Pension Funds Second Amendment Bill: hearings

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Finance Standing Committee

22 August 2001
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Meeting report

 

FINANCE PORTFOLIO COMMITTEE
23 August 2001
PENSION FUNDS SECOND AMENDMENT BILL: HEARINGS

Chairperson:
Ms Hogan

Documents handed out:
Fedusa submission
Association of Retired Persons and Pensioners submission
Actuarial Society of South Africa submission

SUMMARY
FEDUSA's view was in principle the same as COSATU and NACTU. Although the employer is a stakeholder, it does not believe that this entitles employers to share in the fund. The DB fund has been abused by employers and the absence of legislation was causing employers to deplete funds. FEDUSA proposed shortening the twenty year period because it was problematic to trace people that far back.
Any surplus remaining should be apportioned to pensioners and early leavers in equal shares.

The Association of Retired Persons and Pensioners stated that there must be transparency and involvement by members in decisions. Members did not know the assumptions and formula being used in the actuarial calculations. The surplus was not created from employer contributions. Members did not have the opportunity to pay less as contributions were fixed. The Association disagreed with the Board’s decision-making process. It supported the principle of remedying the past but questioned the practicality thereof.

The Actuarial Society sees the necessity for the Bill. The Society suspects that some transfers in the past were unfair. The Bill puts an onus on actuaries to certify equity but all that an actuary can do is say what is reasonable. The Bill does not clearly state what are reserves and what is surplus. It would be difficult redressing the past because the records are not available. The actuarial profession cannot meet the demands of the Bill.

MINUTES
Federation of Unions of South Africa (FEDUSA) submission
Mr Deysel, a SATU member and Vice President of FEDUSA, said that FEDUSA’s view is the same as the other unions that had presented with only a few exceptions. The pension funds issue is very important to FEDUSA as it affects many pensioners and previous members who have been cheated out of their fair share. It is important to address the past inequities.

FEDUSA believes that the employer is a stakeholder because of the contributions that were made. They do not believe that this entitles employers to share in the fund. The DB fund has been abused by employers and the new legislation needs to look closely at this fund. The absence of legislation was causing employers to deplete funds and the FSB is powerless to stop this.

FEDUSA is concerned about the long time period the Bill envisages to addresses to correct past injustices. It was proposed to shorten this period because it was impractical and problematic to trace people that far back.

The main submissions of FEDUSA are the following:
- The pension fund belongs to the members and no third party can stake a legal claim to it. This is based on the principle that the fund is set up for the benefit of the members. All the assets in the fund become part of the fund and therefore for the benefit of the members. If a surplus arises, it remains part of the fund’s assets and for the benefit of the members.
- Every pensioner is entitled to inflation-related benefits.
- Every member is entitled to a proportional share of what he or she would have been entitled to as a pensioner in the fund.
- Any ordinary surplus remaining after satisfying the entitlements of pensioners and early leavers should be apportioned to pensioners and early leavers in equal shares.
- Any deficit must be made good by the employer over time.
- Dispute resolution regarding future minimum benefits and restitution of minimum benefits to past members should be dealt with on the basis of the same principles. FEDUSA feels that the current resolution procedure is too long and supports an ad hoc specialist tribunal.

Discussion
Mr Nene (ANC) asked if it would be difficult to contact people from more than five years ago and asked if advertising would not work.

Mr Deysel replied that it needs to be decided if the time period is practical and manageable. Little proof in the form of documentation would be available. Further one does not know what the person was entitled to twenty years ago.

In answer to Ms Hogan asking what FEDUSA proposes, Mr Deysel said that the FSB could look at the funds and see if they can afford paying the benefits for a twenty year period. Even if the fund can affor, it there is still a problem of tracing people. He supported the principle of fixing the past as best as one could but expectations cannot be created that cannot be met. It is very important to FEDUSA that the steps taken do not cause a total collapse of the pension fund industry.

Ms Hogan wanted to know what the cut-off date should be for new members.

Mr Deysel replied that new members cannot share in the surplus. It needs to be decided if everyone is going to share in the surplus - or only those who suffered an injustice in the past.

Association of Retired Persons and Pensioners (ARP&P) submission
Mr Nick de Villiers said that it was difficult for this sector of society to voice their concerns. The Association has few resources and cannot afford to employ actuaries and attorneys to assist them in scrutinising the legislation.

An example was given to illustrate what had happened in reality in changing to a Defined Contribution fund. In changing, the pension would increase to R800 a month. However the employer would no longer subsidise the medical aid and that those premiums would increase by R800.

Sixty per cent of pensioners receive less than R3 000 per month. Most receive less than R1 500. Medical aid costs a fortune and for most is more than the pension itself.

