Transnet Second Defined Pension Benefit Fund: Progress Report by Transnet, Department of Public Enterprises & National Treasury

Meeting report

Opening Statement
The Committee Secretary informed the Committee that Ms M Mentor (ANC), Ms F Hajaig (ANC) and Mr K Dikobo (AZAPO) could not attend the meeting. Ms G Borman (ANC) would chair the meeting in Ms Mentor’s absence.

The Chairperson said that Transnet had made a presentation to the Committee on the Transnet Second Defined Benefit Fund (TSDBF) on 28 July 2010. The Committee had also heard from the Representatives of Transnet’s Pensioners about the difficulties that they were facing as a result of the 2% per annum statutory increase in their pension. The concerned pensioners viewed the small increase to be the result of poor management of the fund in the past. If Transnet’s deficit had been settled, their pension increase would have been adjusted with inflation. The Committee was on record saying it wanted to resolve this particular issue. Members shared the pensioners’ concerns and they wanted to apply their minds to the situation. From her understanding, the presentation was a combined effort from the National Treasury, Transnet and the Department of Public Enterprises (DPE).

Dr S van Dyk (DA) noted that the presentation also referred to the Transport Pension Fund (TPF). The agenda said that the Committee was only supposed to discuss the TSDBF. This could confuse Members. He asked the Chairperson to rule that the Committee only discuss the TSDBF today.

Dr G Koornhof (ANC) replied that the agenda said that the meeting was a report back from Transnet. In the previous meeting, Transnet was requested to give feedback on the inputs from the Committee. At the time, both funds were “at stake”. Transnet had now prepared a presentation on both funds. It would be unfair to stop Transnet from presenting on the TPF. He suggested that the Chairperson ask Transnet to complete their presentation for the benefit of the Committee so that Members could get into a discussion.

The Chairperson ruled that Transnet would be allowed to present on the TPF, but that Members would only discuss the TSDBF.

Progress and Way Forward for the Transnet Second Defined Pension Benefit Fund
Mr Ashwin Singh, Acting Chief Financial Officer: Transnet, said that since the meeting on 28 July 2010, Transnet, the National Treasury and the DPE discussed and collaborated on the presentation, which showed joint scenarios for pension payments developed by the three parties. The scenarios that were going to be presented to the Committee were supported by Alexander Forbes, the actuaries to the TSDBF. From Transnet’s perspective, they had done well for their pensioners in terms of providing bonuses to pensioners over the last three years. The scenarios presented today were sensible and fair to all parties concerned.

Ms Helen Walsh, Head of Group Taxation: Transnet, told the Committee that the TSDBF had been asked to consider a rule amendment to provide for 50% pensioner-elected trustee representation on the Board of the TSDBF. Transnet had requested through the Principal Officer that the Board table this matter at their next meeting. The Board had considered it and proposed a rule amendment that would come through to Transnet in the course of the month. Transnet, the DPE and the National Treasury had been asked to consider a range of scenarios regarding the request for amendments to the pension increase policy rule (refer to slide 2).

The current scenario, which was the 2% statutory pension increase, was what the TSDBF rules currently provided for. As of 31 March 2010, based on a report drawn up by the actuaries of the TSDBF, the assets of the Fund, which was available for distribution, amounted to R19 661 billion. The liabilities of the fund excluding reserves amounted to R16 189 billion while a provision for reserves amounted to R637 billion. This left the Fund in a surplus position of R2 834 billion.

One could also look at various other scenarios with effect from 1 April 2010:

If a change to the pension fund increase rule were to provide for targeting 75% of the inflation increase going forward, the liabilities of the fund would then be valued at R19 203 billion. This would result in the Fund having a deficit of R440 216 million, equating to a funding level of 97.8%. However, it was likely, assuming the performance of the Fund continued to be good, that this scenario could be achieved through the Fund. Transnet also considered a change to the Fund increase rule targeting 100% of the Consumer Price Index (CPI) increase.

If one were to target 100% of the CPI based on the Funds asset value, the Fund would move into a R2 974 billion deficit.

There was another scenario called “Uplifting the base”. It took a pensioner’s pension as at 1 April 2006 and looked at what it would have been if the base of the pension had increased by 75% of CPI during 2007-2010. If the Fund had to use this as the base pension as from 1 April 2011 going forward in addition to giving pensioners’ 75% pension increases, the Fund would move into a deficit of R3 760 billion.

