Transnet Second Defined Benefit Fund: briefing

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Public Enterprises

18 June 2013
Chairperson: Mr P Maluleke (ANC)
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Meeting Summary

The purpose of the briefing was to update Members on the Fund’s progress since the last meeting with the Portfolio Committee in November 2011, where a number of proposals had been agreed upon by the trustees of the Transnet Second Defined Benefit Fund (TSDBF), as well as the Transnet sub-fund of the Transnet Pension Fund (TTPF) and Transnet. The three key points were to ensure the payment of an additional five months’ pension to TSDBF members, to increase benefits within the current bonus rules to at least match the rate of inflation, and to implement an amendment to the Fund’s rule to allow for future increases, in addition to the current 2% level at which annual increases are pegged, provided funds were available and Transnet and the TSDBF gave approval.

Transnet, as the underwriting employer, had provided strong support and had approved the various ad hoc bonus proposals made by the TSDBF and the TTPF. It had gone beyond the pension fund rules to make an ex gratia payment to the most disadvantaged pensioners of both the funds in October last year. The payments amounted to R143 million. Provision had also been made for an additional ex gratia payment of R70 million to be paid from Transnet funds to these “poorest of the poor” beneficiaries in September. Further support from Transnet had been their recommendation to the Department of Public Enterprises (DPE) to amend the rule so that additional future pension increases – over and above the statutory 2% -- could be granted if funds were available. The rule change was currently in process.

Since November 2011, the TSDBF had made five ad hoc bonus payments to its members, amounting to R849 million. Concerns that had been raised about the Fund’s communication with its members, had been addressed. This had proved a challenge, as the Fund had 65 000 members, with varying degrees of literacy and spread around the whole country. However, great strides had been made, including the holding of regional meetings, the distribution of newsletters and maintaining up-to-date records of members’ personal details. The Transnet sub-fund (TTPF) had made three ad hoc bonus payments, amounting to R121.6 million. The first payment of R89m, in December 2011, had been pro rated to take into account members’ varying years of service.

Members’ views had been extensively canvassed on the proposal that the Fund’s rules be changed to allow pensions to be increased by 75% of the rise in the CPI, and without exception preference had been expressed for lump-sum bonus payments, rather than small increases in their monthly pensions. Furthermore, with an average age of 73, members saw little benefit to them in vesting interest in the Fund.

Several Members expressed concern over the high profile and politicised impending class action involving a claim of over R90bn against the TSDBF. The Fund said that if the case went to court, it would be vigorously defended. Other issues raised included means of improving communication with the Fund’s members, what would happen to the Fund’s reserves when it closed, and the rotation of auditors.
 

Meeting report

Transnet Second Defined Benefit Fund: briefing
Mr Harry Gazendam, Chairman of the Transnet Second Defined Benefit Fund (TSDBF), said that the presentation’s purpose was to update Members on the Fund’s progress since the last meeting with the Portfolio Committee in November 2011, where a number of proposals had been agreed upon by the trustees of the TSDBF, as well as the Transnet sub-fund of the Transnet Pension Fund (TTPF) and Transnet. The three key points were to ensure the payment of an additional five months’ pension to TSDBF members, to increase benefits within the current bonus rules to at least match the rate of inflation, and to implement an amendment to the Fund’s rule to allow for future increases, in addition to the current 2% level at which annual increases are pegged, provided funds were available and Transnet and the TSDBF gave approval.

Mr Gazendam pointed out that pension funds generally did not guarantee an annual increase to its pensions. The rules of funds usually specified that an increase would be at the discretion of the trustees. It was therefore an anomaly that the TSDBF rules guaranteed a 2% increase.

Transnet, as the underwriting employer, had provided strong support and approved the various ad hoc bonus proposals made by the TSDBF and the TTPF. It had gone beyond the pension fund rules to make an ex gratia payment to the most disadvantaged pensioners of both the Funds in October last year. The payments amounted to R143 million. Provision had also been made for an additional ex gratia payment of R70 million to be paid from Transnet Funds to these “poorest of the poor” beneficiaries in September. Further support from Transnet had been their recommendation to the Department of Public Enterprises (DPE) to amend the rule so that additional future pension increases – over and above the statutory 2% -- could be granted if funds were available. The rule change was currently in process.