Main Principles
-
Pension of members must be secured during their life.
- Members must retain full purchasing power from retirement until death subject to funds being available in the fund. The ARP&P submitted that they know they must be realistic but for years members got low salaries and upon retirement only received 60% of their salary and from then their purchasing power only goes down.
- Members’ vested rights and their reasonable expectations must be safeguarded.
- There must be full transparency and involvement by members in decisions. Pensioners did not ever have access to all the documents and information they required to properly enforce their rights. They did not know the assumptions or the formula being used in the actuarial calculations.
- Any proposals should satisfy Clause 7C in that pensioners must be treated fairly.

Surplus
The surplus was not created from employer contributions. Members did not have the opportunity to pay less as their contributions were fixed. In the past members worked for companies for a long time and during this long period of service paid for their entitlements.

Comments on the Act
Section 14(1)(e) proposes pension increases every three years. This was not agreed with and a yearly increase was proposed. Currently funds have annual increases. If the assets are not managed properly, the three yearly increases may be close to zero. In addition to the proposed annual increase, it should target a full CPI index adjustment subject only to the availability of funds.

Section Three concerns
The Bill ‘tops up’ pensioners to the minimum level at the surplus apportionment date but they are not compensated for past poor increases. Former members and active members and deferred pensioners do not have this problem.

If there is a surplus after redressing past wrongs, pensioners are not included in the distribution of the remaining surplus.

Mr Andrew (FSB) pointed out that pensioners will be included in the redistribution. They will look to draft the regulations more clearly so that there can be no confusion as to whether pensioners are included.

Mr de Villiers submitted again that it seems as if pensioners are excluded from the distribution envisaged in Regulation 4.

The FSB stated that Regulation 4 would be redrafted to make it clearer that pensioners are included.

Decision-Making Process of the Board
It was submitted that even though membership of the Board is a fifty-fifty split, in reality the situation is different because of the balance of power. It is a good decision to make the Board decision rest on a 75% vote. It is not clear though what constitutes a quorum. It was proposed that the trustees be given a time limit to reach consensus. If consensus is not reached, the dispute must be referred to an arbitrator. This gives the parties an incentive to reach a consensus as opposed to having a binding decision made by an arbitrator.

It was proposed that all members and former members be given the vote.

Mr Andrew (FSB) said that they did think about voting but most pensioners living on the bread line will think that any increase is better than none so it is easy to induce those members of society. For this reason the FSB felt it was better to go the objection route.

The ARP&P supported the principle of going back to remedy the past. They, however, supported the submission of FEDUSA relating to the practicality thereof. They were concerned about having to wait long for any results. Pensioners cannot afford for all the things in the Act to happen before they see a benefit.

Actuarial Society of South Africa submission
Mr Mike Codron, President of the Society, said that an attempt had been made to get people with different views to prepare the Society’s presentation. He pointed out that there are 450 members in the Society and that the new Act will create too much work for them to handle.

The DB funds were initiated by employers who took investment risks. High inflation and poor investment returns meant that during the 1970s there were no surpluses. In the 1980s, good investment returns created significant surpluses. Surpluses reached a peak in the 1990s and have since come down. The Actuarial Society cannot verify the exact amount of the surplus because no records are available to them.

The Actuarial Society sees the necessity for the Bill and agrees that the processes must take place. He submitted that ownership of the surpluses must be clear, pensioners should be protected against inflation when affordable. The Society suspects that some transfers in the past were unfair but the crux was defining what ‘unfair’ meant.

The Society disagrees that retiring persons are treated differently from those being retrenched.

Disagreements
The Bill puts an onus on actuaries to certify equity but all that an actuary can do is say what is reasonable but cannot say what is equitable.

They feel the 15-month period envisaged in the Bill is too short because young actuaries are only recently qualified and more experienced ones are emigrating.

The Bill does not clearly state what are reserves and what is surplus and this needs to be addressed. Due to this lack of clarity in the Bill, actuaries can approach valuations differently. Therefore, different funds will be paying out differently.

It was proposed that employers’ surpluses should be available to creditors. The Society does not see the need to have an actuary on the tribunal on a permanent basis.

Concerns with Bill and Regulations
The society submitted that it would be difficult redressing the past because all the records of twenty years back are not available.

Minimum benefits also presents a problem because in the past a person got R100 000 when he should have gotten R120 000. But there could be many examples where a person who should have gotten R80 000 also received R100 00. This is problematic.

The Bill does not deal with the situation where in a non-contributory fund the employer contributes everything. In this situation how is the surplus shared because in the Regulations the surplus is shared by looking at the past contributions. The members, in terms of this Regulation, would not share in the surplus and it was their submission that the members should share in the surplus.

Mr Andrews (FSB) commented that the argument was well taken. He noted that the Regulations had only come out recently for comment and the point raised would need to be considered.

The Society felt that there was too little time to comment properly because the 6 September deadline was too early. Also, all the Regulations have not been completed and this matter needs to be looked at as a whole.

Ms Hogan asked if the 6 September deadline was carved in stone.

Mr Andrews (FSB) said that as long as they are aware of the problems by the 6 September, then thereafter the solutions can be worked on.

The Society, in conclusion, welcomed the Bill and said that they would like to have an opportunity to provide further assistance.

The meeting was closed.

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