The same calculation was done using 100% of CPI. “Uplifting the pension” from 2006-2010 by 100% of CPI in addition to giving pension increases per annum of 100% of the CPI increase, would give the TSDBF a deficit of R8 534 billion.

The last scenario proposed was to “uplift the base” using a 75% CPI increase from 2000-2006; thereafter using a 100% CPI increase. This resulted in a deficit of R9 815 billion. If one had to pay out the upliftment of the base, the Fund would require an additional R1.6 billion in addition to the R9 815 billion. The CPI assumption of 5.92% used in these scenarios was based on the government’s existing inflation targeting policy. Any increase greater than 75% CPI would result in the TSDBF moving into a deficit.

If there were a significant increase in inflation, the TSDBF would experience significant deficits. Assuming inflation doubled to 11.84%, the TSDBF, with a 75% CPI increase policy, would move into a deficit of R9 902 billion. If inflation doubled, the TSDBF, with a 100% CPI increase policy would move into a deficit of R20 833 billion. The actuaries advised that a proposed increase policy targeting 75% CPI, subject to affordability, would be supported by them to the Board of Trustees of the TSDBF. If there were a significant increase in inflation, the TSDBF would experience significant deficits.

The The 5% per annum CPI-linked increase could be applied to a pensioner receiving R1000 per month. If applied over the years 2006-2010, one would see that the total amount received by the pensioner would have amounted to R53 752.68. If the 2% per annum statutory increase plus ad hoc bonus scenario was applied over the period 2006-2010 to a pension of R1000 per month, one would see (at the end of the four years) that the pensioner received R53 734.91 in total. The difference between the two scenarios was R17.76. The same could be applied to the 100% CPI increase scenario. Using the current 2% statutory increase scenario with ad hoc bonuses, the pensioner would have received R53 734.91, while the 100% CPI-linked increase would have yielded a pension of R55 430.26. The difference between the two scenarios  was R1 695.35.

If the 100% CPI targeted scenario was implemented, no compensation would be payable to pensioners for the past four years as the total amount received by them from the TSDBF of pension increases plus ad hoc bonuses was not much less than what they would have received. The additional funding required in order to uplift the base pension for pensioners with effect from 1 April 2010 would be R3.32 billion if a 75% CPI linked increase rule was implemented, and R5.56 billion if a 100% CPI-linked increase rule was implemented.

The same scenarios were applied to the Transport Pension Fund (TPF) [refer to slide 7 of document]. It showed that a 75% CPI increase was affordable, assuming a CPI of 5.92%. Assuming inflation doubled, the Transnet Sub-Fund of the TPF, with a 75% CPI increase policy, would move into a deficit of R2 billion. Assuming inflation doubled, the Transnet Sub-Fund of the TPF, with a 100% VPI increase policy, would move into a deficit of R5 billion. Transnet found that the Transnet Sub-Fund of the TPF was in a position to “backpay” the pensioners R42 million, and still provide for 75% CPI linked increases prospectively.

No fund closely resembles the TSDBF, which is not only a closed fund, but had no active members. This meant it did not receive any financial contributions. Section 14B(5) of the Transnet Pension Fund Act of 1990 provided that the control and management of the TSDBF, as well as the benefits due to pensioners and the beneficiaries governed by the rules of the TSDBF, was set out in the schedule to the Act. Rule 24 of the Rules of the TSDBF provided for the statutory pension increase of 2%. Section 14B(6) of the Transnet Pension Fund Act, provided that the rules set out in the schedule could be amended by the Board of Trustees of the TSDBF with the approval of Transnet, provided that an amendment that was likely to affect the financial condition of the TSDBF should be of no force or effect unless it has been approved by the Minister of Public Enterprises with the concurrence of the Minister of Finance. However, Parliament had the constitutional prerogative to take any additional steps that it deemed necessary as within its powers and as governed by the rules of Parliament if it wished to pursue any legislative amendments.

Transnet, therefore, proposed that the Board of Trustees of the TSDBF be advised to consider a rule amendment providing for a targeted 75% CPI increase applied prospectively, subject to affordability. The Transnet Pension Fund Act did not mention any requirement for a guaranteed increase to pensions. Nor was a guaranteed increase policy the norm among pension funds. In line with the increase rule of other funds, this policy would be subject to the fund being able to afford such increases, the actuary’s written confirmation that such increases were affordable by the fund, and the written approval of the employer. The rule providing for the 2% statutory increase would be repealed as well as the rule providing for ad hoc bonus payments by the TSDBF. Transnet would continue with ex gratia payments to pensioners with long services and low pensions, focusing on previously disadvantaged pensioners. This was subject to affordability. Any proposal in excess of 75% CPI, or any funding level below 90% would require a consensus funding solution amongst Transnet, the Department of Public Enterprises and the National Treasury, subject to Transnet’s affordability constraints.

