a case in the Cape High Court dealing with this. Often decisions were taken and the conflict of interest was not revealed.

The Chair commented that not everyone will be satisfied but the Bill makes sense and it is a good legal framework for a point of departure.

The motion of desirability was read.

Ms Botha indicated that the DP agreed with the desirability of the Bill but would abstain because of the constitutional issues and some aspects that are unfair.

The other members agreed to adopt the Bill with the three amendments discussed above.

The meeting was closed.

Appendix 1
Summary of Submissions and Response by Financial Services Board
1. Submissions by
Business and Responses from FSB
1.1 Because boards make the investment decisions, it is unfair to expect the employer to fund any deficit.
The employer can, instead of funding a deficit, walk away from a fund in deficit through liquidating the find and distributing the (inadequate) assets amongst the members, thereby passing the risk on to the members. It is equally unfair to permit a situation in which the employer can derive the benefit of surplus in a defined benefit fund.

This argument is weak because:
· The employer appoints as much as 50% of the members of the board. For the board to adopt an investment strategy which is imprudent would require the participation of these employer-appointed members, who can be expected, in any event, to report back to the employer on an issue such as investment strategy.

· Nothing prevents the rules from requiring that the employer be consulted before the investment strategy is adopted by the board of a defined benefit fund. This would protect the employer against such imprudence.

1.2 The Bill creates uncertainty for companies.
"Uncertainty" in this context only relates to the potential cost to top up former members and
pensioners, where the amount may be unknown at present. There is only a cost if there is surplus
which the employer would otherwise use for a contribution holiday, or there was significant past
"surplus utilised improperly by the employer". As stated below, this argument overlooks equities
and ignores the current legal situation which is that neither the employer nor members have rights
to surplus in law.

Employers will have massive contingent liabilities as a result of adding back surplus utilised improperly and topping up former members who left the fund in the last 20 years.
Members must be provided every year with a benefit statement. These statements set out the
Critical information which is used to determine the benefit payable. Members usually keep these
statements; and the administrator and employer will normally keep a master schedule in order to
address queries. Members, or the employer, or the administrator, are able to produce these
statements for former members, the data is available.

Prior to the compulsory issue of member benefit statements, many funds operated by means of a 'renewal schedule' which summarised the membership inflation at the end of each financial year. Such schedules will also contain the required information.
Members can be asked to substantiate their claims, providing periods of employment, salary history, etc.

1.3.2 "Surplus utilised improperly by the employer"
DSA is incorrect in stating that the use of surplus for a contribution holiday will automatically be included. Section 1 5B(6) includes only a contribution holiday after the commencement date of the Amendment Act. This gives effect to the statement in 1 5A that the employer can continue a contribution holiday that it was already taking on commencement of the Act, but will be obliged to add the value of this to the surplus to be apportioned.
At the time when abuses occurred, there was little difference between the management of the fund and the management of the employer: all the members of the board of the fund were usually senior executives of the employer and there were no member-elected members of the board of the fund. There was also a prevailing view amongst actuaries and consultants that actuarial surplus was at the disposition of the employer. They would therefore have directed the board that the employer had such a right. The Supreme Court of Appeal (SCA) overturned this in the Tek Appeal. The SCA found that the employer had no such right in law, and any rights should be negotiated between the stakeholders including the employer and members as stakeholders) and written into the rules. The decisions were based on a wrong premise. Reviewing them now is therefore appropriate.
Some the cases of improper use" were 'sold' to members as benefit improvements, without the members realising that they were, in Fact, relieving the employer of an obligation that the employer would otherwise have had to fund: examples could be the removal of discriminatory practices and additional pensions in lieu of post retirement medical subsidies.

BSA make much of an example in which 900 000 former members will have to be traced and the contribution rate will rise from 5% to 9%. what was not stated is that the surplus involved in that specific fund is some R12 billion as at the last actuarial valuation, and the contribution rate is as low as 5% only because the employer is using part of the R12 billion to fund a partial contribution holiday. In addition, the Sanlam survey shows that average employer contribution rates amount to I 2%, showing that the 90/o is not out of line with what most employers pay. In Government's view, the Rl2 billion is more than adequate to fund the investigation of the situation of former members!

