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FINANCE PORTFOLIO COMMITTEE MEETING
22 AUGUST 2001
PENSION FUNDS SECOND AMENDMENT BILL: HEARINGS
Chairperson: Ms Hogan
The Committee was presented with the submissions of three groups. The Congress of South African Trade Unions and the National Council of Trade Unions presented the views of labour to the Committee. The submissions of these bodies are based on the same principles and therefore many views are shared with only a few differences. The third presentation was by the Office of the Pension Funds Adjudicator and dealt with their concerns in relation to minimum benefits and the resolution of disputes.
Mr Jan Mahlangu started COSATU’s presentation by saying that COSATU supports the Bill. He outlined the background of the pension fund debate and said that there were discussions between the Financial Services Board (FSB) and COSATU from January 1998 already. COSATU had done their own research on the issue and had submitted a revised document in 1998. The matter was then referred to Nedlac for negotiations between labour, FSB and Treasury. He said that Nedlac was unproductive because some parties were very uncooperative, had no mandated positions and meetings were postponed.
It was COSATU’s view that the pension surplus is being raided by employers and therefore South Africa needs a regulatory framework very soon before the approximately R80 Billion in surplus does not exist. He said that if the surplus is allowed to deteriorate then it is contradicting the government’s principle of savings in the economy.
The major contributing factor to the surplus was members’ opting to move from the Defined Benefit (DB) fund to the Defined Contribution (DC) fund. At the time members were not represented on boards. It is COSATU’s view that those members who did not get what was due to them during this period should benefit under the Act.
The presentation was continued by Mr Abe Mduru, COSATU’s actuary. He said that the R80 Billion is not surplus. R60 Billion is members’ payouts while R20 Billion is not owned by anybody. In the DB funds the employer guarantees that a member will receive a certain amount upon retirement. Then to back up the guarantee the employer keeps an investment reserve. When a transfer to the DC fund takes place, the guarantee falls away and the member now bears the risk. What is supposed to happen is that the investment reserve must move from the fund to the members because they bear the risk. This R60 Billion COSATU terms the extra-ordinary surplus because it is part of the members’ benefits. What needs to happen first is that this extra-ordinary surplus must be accessed by the members. What is left COSATU terms normal surplus and one can debate what is going to happen to this surplus.
The presenter then discussed ownership of the surplus. He said that the law states that the members and beneficiaries are the only beneficiaries of the trust. All the assets are the property of the fund, therefore, by inference it is owned by the members and beneficiaries. In South African law, employers cannot access the fund. What they can do is vary their contribution as this is in accordance with trust law. Once contributions go into the fund it becomes trust assets and only members and beneficiaries can benefit. Therefore, the Bill cannot have the employer as a beneficiary because this is contrary to trust law.
Mr Andrew (DP) asked what money is part of the investment reserve in a DB fund.
The presenter replied that the investment reserves are solely for the purpose of ensuring that a fluctuation in the market does not result in the employer having to pay the difference. The investment reserve is not a separate account but forms part of all the assets in the fund. For example, if a fund’s liability is R100, the assets in the fund need an actuarial value of R100. But if you have assets with a market value of R120 then when a transfer from a DB to a DC fund takes place the R120 in assets must move, not the actuarial value of R100.
Ms. Hogan wanted to know if the employer contributes more than he has to in DB funds.
The presenter replied that to his knowledge this has never happened. What happens is that the trustees and actuary place a value on the assets which is not the market value deliberately creating an investment reserve. So when the market value is high and the actuary gives a lower value then an investment reserve is created.
Ms Hogan asked what happens if there is a negative investment reserve.
The presenter answered that all the actuary is saying is that the value of the assets are now low but in the future, the value of the assets are going to go up. In a DB fund the assets are for the beneficiaries so when you transfer to the DC fund, the investment reserve must move as well. If we accept that the investment reserve is part of the assets, then upon transfer to the DC fund the investment reserve must move because in the DC fund the member bears the risk. A practical example is that if a person one year before retirement moves from a DB to a DC fund and the market goes down by 40%, he gets 40% less. But if he had moved with the investment reserve then he could still get his full amount.
Professor Turok (ANC) said that it seems the transfer from the DB to the DC fund was a watershed moment and he wanted clarity on this.
Ms Nadine Thompson (Cheadle Thompson and Haysom; legal consultants for COSATU) said that in short the members did not know what the transfer values were, more particularly they did not know that there was such a large surplus that did not move with them.
Mr Andrews (DP) wanted to know if the members had any right to access the financial statements.