Since November 2011, the TSDBF had made five ad hoc bonus payments to its members, amounting to R849 million. These had been paid in December 2011 (R197m, or 10% of annual pension), February 2012 (R165m, or 8.33%), February 2012 (R165m, or 8.33%) – effectively a “double bonus” – R162m (8.33%) in November 2012, and R160m (8.33%) in April this year. Concerns that had been raised about the Fund’s communication with its members, had been addressed. This had proved a challenge, as the Fund had 65 000 members, with varying degrees of literacy and spread around the whole country. However, great strides had been made, including the holding of regional meetings, the distribution of newsletters and maintaining up-to-date records of members’ personal details.

The Transnet sub-fund (TTPF) had made three ad hoc bonus payments, amounting to R121.6 million. The first payment of R89m, in December 2011, had been pro rated to take into account members’ varying years of service. The other two payments of R16.3m each, or 8.33% of annual pension, had been made in November 2012 and June 2013. Following a change in the Fund’s rules, pensioner elections had recently been held, allowing greater representation by members on the TTPF board of trustees.

Mr Gazendam presented a series of graphs depicting how the payment of ad hoc bonuses, over and above the statutory 2% annual increases, had enabled the pensions of members to stay above the consumer price index (CPI) in recent years.

Members’ views had been extensively canvassed on the proposal that the Fund’s rules be changed to allow pensions to be increased by 75% of the rise in the CPI, and without exception preference had been expressed for lump-sum bonus payments, rather than small monthly increases. Furthermore, with an average age of 73, members saw little benefit to them in a vesting interest in the Fund. Actuarial advice was also that bonuses could be drawn from surpluses in the Fund – and the surplus was currently R2 billion. However, as soon as one commits to vested increases, the surplus disappears. A “Catch 22” situation would arise, with trustees, in terms of their fiduciary duties, no longer able to approve the payment of bonuses, and employers unable to support the payment of bonuses, because the payment of bonuses without surpluses would mean breaking the law. Paying ad hoc bonuses annually means that actuarially the surplus is not eroded.

Discussion
Ms N Michael (DA) raised concerns over the class action being instituted by a group of pensioners against Transnet over the pension fund. Although there was obviously a great deal of political grandstanding taking place, many top advocates were involved who were convinced that the pensioners had a case. Even the Public Protector felt there were abnormalities that needed to be investigated. She was receiving copies of minutes from meetings of dissatisfied pensioners, and these made it plain that they were not happy to settle on the terms that had been set out in the presentation.

Mr A Mokoena (ANC) said Transnet should be complimented, as he knew of no parallel where such exemplary kindness had been shown. In 1994, the deficit in the Fund had been R17bn, and this had been drastically reduced to the situation where there was a “miracle” surplus of R2bn. He would not criticise those who were bringing a class action – it was their democratic right – but he was amazed that Transnet’s actions had attracted such a reaction.

Dr G Koornhof (ANC) pointed out that the pension fund’s challenges originated in the 1980s, and this was the first Parliament with “the guts” to address the issue. Transnet had gone the extra mile, and should be congratulated. He questioned how well the member database was being updated, pointing out that without a solid database it was impossible to communicate effectively. What media were used, and was the information sent out easy to understand? Very few pension schemes could afford to provide increases enabling their members to maintain their standard of living, and the graphs illustrating how TSDBF pensions were staying ahead of the CPI, did not tell the full story, particularly for those at the bottom of the scale. He asked for confirmation that no surplus would be allowed to build up in the Fund beyond that which was required, and that as money became available, it would be distributed to members.

Ms G Borman (ANC) asked how long the Fund would continue until it was finally wound up. She commented that the payment of bonuses was purely at the discretion of Transnet and the TSDBF, so there was no guarantee that members would receive more than the statutory 2%. How could one forecast that Funds for bonuses would be available in the future? She asked whether the Fund retained the same auditors each year, or whether changes were made.

Mr K Dikobo (Azapo) said that although the TSDBF’s funding level was a “healthy” 114%, he wondered whether it would be sustainable without Transnet’s ex gratia payments. Did these amount to a “bail out”? He was also concerned about the information reaching members of the Fund, and wanted an assurance that everyone was being reached, as one did not want certain groups disputing everything they were told.