1.3.3 Massive contingent liabilities
The employer's costs will only increase if the employer
· either has to pay into the fund when the apportionment of surplus to the employer is smaller than the surplus utilised improperly by the employer
· or the employer loses the right to fund a contribution holiday out of surplus, because the surplus apportioned to the employer is insufficient to fund the contribution holiday.
The first case suggests that there was abuse in the past on a considerable scale, and the second can only occur if the topping up of past members and pensioners uses up the surplus (which suggests that the past practices were penal to the former employees, which must question whether the employer is morally entitled to take the contribution holiday) or analysis of the origin of the surplus has convinced the board that the employer is not entitled to greater apportionment of the surplus (which suggests that the employer is not, in equity, entitled to take the contribution holiday).

Massive contingent liabilities can only occur if there were penal past practices (and therefore former members were treated inequitably) or the employer is not entitled, in equity, to take the contribution holiday that the employer is currently enjoying

1.3.4 Topping up former members
Mechanisms have been inserted to make this process manageable: the 'reasonable step', the 9 month maximum after advertising, the ability to set moneys aside in a contingency reserve Any time period can be extended at the written request of the fund.

The 'retrospectivity' in the Bill is justified because of the past knowledge differential, poor disclosure and inadequate access to independent advice. Parties involved in negotiating conversions and transfers were not operating from equal access to information and equal knowledge. The Portfolio Committee decided that the differentiation between retrenchment, dismissal and resignation implicit in the Bill is not justified. This has had the consequence of increasing the administrative problem of tracing former members considerably, and will increase the share that former members get of the current surplus.

1.4 The Administration task of tracing and topping up former members will be crippling. BSA wants the period limited to the period for which there are records available.

Section 1 5B(4) requires that reasonable steps be taken and places time limits on members' rights to come Forward and provide the required information. As is stated above, members could have the information themselves. Limitation of the period to the last 7 years, or so, will not address the events that are so critical to Labour, namely the mass conversion of defined benefit funds to defined contribution funds which took place over the 1980's and early 1990's.

1.5 The natural response to the Bill will be to liquidate funds and start new funds under the new regime.
Most employees now belong to defined contribution funds. There is no future cost increase as a result of the minimum benefit provisions. The only possible cost to the employer could be the apportionment of any surplus resulting in less available to fund a contribution holiday. There is no justification for the liquidation of such funds. Liquidation will result in the same apportionment as if the fund continues unchanged.

As Far as defined benefit Funds are concerned, membership is now small outside the public sector and the NEDLAC discussions showed that employers are not prepared to underwrite such Funds in the present environment of investment volatility and HIV/AIDS.

Liquidation is likely to happen in any event. If funds are liquidated while in surplus, the former members will be topped up, so that the employer will gain nothing by liquidating the fund.

2. Submissions by Labour and Responses from FSB
2.1 The Bill will legalise looting by the employer.
"Looting by the employer" implies that the employer will gain a direct financial benefit to which the employer is not entitled. The minimum benefit is designed to ensure that members get an amount which is reasonable in terms of their expectations, taking account of prevailing investment conditions. "Looting" can only happen if they get less than this and the employer uses the balance.

2.2 Members who converted from defined benefit to defined contributions were entitled to their investment reserve. The release of this reserve into surplus and use of such surplus by the employer is improper.
BSA has acknowledged that if members received less than they were contractually entitled to receive, then the amounts paid previously must be adjusted.
Government believes that members were not entitled to what Labour has described as the "investment reserve"; rather they should have received sufficient to satisfy their reasonable expectations. The debate is therefore about what "reasonable expectation" means, and who can benefit if the fund reserved more than the amount required to satisfy these "reasonable expectations".
Government believes that its definition is fair.