Mr Steenkamp (Cheadle Thompson and Haysom) replied that only after 1998, when 50% of the Board could be elected by members, did they have access. This was so in theory but in practice it was another matter.
Mr Mahlangu went further and said that the industry was not regulated. Members had even used strike action to get access to information but it was never forthcoming. Ms Thompson said that even if they got statutory actuarial reports only actuaries could understand the reports. She said these statutory valuations were available but that the value of the assets at transfer were manipulated and that this was in fact part of COSATU’s submission.
Mr Andrew (DP) asked if the members were not unionised and if the unions could not advise them. In response Ms. Hogan said that we need to take into account the history of trade unions especially their capacity in the early 80’s to deal with matters as complex as this one.
COSATU submission (continued)
Ms Fiona Tregenna presented the seven core principles and concerns of COSATU regarding the issue:
· Pension Funds belong to the members and members only and no third party should have a legal claim to it.
The presenter said that the fund is a trust vehicle and that if a surplus arises it is part of the funds assets. She said that the law accepts that pension fund assets are for the benefit of the beneficiaries. What the Bill does is erodes this concept because it gives the employer access to assets in the fund and therefore amendments are needed.
· Every pensioner is entitled to inflation related benefits.
The Bill does have this but COSATU wants Section 14A(1) to be modified. What the Bill does is bring in an inflation related ceiling but COSATU wants it to be the floor.
· Every member is entitled to receive a proportional share of what he or she would be entitled to as a pensioner in the fund.
Early leavers who leave for whatever reason should get a proportional share of the benefits they would have received had they remained in the fund until retirement. In COSATU's view the Bill only affords the member their actuarial liability and does not give them their proportional share. This means that members will not get their share of the surplus and will not be protected from market variables.
COSATU understands the need for the window period to phase in the minimum benefits. They do suggest that the member’s right to the minimum benefit should vest at the commencement of the Act as opposed to after the window period. The rationale is that employers could avoid minimum benefits by terminating funds. Also the period prejudices members who might not get minimum benefits for a while.
· Any ordinary surplus remaining after satisfying the entitlements of pensioners and early leavers should be apportioned to pensioners and early leavers in equal shares.
The Bill says that the ordinary surplus must be apportioned between the stakeholders hereby giving employers access. COSATU says this is a fundamental flaw because trustees should not owe a fiduciary duty to all stakeholders but only to the fund and its beneficiaries. COSATU proposes that the ordinary surplus be included in the scope of minimum benefits. This would mean that there would in the end be no surplus available and no employer or member reserve accounts can be utilised.
One compromise that COSATU is willing to make is to give the employer access to surplus if it would prevent job loss.
· The same principles that apply to future benefits should apply to the past and should benefit all former members and pensioners since 1980.
COSATU is of the opinion that the Bill does not address the past inequitable practises. The memorandum does mention the past but bit is not properly carried through in the Bill. The Bill should provide all former members with their minimum benefits from 1980 onwards.
COSATU proposes that all former members should receive the difference between the proportional share they should have received and the proportional share they did receive when they left
If surplus remains after satisfying all members from 1980 then all the members should share in it and no one else.
· Any deficit must be made good by the employer over time.
The Bill envisages that members will only be compensated for the loss if funds are remaining to do so. COSATU feels that this is absurd. Why should the members suffer when it was the employer who depleted the fund. COSATU believes that this issue should be dealt with in terms of Section 18 of the Act.
· Dispute resolutions regarding future minimum benefits and restitution of minimum benefits to past members should be dealt with on the basis of the same principles.
The tribunal has advantages but it is a duplication of function. COSATU suggests that the Pension Funds Adjudicator should handle the dispute resolution and that funds can be released to his office to equip it to deal with the extra work.
Mr Andrew asked if COSATU thinks that the Act should be applicable to the public sector.
Mr Mhlangu replied that many laws govern the pension fund industry and in the long term they want one industry, one regulator and one act. He said that in the future COSATU would want to see the amendments to the act to achieve this.
Office of the Pension Funds Adjudicator submission
Mr John Murphy, the Pension Funds Adjudicator, said that he fully supports the aims and objectives of the Bill. It is a sensible solution to a difficult problem. He says that the implementation of the Act is very important and it would be sad if the new legislation is a failure because of poor implementation. His main concerns centred around dispute resolution and minimum benefits.
