Pension Funds Second Amendment Bill:deliberations

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Finance Standing Committee

10 September 2001
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FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
11 September 2001
PENSION FUNDS SECOND AMENDMENT BILL: DELIBERATIONS

Chairperson:
Ms Hogan

Documents Handed Out
Pension Funds Second Amendment Bill [B41-2001] at
http://www.treasury.gov.za
Working draft of the Pension Funds Second Amendment Bill with amendments included

SUMMARY
Mr Andrew (FSB) took the Committee through the proposed amendments from start to finish. As he went along the issues of principle not yet decided on by the Committee were finalised. One such issue was that it was decided that all, including the employer, shares in the surplus.

MINUTES
Clause 1 Definitions:
Actuarial surplus
– The proposals of the Actuarial Society of South Africa and the Life Offices Association (LOA) will be followed. Incorporated are the suggestions that the assets of the fund must be reduced by the credits in the member surplus account and the contingency reserves are added to the liabilities rather than deducted from the assets.

Contingency reserves – The LOA and the Actuarial Society proposals are accepted in that government agrees not to limit the ability of the board to deal with contingencies not explicitly set out in the rules of the fund.

Deferred pensioner – The term ‘retirement date’ must be replaced with ‘retirement age’ which is a more acceptable term.

Employer surplus account – COSATU wants this definition deleted in line with its principle that the employer cannot share in the surplus.

Ms Hogan advised that the ANC favours the view that all including the employer shares in the surplus.

Mr Andrew (DP) and Mr Rabie (NNP) said that they also supported the principle that the employer shares in the surplus.

Ms Hogan said that there is agreement with what the Bill wants to do with the surplus.

Mr Andrew (DP) concurred.

Contribution holiday – The proposals of the Actuarial Society and the LOA will be followed.

Conversion – The wording change suggested by COSATU will be followed.

Employer Surplus Account – The LOA has just pointed out that the Bill refers to Section 15A wrongly and should refer to S15B, S15C & S15F. They are correct.

Fair value – The definition comes out because it is already defined in the Pension Funds Amendment Bill.

Investment Reserve Account – The LOA suggested a change of wording that achieves the same objective as the Bill but is much shorter. The wording of the LOA will be followed.

Member Surplus Account – COSATU wants this definition out because of their underlying principle. But since the Committee had decided that the employer does share in the surplus, the definition remains.

There are no other major changes to the definitions.

Clause 14A(1) – Minimum Benefits
Sub paragraph (1)(a) is amended to reflect the decision of the Committee not to discriminate against members on the basis of how they left the fund. The section will therefore no longer refer to members who have been retrenched, but rather to members who ‘leave’ the fund.

Mr Andrew (DP) & Turok (ANC) had a problem with the word ‘leave’ because it suggests a voluntary action. Account needs to be taken of those who are forced to leave. They suggested the wording ‘ceases to be a member’ to make it more neutral.

Mr Andrew (FSB) confirmed that he would attend to the word change.

There is only a grammatical change to sub paragraph (1)(b) and no changes to (1)(c).

Sub paragraph (1)(d) can be deleted because it is not needed now that sub (1)(a) does not discriminate against members on the basis of how they left the fund.

Sub paragraph (1)(e) now becomes sub paragraph (1)(d). In response to this section the Association of Retired Persons and Pensioners wanted the pension increase to be earlier than the Surplus Apportionment date. From discussions it was felt that the pensioners should not be benefited to the advantage of other members. Mr Andrew (FSB) will attempt to change the section to partially give effect to the needs of pensioners.

Sub paragraph (1)(f) can be deleted because it is not needed now that sub (1)(a) does not discriminate against members on the basis of how they left the fund.

Clause 14A(2) – Window Period
The 12-month window period after the surplus apportionment date is provided for to enable the employer to renegotiate the benefit structure if the fund cannot afford go through the process of the Bill. COSATU wants this window period removed. This means that the Bill applies from the commencement date i.e. minimum benefits would apply from this date. The employer would have no chance to restructure the benefits so the employer would have to fund the deficit. The Bill has two situations where the employer funds the deficit. One is where the surplus was utilised improperly. The second is in terms of section 33. The government did not want to put the employer in the position of funding a deficit without giving the opportunity to renegotiate the benefit structure.

Mr Mguni (ANC) asked what would happen to a member who leaves between the surplus apportionment date and the end of the window period.

Mr Masilela (Treasury) said that it would not affect the benefits of a member because from day one of the window period, the new rules in the Bill will have to be followed.

Mr Andrew (FSB) agreed with Mr Masilela but said that they have to ensure that this situation is dealt with clearly in the Bill so a rewording will be necessary.