2.3 Employer should not have any access to surplus.
Cosatu acknowledge that "ordinary surplus" may result from actuarial conservatism (or a cautious approach to Future economic experience) and that this actuarial conservatism will have caused the employer to pay higher contributions into the Fund than the employer should have needed to pay into the Fund if the actuary had anticipated what actually happened.
Government believes that the employer should be able to share in the surplus apportionment precisely because the employer contributed to it in this way.

2.4 Former members and pensioners should be compensated up to their entitlement at the time of exit.
All parties agree with this, in a strict legal sense: all beneficiaries should get what they are legally entitled to receive.
The difficulty comes with Cosatu's view that former members were entitled to the investment reserve. BSA disputes that Former members were entitled to this.
Government concluded that the minimum benefit to be taken into account in the topping up of past members should be defined differently from the way in which the particular fund had managed its contribution rates and surplus calculation in the past, and the assumptions used in determining the standard should be common across all funds.

2.5 The minimum benefit prescribed assumptions should be set in the Bill and should not be left to regulation (at least in respect of the past).
The UK tried to Legislate a standard for the future, and failed: the Blair government has indicated that it will be reviewing or scrapping their "minimum funding requirement" which includes the critical assumptions in the legislation. The reason for scrapping it is precisely because economic conditions have changed and it has not been practicable to change the law to keep pace with changing circumstances.
Government has promised a representative committee to draft the minimum basis and wide consultation. This will set out, probably once only, what will happen in terms of the past. The resulting basis is likely to vary over time. Government felt that it was not practicable to include it in the legislation.

2.6 The list of "improper utilisation should be extended.
The list may be extended as abuses which lie outside the present list become apparent
The eases Cosatu has cited are problematic: if a defined benefit fund remains in surplus after the employer has taken a contribution holiday, by definition, such contribution holiday was permissible;
if some surplus is released on transfers or conversions, once the former members have received sufficient to satisfy their reasonable expectation, then it is not inappropriate to permit this surplus to be used by the stakeholders.

2.7 Defined contribution funds with surpluses are excluded.
The Act requires all funds to be actuarially reviewed, except for those exempted from review by the Registrar. Regulation 2 sets out the conditions for exemption. Regulation 2 will be amended to ensure that any defined contribution fund which contains surplus will be no longer be exempt. As any previous exemption may be retracted by the Registrar, all funds with surplus will be swept into the net.

2.8 Deficits on termination and conversion may not need to be paid by employers.
This is correct during the window period, but not thereafter. The window period is designed to p1-event employers being faced with debts which they cannot afford to Finance.

2.9 The window period will make a mockery of the minimum benefits.
Government does not agree. If a fund liquidates or converts during the window period, an automatic surplus apportionment is triggered - former members and current members should then enjoy their minimum benefits if the fund can afford it. Only if the fund is in deficit with regard to the minimum benefits will members and former members not receive them.

2.10 Any contribution holiday should apply equally to members and the employer. Members and former members have no right of recourse to the dispute resolution process.
If surplus has been apportioned for use by the members (in a member surplus account) and by the employer (in an employer surplus account), the board may approve a reduction in contribution due by either party at their request.

2.11 Members and former members have no right of recourse to the dispute resolution
Members and former members have a right to complain to the board. The board is obliged to inform the Registrar of these complaints and the action taken. The Registrar has then the right to refer to the specialist tribunal. If the members and former members are aggrieved at the Registrar's refusal to refer the apportionment to the special tribunal, they may lodge an appeal to the FSB's Appeal Board The Registrar will therefore decline to refer cases in which there are outstanding complaints at his peril. in all likelihood unless a complaint is obviously trivial, referral to the special tribunal will take place.

2.12. Concern about duplication in dispute resolution and forum shopping.
The duplication and forum shopping concerns were addressed by making the determination of the tribunal binding, and by giving the Registrar and the Courts limited powers of review.

3. A concern of business and labour
Permitting employers to do in the future out of moneys in the employer surplus account what is improper use in the past presents an anomaly.

