Pension Funds Second Amendment Bill: hearings

Meeting report

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

Chairperson: Ms Hogan

SUMMARY
Business South Africa submitted that the Bill should not require any retrospective enhancement of benefits paid out in the past. The full transfer value did not have to be transferred. The Bill should facilitate repatriation of the surplus to the employer. Such repatriation would generate company tax for the government.

MINUTES
Business South Africa submission
BSA was represented by Mr Shipman (convenor of task team participating at Nedlac), Mr Lamprecht (BSA chairperson), Mr Shefler (an actuary and former head of employee benefits at a large insurance company) and Mr Van Wyk (Executive director at Rembrandt). BSA is an umbrella body of employer organisations that submitted their mandated position.

Mr Lamprecht stated that their submissions are made on a basis of principle and concept to assist in making difficult judgment calls. He said that South Africa is a country of opportunities and has great potential. The BSA only recently received the Regulations so this presentation is based on the broad principles in the Second Amendment Bill.

Mr Shipman spoke on the retrospectivity of the Bill and said that employers were never compelled to provide retirement benefit funds but that 70% of all formally employed South Africans were members of retirement funds. This compares favourably with developed countries.

Giving the background of the Defined Benefit (DB) fund, he said that it was inherited from the UK. It was good if you had a long term of service but bad for withdrawal benefits. The employer funded the balance of the cost either by way of percentage of salary or balance of contributions. In new funds with young members the employer need not pay any contributions whilst with the older funds with older members (where the liability was high), the employer paid four to five times more than the member. He said that inflation increased investment yield and therefore, there was an investment surplus. He said part of this surplus was used for the improvement of benefits but were at no time compelled to.

Transfer values equalled the value of a promise and did not reflect accumulated contributions or the value of assets. At all times what the member was entitled to was transferred and thus the transfer values were not manipulated.

He submitted that there is a great risk in dealing with surplus by trying to force it into the mould of a Defined Contribution (DC) fund. This would be inappropriate because defined benefit funds were governed by the law of the time.

Mr Lamprecht continued and said that the nature of a DB find is different from a DC fund and one cannot impute characteristics of the DC fund retrospectively to the DB fund. With the DB fund the promise is underwritten. If one is able to fulfil the promise, the employer does not need to contribute. But if the promise cannot be fulfilled, then the employer must contribute. He submitted that it was impossible to marry the two schemes retrospectively and that this is not good governance.

It was the view of the BSA that the Bill goes beyond the record-keeping period and that this undermines confidence and legal certainty. He made the point that there must be legal certainty for investment and that retrospectivity has negative consequences.

One of the main points made by Mr Lamprecht is that the consequences will be great and therefore one cannot just go ahead without examining these consequences. It was possible that the Bill could cause employer contributions to increase significantly. If this should happen it would reduce company profit - but this is not the major problem as the loss in profit can be rectified over time. However, a dangerous consequence would be the immediate devaluation of many companies.

He said that there are many operational principles that need to be looked at. The Bill is not clear what would happen if members were not alive. The question of their dependents is not addressed. Also, many business transactions have taken place. When there has been a merger or a purchasing of a company, a due diligence report was performed which included assessing the liability of the DB fund. The extent of the liability would have an impact on the purchase price. He questioned how this would be addressed.

Mr Lamprecht again said that the extent of the problem is a question of scale. The BSA feels that the problems are of a large scale and that calculations need to be done.

Mr Shipman continued and said that a codified list of the uses of the surplus should be enacted. The arrangement in the Bill was too restrictive. The surplus should be available for contribution holidays because this is in the nature of DB funds. It is not clear why the employers must wait to access the surplus until the fund is wound up.

Mr Van Wyk said that a committee in the UK had looked at the pension fund industry and more particularly at the use of the surplus. They found that sweeping changes in the law concerning the use of surplus were not needed. He agreed with the need for minimum benefits and for inflation rate related benefits. One has to keep in mind that the pension fund industry is not a static object and changes all the time.

BSA believes that to introduce practices that were not an obligation in the past, was contrary to international practice.

In the past nothing in the law compelled the employer to top-up. Employers seldom walked away from the fund and only did so when they themselves were in a dire financial position.
The BSA is not happy that the Bill compels employers to fund the deficit. Mr Van Wyk said that the deficit can be for a number of reasons and to give unlimited liability to the employer when it did not control the investment decisions is a huge problem.

Mr Van Wyk said that South Africa should not create something new and that the surplus should be repatriated to the employer. Such repatriation would generate company tax for the government.

Mr Shipman addressed two issues in the draft Regulations:
- BSA was troubled by Regulation 2 dealing with the so-called improper uses of the surplus. The law should not characterise something as unlawful that was legitimate in the past. The BSA proposes that Regulation 2 be deleted.
- BSA believes there is a drafting error in Sub-regulation (1) which stipulates that the trustees must identify all transfers. BSA was of the opinion that only significant transfers would be targeted. If the regulation remained as is, it would be burdensome on the trustee.