Mr Brian Molefe, CEO of Transnet, explained the rationale behind the payment of R70m to top up the pensions of the widows of black pensioners. Until the 1980s, black employees of Transnet were not defined as employees, and were therefore not eligible for membership of the pension fund. Since the change in the definition, the widows were eligible for benefits, so in 1996 the Transnet board had decided to make a special allocation, and the R70m was to top up this allocation.

He strongly refuted the suggestion that the ex gratia payments were a “bail out.” He pointed out that the TSDBF was a defined benefit fund, and the benefits paid out were those that were defined. The ex gratia payments were over and above the defined benefits, and not a bail out to help the Fund.

Mr Gazendam said the TSDBF was concerned about the impending class action being instituted by members of the Fund. However, this was not yet a court case – it had yet to be determined whether it actually constituted a class action. The funds of TSDBF, or Transnet, would not be used to prevent the members from putting their case forward, but if the matter went to court, the Fund would vigorously challenge the merits of the case. Although the issue had a high profile and had been greatly politicised, he did not think any specific political party was behind the class action. The Fund had been approached by the Public Protector, putting forward the concerns expressed in moderate terms by a political party, but there had been no further communication and it was not known if the matter was now closed.

He shared Members’ concerns about reports emanating from meetings of pensioners. He said the TSDBF also received negative letters, which was to be expected when 65 000 members were involved. However, it was obvious that some pensioners were being misled, and there was very little the Fund could do about it. Experience had shown it was unwise to conduct a battle in the media, so the Fund’s strategy was to maintain a low profile.

He agreed with Dr Koornhof that the graphs did not tell the full story. The impact of inflation on low-income pensioners, who spent most of their income on basic necessities, was frightening.

Statistically, the TSDBF was expected to close by 2050, and there were definitely sufficient reserves to meet its obligations if it stuck to its prudent policy. There was no intention to retain a surplus at the end, when there could be a handful of members and hundreds of millions of rands in reserve. When the Fund’s members dropped to 200, the Fund would be run down to zero, and the employer would assume responsibility for the small pension payments still to be made.

Good corporate governance dictated that there should be a rotation of auditors. This was the case at TSDBF, where the audit partners were changed each year, and the auditing firms changed very three years.

Although the TTPF was significantly smaller than the TSDBF, it was now 129% funded, and with assets of between R18bn and R19bn, it was well placed to be sustainable into the future. Even if the trustees failed to protect these assets, the Fund still had Transnet to fall back on.

Mr Peet Maritz, Principal Officer, TSDBF, said the member database had been established in 2000, and was now complete. Keeping track of people who moved was a challenge, and for this reason members were motivated to update their particulars through a competition with a R10 000 prize, and this was working well.

A competent call centre, with operators able to handle all the different languages, was helping to improve the level of communication with members. Newsletters were sent out four times a year, and emphasis was placed on making them simple to understand.

Mr Melanchton Makobe, Chief Director, Legal Counsel, DPE, advised the Committee that any changes to the rules that had an impact on the financial condition of the Fund, required the approval of the trustees, the Minister of Public Enterprises and the Minister of Finance. The proposed changes were currently being assessed and final approvals were expected within the next two months.

Mr Gazendam clarified that the funds of the TSDBF would not be used to defend the class action, if the matter came to court. All of the Fund’s administrative costs were borne by Transnet, and this included the legal costs.

Ms Michaels said the claims of the class action amounted to more than R90bn, and if the court found in favour of the applicants, it would be enough to sink not only the TSDBF, but Transnet as well. It was therefore important to try to eliminate the confusion which existed at present, with some members seeing a potential court victory as a boon, and others suffering a great deal of anxiety over the future of their pensions.

Mr Molefe said the matter should be considered sub judice, and those involved in putting out information on the class action should be advised they were breaking the law.

The Chairperson said a lot of politics surrounded the case, and the Portfolio Committee’s role was to deal with the facts, as they had been presented at the meeting.

He suggested that the TSDBF should expand its communications efforts through the use of community newspapers and radio stations, and through involvement with ward committees.

He closed the meeting.
 

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