This argument overlooks the critical fact that, in the past, there had been no equitable apportionment before --the employer used the surplus for its benefit the employer was using surplus which the employer had no right to use. In the future, on the other hand, the employer will be using surplus which has been apportioned to it after an equitable process.

Appendix 2:
Response to the document "COSATU Further Drafting Proposals - Submitted on 6 November 2001"

1. A number of the issues raised in the document are not "drafting proposals" but are issues of substance which were extensively discussed previously
either in NEDLAC (including the technical committee which met under the auspices of NEDLAC), the bilateral and trilateral discussions between Government, Labour and Business, or before the Portfolio Committee on Finance in the National Assembly. These relate to:
1.1. the definition of the minimum benefit,
1.2. the window period (and what it implies on liquidation and conversion),
1.3. a requirement that funds plan to increase pensions by the full consumer price index after retirement,
1.4. the exclusion of funds that are exempt from actuarial valuation from a requirement to submit a scheme for the apportionment of actuarial surplus
1.5. the use by employers of actuarial surplus to fund contribution holidays
1.6. the role of the person representing the interests of former members.

2. Some of the issues are more minor and are either being raised for the first time, or have only been discussed between COSATU and the FSB, but not the balance of the Government team. These are not drafting issues, however, but more fundamental changes. These cover:
2.1. reference to the legal predecessor of the fund;
2.2. including a statement that the rights and reasonable expectations of members should be taken into account in the apportionment;
2.3. extension of the uses of actuarial surplus that would qualify as "surplus utilised improperly by the employer";
2.4. giving the right to former members to complain to the special tribunal.

3. To deal with the issues of substance first:

3.1. The definition of the minimum benefit
3.1.1. COSATU propose (as they did in NEDLAC and in their submission to the Portfolio Committee) that the minimum benefit (both in respect of past and future exits) should be
the accrued liability (that is the value the actuary places on the obligations of the fund towards the member in respect of the member's past service)

multiplied by

· the ratio of the fair value of the assets to the actuarial value of the assets, where the assumptions used in determining the accrued liability and the actuarial value of the assets will be those set out in the actuarial valuation that preceded the first major transfer or restructuring event in the history of the fund after 1 January 1980. This will
· Produce amounts which will vary from fund to fund depending on the methods and assumptions used by the actuary who valued the fund.
· Crystallise, as an entitlement for the former members, provisions in the actuarial methods and assumptions which were used in past actuarial valuations to determine the contribution rate, without any thought that such amount would be paid out as a benefit or transfer value. If it had been known that such amount would be paid as a benefit or transfer value, it is likely that different methods and assumptions would have been used. In particular, it will give former members a right to any conservatism in the actuarial methods and assumptions, which was accepted at the time in the knowledge that, if the conservatism produced a higher contribution rate than was required to keep the actuarial value of the assets greater than or equal to the accrued liabilities, actuarial surplus would emerge which could be used to drop future contributions due from the employer.
· Produce amounts which reflect the valuation of an ongoing fund. In particular, a proportion of members of the age and length of service of the member transferring will be expected to resign or die prior to retirement age.

3.1.2. Government propose that members should have received an amount which, if invested in the market at the time of transfer, could reasonably have been expected to grow with subsequent net investment returns to be sufficient to replace the benefit that the member expected to enjoy on retirement in respect of service prior to date of exit if he or she had remained in the fund. This will be
· Standard across all funds.
· Designed in the knowledge that it will be used as a basis for the topping up of former members' benefits and the minimum exit benefit for existing members in future. No artificial conservatism or optimism will be included in the assumptions. [The assumptions will be expected to vary by time, to take account of market conditions at various dates in the past.]

· Determined by a representative committee (including Labour, Business and industry representatives) as fair in respect of the past and the future.

The amount has been expressed in the Bill as "the fair value equivalent of the present value of an accrued deferred pension". This means
· The member's deferred pension at date of exit will depend only upon service and salary at the time.
· The basis will make provision for increases in the deferred pension which will correspond to increases in salary over the period until retirement date, and increases equal to the change in the consumer price index after retirement.
· The calculation will not include allowance for the member to die or resign prior to retirement. The member will get full value.
· The calculation will take account of investment conditions at date of exit to give "the fair value equivalent".