The proposed amendment to the Rules of the TSDBF would be drafted and the final impact would be reviewed and reported on by the TSDBF’s actuaries. If approved by the TSDBF Board of Trustees, the proposed rule amendment would be tabled at the Transnet Board of Directors meeting to be held on 25 November 2010. If approved by the Board of Directors, the rule amendment would be sent to the Department of Public Enterprises (DPE) for consideration and approval. Once approved, the DPE would forward the rule amendment to the National Treasury for consideration and concurrence. Approval and concurrence was likely to be granted mid-2011. Once approved, it would be gazetted. The approved rule amendment could be expected to be implemented in the last quarter of the 2011 calendar year.

Discussion
Mr A Mokoena (ANC) asked if the total number of beneficiaries or claimants amounted to 80 000. On what basis was Transnet paying out periodic bonuses? He wondered if giving periodic bonuses to beneficiaries was all that Transnet could manage to do. He asked why Transnet had limited itself to giving bonuses only.

Ms Walsh answered that there were 75 411 pensioners benefitting from the TSDBF. This covered pensioner members, spouses and children.

Ms Walsh clarified that Mr Mokoena’s question touched on bonuses paid by Transnet and not the ad hoc bonuses paid by the TSDBF. Transnet paid a bonus purely out of recognition of the plight of pensioners. The calculation of the payments focused, in particular, on pensioners with long service and low pensions, especially previously disadvantaged pensioners.

Mr P van Dalen (DA) asked if the assets of the TSDBF amounting to R19 661 billion was being invested. If it was, how much was the interest on it? Transnet said that pensioners received more or less what they would have received had their pension been increased to 75% of inflation. He did not understand why this was the case when the 75% CPI increase seemed to put the Fund into a deficit position.

Mr Anton Nel, Senior Actuary: Alexander Forbes, replied that the R19 661 billion worth of assets in the Fund were invested. As of 31 March 2010, the expected future returns on the assets were approximately 8.6% per annum going forward. A lot of the assets were invested in appropriate “vehicles” to match the cash flow of the TSDBF going forward. The Fund was disbursing in the order of R2 billion to R2.5 billion a year. The entire amount could not be invested in the equity market; therefore it was invested in appropriate structures.

Mr van Dalen wondered where the rest of the money was going if the interest earned on investment was 8.6% and the pensioners were only receiving pension increases of 2% per annum.

Mr Nel answered that the assets were valued at market value. It was expected to make a return over time. They then valued the TSDBFs liabilities. If one looked at a pensioner that earned R1000 and applied the current scenario of earning a 2% pension increase per year, the pensioner would earn R1020 in the next year. The TSDBF discounted the current pension plus the future pension increase promise based on the 8.6% interest. The TSDBF projected what the pension and cash flow was going forward, and they discounted it at 8.6% to compare it with their asset values. This was where the TSDBF determined the funding level of 116.8%. If one increased the pension increase policy to 100% of CPI instead of discounting back R1000, the pension would be R1000 in the first year and R1060 in the next year etc. The cash flows would be a lot more if they discounted it at 8.6%, but it would result in a higher present value of liabilities.

The Chairperson noted that Mr Nel was dealing with very technical matters. The actuarial side of things was not easy to understand. She wanted to move forward and get a total picture of what was happening.

Dr Koornhof asked Transnet if the scenario of the 2% per annum increase with the ad hoc bonus payments had any guarantees. Transnet showed the Committee some of the ad hoc bonuses at their last meeting. He noted that the bonuses fluctuated; therefore were there any guarantees? Transnet spoke of a 75% CPI increase per annum, but at the same time they said there was no guarantee for this increase. What effect would the 75% CPI increase have on pensioners that had few years of service and low salaries when they retired? He asked why they chose to uplift the base from 2006. Where did they get this date from?

Ms Walsh replied that the 2% statutory increase currently in the rules of the Act, was guaranteed. However, the ad hoc bonuses paid by the TSDBF were not guaranteed. The ad hoc bonuses were based on the affordability of the fund to pay the bonuses and retain the monies required to pay future pensions.

Mr Mokoena said he was confused. He thought that Transnet paid the bonuses.