Mr Sheffler continued the presentation and proposed that the apportionment share principle should apply for early leavers as opposed to full market value appreciation as is proposed by Labour. If one went the market value route, it would increase the cost and risk. It would also render ineffective the use of the surplus to protect job loss because the surplus first needs to be allocated to a member, which means that it cannot be used if the employer is in financial trouble. Full market value appreciation will be destabilising because the surplus will fluctuate from year to year. He submitted that it was not true that the employer benefited from the surplus. Also, the sustainability of a DB fund was based on being fair to those people who remained in the fund and not those who left the fund. The DB funds were in fact designed this way. It was not the preferred fund but something South Africa had inherited.

He ended by saying that there was no legal or moral basis to force employers to make good the deficit.

Discussion
Ms Hogan commented that she had not expected the BSA to submit that there is no legal or moral basis to correct the past. She quoted from submissions and said that Mr Murphy had submitted that actuaries, working for employers, had restructured funds from DB to DC and repatriated the surpluses to the employers. She said that an impartial view would have to conclude that an injustice has been done. She understood the BSA view on the dangers of retrospectivity but could not understand how the BSA could state that there is not any legal or moral basis when a clear injustice had been done.

Mr Lamprecht said that the BSA was not here to justify harsh cases of the past. If the transfer values were fairly calculated and in accordance with the rules of the fund, there is no problem. If there is now a new way of calculating the transfer values, then the consequences are huge.

Ms. Hogan wanted more clarity on the scale of the consequences and if investigations had been done.

Mr Lamprecht said that BSA had only received the regulations that day and from what they see, the scale of consequences is huge. If the scale is smaller, then the risks inherent in the system are smaller.

Mr Andrews (FSB) said the FSB had limited research from the funds themselves but the FSB felt that what the Bill envisages is affordable. Also, only the existing surplus will be used to redress the past and employers will not have to put in a whole lot of money.

Mr Nene (ANC) wanted to know what the cause of the surplus was in the view of the BSA and whether the full value should have been transferred.

Mr Shefler said that the BSA agrees with all the submissions of the Actuarial Society in respect of the cause of the surplus. He said that the full transfer value did not have to be transferred.

Mr Lamprecht said that the move from the DB fund to DC fund was instigated by Labour. If the moved occurred when under-funded, then the employer had to make good the difference. But at all times the full entitlement was transferred.

Mr Andrew (DP) asked if it was correct that if a DB fund has a depleted surplus brought about by unscrupulous employers, even then that employer would not contribute. Also was it correct that if a DB fund has a surplus and the employer gave a fair transfer value, as the fund has a surplus after transfer to a DC fund, the employer will contribute as this Bill only deals with surpluses and not deficits.

Mr Masilela (Department) said that the Bill is trying to avoid turning a surplus into a deficit. Therefore the Bill only looks to distribute the funds if there is a surplus amount. There was a view that funds with no surplus or having a deficit are in that position because of contribution holidays and improper use of the surplus. If improper uses can be identified, then the employer must make good the shortfall. The Bill takes this approach to prevent an imbalance in the industry.

Mr Andrews (FSB) asked what should happen to the surplus according to the BSA?

Mr Shefler replied that the members of the BSA wanted legal certainty in respect of the surplus. He said there is no mandated view in respect of the surplus because the view has not been sought from BSA members.

This answer was at odds with BSA's earlier submission that the BSA wanted repatriation of the surplus to the employer. Ms Hogan said that the Committee needs to be clear on what the BSA's view is.

Mr Lamprecht replied that repatriation to the employer is the logical consequence of the DB fund because the employer needs this reserve to make good the liability in time to come.

Ms Hogan commented that each party making submissions is arguing with different perceptions in mind and therefore the Committee needs the technical information in relation to the number of funds, the number of members, the amounts of money etc.

The FSB said that there is very little technical information available.

Ms. Hogan asked for any technical information available to assist the Committee. The Chair then drew the session to a close, the BSA not having an opportunity to conclude.

The conclusion in the written submission to Parliament stated the following:

BSA does not support the bill as its approach differs from that in the Act in a number of fundamental respects. Not least of these is the fact that the Bill seeks retrospectively to create new rights and duties where they had not existed before.

As an alternative approach BSA submits that the Bill should not require any retrospective enhancement of benefits paid out in the past in terms of the legal arrangements existing at the time. Instead it should facilitate repatriation of the surplus to the employer and thereby allow the state to use its fiscal powers to tax the distribution of the surplus. The income so derived should then be used to the benefit of all previously disadvantaged persons by means of carefully targeted action.

[At the meeting COSATU handed out a written response to the submissions of BSA.]