Government continues to feel that its approach is the fairest way to address the problem. In respect of the future, the Government's approach was endorsed by a number of industry parties including the Actuarial Society of South Africa, the Institute of Retirement Funds and the Life Offices Association.

Government does not support the amendments proposed by Cosatu to section 1 and clause 14B(2)(a).

3.2. The window period.

3.2.1. Why have it?
The introduction of minimum benefits into a defined benefit fund will require the contribution rate to rise considerably for a number of funds, for two reasons:
Members who leave the fund after the minimum benefits come into operation will acquire greater rights in respect of past service. This will cause some funds to be in a deficit situation (because the accrued liabilities will exceed the actuarial value of the assets after the minimum benefits come into operation). The employer will have to pay a higher contribution in order to amortise this deficit.

· Future service costs will rise because members will have higher benefits in future when they leave the fund.
The Chief Actuary to the FSB has put the increase in the employer contribution rate at 2% of payroll as a broad estimate, although this will depend upon the benefits offered by the fund prior to the Bill.

Some employers may not be able to afford the increase. In this case they will want to negotiate a restructuring of the benefits (reducing the retirement benefit because of the increase in cost of the other benefits) or will liquidate the fund, perhaps replacing it with another fund having a different benefit structure (which is most likely to be a defined contribution fund).

Some employers may want to negotiate with employees some sharing of the increase in cost.

The window period is designed to enable the Bill to be promulgated immediately, because it incorporates this window period within which such negotiations may take place. Otherwise Business would be likely to request a delay to the commencement date, which, if granted, would enable the renegotiation prior to the commencement date without the protection in 3.2.2. below.

NB. No surplus may be used for the benefit of the employer after the commencement of the Bill except for a contribution holiday -BUT the value of this contribution holiday after the commencement date is added to the surplus at the time of the surplus apportionment, so the employer runs the risk of having to pay any such contribution holiday back to the fund.

Government feels that the liquidation problem is adequately catered for. The following analysis sets out what Government believes will happen.

3.2.2. What happens if a fund is liquidated before the commencement date?
Former members have no rights in terms of the rules and the law, if they have previously been paid out the benefit they were promised in terms of the rules. The fund would liquidate in terms of the current rules, which commonly provide protection only for the members who remain in the fund at date of liquidation and those who left the fund in the 12 months prior to the date of liquidation.

The Lintas and Paarl Widows decisions of the Appeal Board of the FSB mean that employers would be able to recover any residual surplus in the fund on such liquidation, if this is agreed to by the existing members and if the rules are suitably amended.

Former members who left prior to 12 months before liquidation will get nothing.

For this reason, Government is anxious to have a commencement date as soon as is practicable.

3.2.3. What happens if a fund is liquidated after the commencement date but before the end of the window period?
Existing members will get the minimum benefits provided the fund can afford it (because the accrued liabilities must be valued on at least the minimum benefit basis because of 14A(1)(b) read with 14A(2)(b)(ii)). The employer will not be obliged to fund any shortfall.

The date of liquidation will become the surplus apportionment date. If there is then sufficient actuarial surplus, former members and pensioners will be topped up to minimum benefits.

This means that any funds that are likely to be in a deficit if they pay minimum benefits to all existing members will liquidate, unless the employer is prepared to fund the shortfall. Government felt that it was not reasonable, in the spirit of having a window period, to prevent this because of the magnitude of the likely cost to the employer. As one of Government's fundamental principles, it did not want to destabilise the retirement fund industry and cause economic shock to employers.

If the fund has sufficient assets to fund the minimum benefits for existing members, there is nothing to gain from liquidation, because this will accelerate surplus apportionment.