The Chairperson clarified that there were two kinds of bonuses. The one bonus was paid by Transnet and the other ad hoc bonus was paid by the TSDBF.

Ms Walsh continued with her explanation. Since 2007, the ad hoc bonuses had fluctuated but had increased constantly based on the funding position of the TSDBF. In July, Transnet showed how the funding position of the TSDBF had improved quite a bit over time, and particularly in the last three years. Once there was greater certainty, the TSDBF would be able to pay higher bonuses than it had previously.

The 75% of CPI-linked increase policy would be targeted, but it would not be guaranteed. It would be dependent on the performance of the Fund. The assumptions around the CPI in the long term would impact on the ability of the TSDBF to pay 75% of the CPI. Out of the 75 411 beneficiaries of the TSDBF, approximately 32 000 of those pensioners received less than the state pension each month. This would mean that they were potentially entitled to claim from the State Old Age Pension. The amount that they would receive would take cognisance of the pension they received from the TSDBF. Currently, pensioners were sitting with the pensions they received after the 2% statutory increase. The ad hoc bonuses paid by the TSDBF were not taken into consideration when calculating what amounts pensioners were entitled to from the State Old Age Pension. If the increase rule had to be changed to an inflation-linked increase rule, there would not be an ad hoc bonus. Those pensioners that qualified to receive a state pension would still qualify but the money they would receive would be limited.

Ms Walsh explained the reference to 2006 was because the fund started moving into a surplus position on 1 April 2006.

Dr van Dyk addressed the bonuses paid to pensioners since 2007 [refer to slide 4 of the presentation]. He noted that the bonuses were once-off and not guaranteed, but they were considered according to affordability. These bonuses also did not uplift the pension base. The Committee wanted to see the pensioners being treated “equally”, as if they were still civil servants or as if they belonged to the Government Employees Pension Fund (GEPF). His understanding was that the pensioners received a 2% statutory increase in their pension per annum as a rule to the schedule of the Act. Transnet also had to address the backlog of payments to pensioners. Since 2006, the rules of the Government Employees Pension Fund changed to pension increases of 100% of CPI. If Transnet addressed the “backlog” or “backpay”, what would the cost be? Transnet had to take into account that pensions would have increased by 75% of CPI from 2000-2006 and by 100% of CPI from 2006-2010. He noted that a 75% of CPI increase on the low pension base from now onwards, was affordable for the Fund. He wanted clarity on this.

Ms Walsh answered that the TSDBF needed R1.6 billion to address the backpay issue.

Mr Nel explained how the R1.6 billion was calculated. He said they looked at the pensioners’ pension as at 2010 and worked it back to what it was in 2000 where the pension was given 75% CPI-linked increases on an annual basis to 2006, and 100% CPI-linked increases thereafter. The cash flows were accumulated and the amount the pensioners already received was subtracted. This gave the TSDBF an amount of R1.6 billion.

Ms Walsh confirmed that the ad hoc bonuses payments were once-off and were not guaranteed; they were always subject to affordability and did not impact on the base pension of pensioners.

Ms Walsh clarified that the pension increase of 75% of CPI was affordable.

Ms Avril Halstead, Chief Director: Sector Oversight, National Treasury, added that the GEPF was given an increase of 75% of inflation. If it was affordable, they were also given bonuses that would bring the pensioners up to 100% of inflation. But, the 100% CPI-linked increase in pension was not guaranteed; the 75% CPI-linked pension increase was.

Mr L Greyling (ID) said he was still confused as to why the base year of 2006 was being used. He understood that it was because it was the first year that the TSDBF declared a surplus. He did not think the Committee should be looking at the matter through the perspective of the Fund; they had to look at it from the perspective of the pensioners. From the year 2000, the pensioners had seen their real income become reduced by approximately 4% every year. This had to be the Committee’s starting point. When Transnet calculated how much the pensioners would have received if a 75% of CPI-linked increase was introduced in 2006, they showed that it was only a few Rands extra. But, Transnet had to go back to the year 2000, not 2006. What would the pensioners have received if the 75% of CPI-linked increase was calculated from the year 2000? This was the real issue.

Ms Walsh replied that the 2% statutory rule was implemented well before 2000.

Mr Peet Maritz, Principal Officer: TSDBF, explained that the 2% statutory increase rule was in the Fund since its inception. It originated from the old Transnet Pension Fund. The increases per annum were given based on the rules as they were.