Clause 14A(3)
This section deals with the situation where a fund is terminated in terms of the rules of the fund before the commencement date. The LOA submitted that not only the fund must be protected from subsequent action but the employer as well because the employer could decide to terminate the fund not only the board. The section will now reflect LOA’s concern.

Clause 14B
Section 15K also deals with minimum benefits so it was decided by the FSB to bring it in under Section 14 because minimum benefits are dealt with here. A new section 14B is created. This new section is the old 15K.

When the LOA made recommendations on the old 15K(1)(a) & (b) they suggested that after the words ‘gross investment returns earned by the fund’ the words ‘on the assets backing the fund’s liability in respect of the member’ be included. This change says exactly the same thing as the Bill but is shorter and makes it unnecessary for subclause (b). The LOA proposal will be followed and therefore sub (b) can be deleted. Instead of being 15K(1)(a) & (b), it is now 14B(1)

Section 15K(2) dealt with the minimum contribution accumulation. This section and all the comments on this section fall away because of the position adopted in section 14A(1).

S14B(2) is the old 15K(3) that dealt with the determination of the minimum individual reserve account of the member. It is the government’s feeling that a standard approach must be used. The standard will be determined by a Committee representing all the stakeholders. The COSATU method does not take into account the fact that all the funds used different methods.

Ms Hogan said that the standard approach seems reasonable.

The LOA has suggested that when determining the members’ individual reserve account the retirement date should be used rather than the retirement age. This is correct and the change will be made. The LOA also wanted the value obtained when calculating a member’s individual reserve not to be less than the minimum contribution accumulation. This concern is taken care of in S14B(2)(a) that now states that ‘the board shall determine the greater of…’

S14B(3) is what used to be S15K that dealt with the determination of the minimum pension increase. Government proposes the lower value while COSATU wants the higher value to be used. The COSATU proposal will require the funds to give full inflationary increases and the funds were not designed for this. The calculation of the minimum pension increase is broken up into subsections. Mr Andrew (FSB) said that the Actuarial Society will reformulate the wording to make it more correct and asked the Committee to wait for that version.

Ms Hogan wanted the wording, ‘the lower of ’ changed because it suggests that the member is getting a disadvantageous benefit. She wanted some other way of saying the same thing.

Clause 15A & 15B
No changes need to be made to these sections because they now accept that the employer can share in the surplus.

Mr Andrew (FSB) said that he had not had an opportunity to draft the clauses that incorporates the regulations into the Bill under 15B(3) so they should continue for now. The rest of S15B is covered in that all the matters of principle have been decided.

Ms Hogan wanted clarity on what happens if a fund is liquidated before the surplus apportionment date.

Mr Andrew (FSB) said that the surplus apportionment date is brought forward to the date of liquidation. The minimum benefits will apply on this day.

The Committee then discussed what happens to the employer surplus account on liquidation. It was previously decided that these funds should go to the employer and fall into the estate and be dealt with in terms of the laws of insolvency. The Committee members were not happy that the surplus would first go to pay outstanding income tax and other taxes and then if there is anything left, the secured creditors get paid. Only thereafter the outstanding wages will be paid. The Committee members decided to keep the principle in the Bill that states that the funds in the employer surplus account on liquidation will go to the members.

Clause 15C
Because it was decided that the employer would share in the surplus, the proposals on this section did not need to be considered.

Clause 15D – Utilisation of Surplus for the Benefit of Member
Clause 15e – Utilisation of Surplus for the Benefit of Employer
Mr. Andrew (FSB) had not had the opportunity to redraft these sections but they will be in accordance with the deliberations on 6 September 2001.

Clauses 15F – 15I
Because it was decided that the employer would share in the surplus the proposals on these sections do not need to be considered.

Clause 15J
This section deals with the utilisation of the surplus to prevent job loss. The FSB accepts the COSATU proposals on this section except for one. The government felt that only the funds in the employer surplus account could be used to prevent job loss. COSATU wants the whole of the surplus to be use if needed.

Clause 15K
This section is incorporated under section 14B.

Clause 15L - Specialist Tribunal
This section has been discussed on 6 September 2001. It now becomes 15K.

Clause 30
Since it has been agreed that the window period is needed, the COSATU proposals need not be considered.

Ms Hogan was satisfied that the Committee had now gone through the Bill. She said that COSATU was concerned about how the rights of former members of Defined Benefit funds will be protected especially since existing Defined Benefit funds have an interest in excluding as many people as possible from participating in the surplus. COSATU has suggested that a conciliator be used to protect the rights of these members. COSATU will however be given an opportunity to present their views to the Committee.

The Committee had no further outstanding issues that needed to be resolved and the meeting was closed.

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