3.2.4. What happens if a fund is liquidated after the end of the window period?
As for 3.2.3, except that any shortfall will represent a debt payable by the employer. The liquidator of the fund will seek to recover as much as possible of this debt before distributing the assets of the fund. Where the employer is able to fund the debt, then the existing members will get at least their minimum benefits.

3.2.5. Amendment of section 14A(3)
Cosatu have also proposed that the claim that a member could have against the board of a fund which consents to liquidation of the fund during the window period, should not be voided through the current wording in section 14A(3).

Government does not regard this as reasonable. The employer has the right in most funds to terminate contributions to the fund (or to instruct the board to liquidate the fund). It would be inequitable to then leave the board exposed to claims from the member.

3.2.6. Conversion
The argument on conversion before, during and after the window period is analogous to that on liquidation. Cosatu is correct that, if conversion is achieved by means of a rule amendment rather than transfer to a new fund, section 30(3) is irrelevant, except in so far that part of that debt may still be outstanding. We see no reason to remove the reference, therefore.

If we do not have the proviso in clause 14A(1)(c), funds or employers that wish to achieve conversion without funding a shortfall will liquidate the old fund and the start up a new fund.

Cosatu's suggestion that section 30(3) be amended to include the words "or conversion" after "liquidated in terms of section 28 or 29" is, however, reasonable. We will introduce this with the next set of amendments to the Act.

3.2.7. Proposals by Cosatu.
Government does not support the amendments proposed by Cosatu to clauses 14A(1), 14A(2)(b) or 14A(3).

3.3. Full inflation proofing of pensions
For many funds full inflation proofing will impose a huge financial burden because the funds have never intended to inflation proof pensions, and have never made such a promise to members.

While this is a legitimate social objective, it was not seen, by Government, as something that could be introduced in this legislation. It properly belongs when there is holistic revision of the retirement fund system.

Government introduced the provisions regarding minimum pensions to ensure that members get appropriate increases relative to what the fund can afford. Government did not intend to create a substantial burden for funds.

Government does not support the proposed amendment to clause 14B(3) as part of this Bill. Government will encourage debate on the issue when the holistic review of retirement funding is undertaken.

3.4. Exclusion of funds that are actuarially exempt.
In terms of the Pension Funds Act, all funds require actuarial valuation. The Registrar is given the authority in terms of section 2(3)(a) to exempt certain funds from actuarial review. The conditions for exemption are set out in Regulation 2. Currently many thousands of defined contribution funds are exempted. Some of these do contain investment reserves, and some have contingency and other reserve accounts.

It is the Registrar's intention to review Regulation 2, coincident with the promulgation of the Bill, to remove any exemption from funds which include actuarial surplus. Such actuarial surplus could be present in reserve accounts. The Registrar will permit exemption only where a defined contribution fund has an investment reserve, on the understanding that the Bill will force such investment reserve to be distributed to members on exit in proportion to their individual account values.

Cosatu have been told this on a number of occasions.

Government, therefore, does not believe it is necessary to amend section 15B(1) as proposed by Cosatu.

3.5. Topping up to refer to accrued liability multiplied by the ratio of the fair value of assets to the actuarial value of assets.
As stated in 3.1 above Government does not support the proposal by Cosatu to amend 15B(5)(b) by changing the portion of (b) starting at "Provided that...".

3.6. The use of "extraordinary surplus" to fund contribution holidays, and "contribution holidays that were unaffordable or unapproved" to be included as an improper uses of surplus.
Cosatu have defined as "extraordinary surplus" the actuarial surplus released when members transferred out of the fund or were retrenched with less than their accrued liability multiplied by the ratio of the fair value of the assets to the actuarial value of the assets.

Cosatu ask that the employer pay back any extraordinary surplus used to fund contribution holidays or any contribution holidays that were "unaffordable or unapproved". This would be achieved by adding to clause 158(6) the words

"the value of any contribution holiday enjoyed by the employer that was:
(i) not in accordance with the rules of the fund; or
(ii) not in the interest of the members of the fund;

Government believes that the first clause (i) is not needed, because no contribution holiday can ever be enjoyed by the employer if it is not in accordance with the rules: such a contribution holiday would be ultra vires.