Mr Murphy says that in the view of senior lawyers the new Bill is a litigator’s dream. It is possible that many court battles could result and problems could drag on for years. He emphasised the value and practical considerations of an alternative dispute resolution (ADR) process. The ADR process must be kept simple and quick. What South Africa needs in his opinion is a one stop shop to deal with all complaints. The fact that the ADR process in the Bill leaves the option open for litigation at each step could be a good thing because skilled legal professionals will dispose of the matter. But this is also bad because the stakeholders who have no resources to litigate, will be at a disadvantage.
A member could object if the scheme is certified, but the Bill does not make it necessary for the certification to be conveyed to members. His main concern is that the Bill does not provide an accessible mechanism for complaints, which will mean that the adjudicator will be inundated with complaints. This will be burdensome on the resources of the adjudicator and will force his office to dismiss any objection for lack of jurisdiction. In his opinion poorer members will take their grievances no further than the registrar.
To give members better access to justice and to protect his office he suggests arbitration. The Bill should, therefore, state that if there is a complaint an arbitrator must hear the matter and make the final decision. The Bill must further provide that the rules of a fund must state that an arbitrator must be appointed. This will also solve the problem of jurisdiction.
Mr Murphy feels that if a member leaves the fund for any other reason besides retrenchment, the benefits that that member receives is discriminatory. He provides the following example: if a member leaves the fund because of ill health he gets the contribution that was made plus a reasonable rate of interest. But if a member is retrenched he gets his full benefits. Another example is that if a member is unfairly dismissed the only recourse is to seek relief at the CCMA. But the CCMA aims at remedying a delict and relief is limited to twelve months salary which is much lower than the benefits which that member was entitled to.
Section 14 of the Pension Funds Act states that when a transfer takes place full recognition must be given to members’ rights and expectations. He says that this section seems to suggest and actuarial method in calculating the transfer value. He says that there are four actuarial methods and that S14 can be likened to projected unit method that is the most generous. He makes a point that the method alone does not determine the transfer value but says that the new Bill seems to suggest a method that does not fit under one of the four standard actuarial methods. He is, therefore, concerned that the new Bill could lessen the members’ rights.
Discussion and comments
Mr Andrews (FSB) said that the new amendments in Clause 2 of the Bill that adds S14(1)( c) retains the reasonable benefit and reasonable expectation which was contained in the old S14. He stated further that most funds were excluded from S14 because of other exceptions in the Act.
Ms Hogan asked that if the benefits were equalised for all persons no matter the reason for exit from the fund would the rules of the fund have to be changed.
Mr Murphy replied that they would. The important point that Mr Murphy said he was making in relation to minimum benefits was that a standardised version to calculate the transfer values needs to be adopted.
National Council of Trade Unions submission
Mr Roger Wellstead, a consultant representing NACTU, stated that NACTU holds the same position as COSATU. It is impossible to deal with the issue of pension fund surplus without dealing with the past. He also asserted that companies are stripping reserves and if legislation does not come soon there will be no surplus.
Mr Wellstead gave real examples of what companies had done in South Africa. In one of these examples he said that there was a mass transfer and at the time of the transfer the pension fund was under-funded by 30%. After the negotiations but before the transfer the actuary was instructed to re-value the assets differently. The members, therefore, did not receive what they were supposed to. In this case the union employed an actuary to check the figures. His report stated that the members were given a fair share but failed to tell them that they were getting 30% less than they were supposed to. The surplus was taken out of South Africa.
Regulation 15 defines surplus as well as deficiency. He says that every actuarial report has to be in terms of this regulation and he submitted that the whole transfer issue revolves around regulation 15.
Mr Wellstead listed six companies and said that R100 billion had left the country through their pension funds. He says the Bill does not address this and asks whether South Africa can afford to lose this money. The Bill as is stands legalises the past. The unions cannot go to court to get back these lost fortunes. The reserves have become company profit.
Before the transfer it was agreed that full reserves would be transferred but in practice it was not and, therefore this money must come back. These transfers were not done in terms of Regulation 15 and were therefore wrongly done.
NACTU supports COSATU’s position except that they want to go beyond the existing surplus and get back the money that was lost. All the COSATU amendments are also supported by NACTU.
Discussion and comments
Mr Masilela (FSB) said that in the past there was no standard as to how transfers were to take place and therefore it is not clear-cut that the transfers referred to by Mr Wellstead were illegal.
Mr Andrew (FSB) commented that the Bill does not cover the problem mentioned by Mr Wellstead because it is not retrospective. Minimum benefits will raise everyone’s pension but will not give to them what they should have received in the past.
The meeting closed.
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