Dr Koornhof said that the current scenario of the statutory 2% increase plus the ad hoc bonuses versus the proposed 75% CPI-linked increase showed that there was not much of a change to the pensions. As a matter of fact, it seemed that a 75% CPI-linked increase could put some pensioners in a worse position.

Ms Walsh answered that the reality was that the assets in the Fund would be paid out to the beneficiaries of the Fund. All the asset growth would go towards the beneficiaries of the Fund. Based on the bonuses paid over the last four years, the performance of the fund and the current financial position of the fund, it was anticipated that bonuses would definitely be paid out even though there were no guarantees. The difference was that there would be more certainty of increases for pensioners if the scenario of 75% of CPI increase was implemented.

Dr van Dyk said that Transnet had to think of things that could be guaranteed rather than preparing scenarios that could not be guaranteed. There was no calculation to prove that the 32 000 people would not be able to receive the State Old Age Pension if the bonuses were made compulsory. There was calculation being done by the actuaries to say how many people would not be able to claim from the State Pension.

Ms Walsh replied that the legislation of the State Old Age Pension stated that if one had to guarantee the bonuses, they would be taken cognisance of the means test. This meant that pensioners receiving the State pension would receive less cash flow.

She noted that there was no calculation to show how accurate this information was. They did not have information from every pensioner that did or did not claim the State Pension. It would depend on what each pensioner’s pension amounted to.

Dr van Dyk said that the figure of 32 000 pensioners who would lose out on State Pension could not then be taken as fact. Transnet could not prove it.

Mr M Oriani-Ambrosini (IFP) said he had read the document very carefully and had gone through all the information. He felt that Transnet’s explanation was very “intelligent”, but it seemed that the pensioners were still being defrauded. The Committee seemed to be comparing a Fund that was under-performing since the beginning because it was not sufficiently funded, with other funds that were sufficiently funded. There was a reasonable concept of affordability, but the TSDBF could not afford more than a 2% increase in pensions. The Committee was faced with a situation where they knew the TSDBF would not be able to resolve the situation. They knew that Transnet was responsible for the Fund’s liabilities and that the state had to provide surety if Transnet’s balance sheet was not sufficient to cover these liabilities. Why did the Committee have to go through all of this? The Committee knew what it wanted and declared this at the last meeting. Members wanted pensioners to receive their back pay and to be brought up to 100% of CPI. This had been a unanimous resolution. Transnet, the National Treasury and the DPE had to figure out how to resolve the matter, but the presentation did not show the Committee how they were going to fix it.

Dr Koornhof suggested that the Committee form a small task team to find possible financial solutions for the Fund together with the DPE, Transnet and the legal advisers. The task team would engage with these parties on funding solutions. The Committee was now familiar with the scenarios that Transnet had put on the table and he was speaking on behalf of the Committee when he said that the solutions did not go far enough. The task team had to move and find a solution as soon as possible.

Mr Mokoena supported D Koornhof’s proposal. The Committee already had one task team consisting of Dr Koornhof, Dr van Dyk and another member (he could not remember the name). One person from the DPE and the National Treasury had to be included in the discussions and another Member from one of the opposition parties had to join the task team. The Chairperson had to convene the meetings and there had to be a report-back to the rest of the Committee as soon as possible.

Dr van Dyk also agreed with Dr Koornhof’s proposal. He reminded the Committee that Chairperson Mentor had resolved that the matter would be sorted out by the end of the year. The task team had to engage with all the relevant role players and if the Committee failed to reach an agreement with these parties, Members would take a resolution, which would then be forwarded to the House.

The Chairperson noted that the Committee was in agreement to use its original task team consisting of Dr Koornhof and Dr van Dyk. Together, these two Members had set the Committee on its road to resolving the TSDBF matter. The DPE, Transnet, the National Treasury and the legal advisers would engage with the task team. More Members were needed on the task team. This was not a political decision. So far the task team consisted of one Member from the ANC and one Member from the DA. Another ANC Member was needed on the team. The smaller the team, the quicker the job could get down. She suggested that the task team meet within the next two weeks.

Mr Mokoena proposed that the Chairperson join the task team where she would also convene the meetings.

The Chairperson noted that the Members approved of the proposal and she accepted the position on the task team. She said that the task team would report back to the rest of the Committee on 12 October 2010. She thanked Transnet, the DPE and the National Treasury for the presentation. She also thanked the Representatives of Transnet Pensioners for attending the meeting. The Committee was committed to resolving the matter of the TSDBF.

The meeting was adjourned.