Government would also have difficulty with the second part of the clause, as it could be argued that no contribution holiday is ever in the interest of members, because it weakens their security of benefits. This would be tantamount to outlawing all contribution holidays.

In the NEDLAC discussions Labour accepted as a fundamental principle that employers could utilise a contribution holiday funded from actuarial surplus in a defined benefit fund, if the rules determined the employer contribution as "the balance of cost of the benefits". Government cannot support the amendment suggested.

3.7. Members' trustees right in respect of the employer's access to surplus.
Once surplus is "parked" for benefit of the members in the "members' surplus account" and the employer in the "employer surplus account", the Portfolio Committee was concerned to ensure appropriate governance of access to these accounts.

There will be many members whose competing interests in respect of the use of moneys earmarked for members in the member surplus account will need to be balanced. There could also be more than one participating employer who could have a claim against the employer surplus account.

The Portfolio Committee therefore felt that the board should make the decision as to how these accounts are used. The Committee was, however, conscious of the possibility that member-elected members of the board could block the employer's use of the employer's surplus account, and the employer-appointed members of the board could block the members' use of the member surplus account. The provisions were therefore inserted at the Committee's request to ensure that, if any voting is required on the requests for use of the members' or employer surplus account, the appropriate members of the board had a vote. Hence the provisions at the end of sections 15D(1) and 15E(1).

Government felt that these provisions are reasonable as the FSB has had experience of stalemate within boards of funds when 50% are appointed by the employer and 50% elected by members, and such a clause would prevent the improper blocking of decisions over the use of the surplus accounts.

This is a pragmatic recognition that member-elected and employer-appointed members of the board do not, in practice, put aside their constituencies' interests after appointment. Government does not support Cosatu's proposed deletion of the proviso at the end of

3.8. The person representing the interests of former members.
3.8.1. Consultation on the appointment of the person
The appointment of the person to represent the interests of former members was discussed both in the Government team and the Portfolio Committee. We were conscious that it was desirable that such person enjoy the support of the former members, and therefore some consultation was appropriate, but did not want to introduce a requirement to consult various parties which would complicate the appointment. The decision taken was that the board should make the appointment. Obviously the board would know that any appointment that might be viewed as contrary to the interests of the former members would give rise to complaints that such person had not executed his or her responsibilities appropriately. If a union is capable of representing former members, then it would be appropriate for the board to consult such a union.

We propose that this is rather dealt with through a PF Circular from the Registrar of Pension Funds than inserting the requested clause into the first paragraph of 158(3).

3.8.2. Rights of participation and voting, and the right to refer a dispute.
The proposal put to the Portfolio Committee by Cosatu included provision that the person representing the interests of former members should be a member of the board for the purposes of the apportionment.

The Government team and the Portfolio Committee did not include this provision because the 75% voting majority required in the board for approval of the scheme could "out-vote" such person and the Registrar would be unaware that the scheme was flawed with regard to former members. The Portfolio Committee therefore inserted provision that the person who represents the interests of former members must report to the board, in writing, on the exercise of its discretion by the board and such report must go to the Registrar with the scheme.

This puts the person representing the interests of former members in a much more powerful position than a member of the board, because his or her report must accompany the scheme, and the Registrar must be satisfied that this report does not reveal that former members have been treated inequitably, otherwise the Registrar should refer the scheme to the special tribunal, because the Registrar is required to be satisfied that, inter alia, the scheme is equitable towards former members.

Government does not, therefore, support the proposed amendments by Cosatu to clause 158(3)158(7) and 158(8), although Government would not be averse to giving the person representing the rights of former members a right to refer the apportionment scheme to the tribunal. If we find it desirable in the light of experience, a more suitable amendment than that proposed by Cosatu would be to amend clause 158(10) by adding the words "or at the request of the person appointed in terms of subsection (3)" into line 20 of page 12, immediately before "or at the request of the board".

4. Other issues
4.1. Amending 15B(6) to replace the words "consist of" by "be determined by the Registrar and shall include" and including a further item "(f) the cost of any payment to members in lieu of the employer's obligation to members that was not in the interest of members

Government's idea behind 158(6) was to specify exactly what "surplus utilised improperly by the employer" consisted of. This would ensure certainty and would enable practitioners to determine the amounts without reference to the Registrar.

With the wording proposed by Cosatu, all determination of such surplus utilised improperly by the employer would have to be determined by the Registrar. This is just not practicable. Government cannot support the replacement of the words "consist of" by "be determined by the Registrar and shall include".

In discussion with Cosatu, we did indicate that it would be possible to add to the list of items, if such addition was properly motivated.

Government does not understand the specific addition proposed in (f). There is a logical absurdity in the suggestion: how can any payment to members in lieu of the employer's obligation to members not be in the interest of members? It replaces a "bird in the bush", or an undertaking by the employer, by a "bird in the hand", being an actual payment by the fund. The greater certainty has to be in the interest of members.

Discussion may reveal a more appropriate wording.

4.2. Deletion of the "Provided that..." clause at the end of 15B(6).
Cosatu argue that union or member approval cannot legitimise past improper utilisation, and therefore this clause should be deleted.

The FSB is aware of certain past actions which fall within the circumstances described as "surplus utilised improperly by the employer" but which were not improper, in that the surplus used for such purposes was part of the surplus allocated for use by the employer in terms of a negotiated distribution of surplus agreed by the members or representative trade unions.

This is not past improper utilisation.

If it is desired that someone neutral should play referee in this matter, it would be possible to add the words "the Registrar is satisfied" between "which" and "was approved by" in line 7 on page 11. The Registrar can then investigate each case which a board wishes to exclude from section 158(6) and confirm approval or otherwise.

Government does not support deletion of the clause.

4.3. The right of access to the special tribunal.
The Bill in its current form gives members, former members and the employer the right to object and have these objections either satisfied or referred to the Registrar when the scheme is sent for approval.

As the scheme requires the approval of 75% of the members of the board,
· the report by the person representing the interests of former members must accompany the scheme (and as explained earlier any disquiet expressed by this person will alert the Registrar to a problem), and
· the Registrar must be satisfied that the scheme is reasonable and equitable and accords full recognition to the rights and reasonable benefit expectations of existing and former members,
the Registrar would be expected, unless the Registrar feels any unresolved complaint is trivial, to refer the scheme to the special tribunal.

Cosatu wants members and former members to have a right to refer matters to the special tribunal without the Registrar exercising any discretion.

Having had experience of complaints to the FSB and having listened to the experience of the Pension Funds Adjudicator and his advice to the Portfolio Committee that the person representing the interests of former members should filter complaints to eliminate the trivial, the FSB is not comfortable with an automatic right to members and former members to require referral to the special tribunal. The Bill might just as well have been written with the special tribunal doing everything, because, as with any distribution of moneys amongst claimants, there will be at least one complainant who is dissatisfied with every scheme. To allow such a claimant to impose the cost and delay of the special tribunal, at no cost to the complainant, is unreasonable.

If it proves, in practice, that members and former members suffer injustice as a result of the present wording, Government would have to review its position. At present Government is content to leave the Bill as it is, with perhaps the amendment suggested at the end of section 3.8.2.

Government does not support the amendments proposed to section 158(10) and ISK(1) and (IA).

5. Conclusion.
The clauses may need fine tuning once we see, in practice, how the apportionment schemes are working out. The Government team do not feel that the amendments proposed by Cosatu warrant the delay that would result from referral of sections of the Bill by the National Council of Provinces to the National Assembly.

Such delay will afford some stakeholders, who wish to evade the provisions of the Bill relating to former members, sufficient time to achieve their objective, because the Bill would then be delayed until at least sometime in 2002.

Cosatu has raised issues and if amendments are required to the Act, then such amendments should be proposed during 2002 for consideration.


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