A ruling by the highest court in the land, the Constitutional Court, has put to rest concerns about pension fund rule amendments, which arose after a determination against a fund by the Pension Funds Adjudicator was upheld by the High Court but then overturned by the Supreme Court of Appeal.
A RULING by the highest court in the land, the Constitutional Court, has put to rest concerns about pension fund rule amendments, which arose after a determination against a fund by the Pension Funds Adjudicator (PFA) was upheld by the High Court but then overturned by the Supreme Court of Appeal (SCA).
All retirement funds in South Africa – except those that fall under separate legislation, such as the Government Employees Pension Fund – are governed by the Pension Funds Act. In addition to the general rules prescribed by the Act, each fund has its own set of rules tailored to its own membership. Among these fund-specific rules may, in the case of a defined-benefit fund, be one that provides a formula to calculate the benefit members are entitled to on leaving the fund. All fund-specific rules must be registered with the Registrar for Pension Funds at the Financial Sector Conduct Authority (FSCA), and any amendments to these rules must be approved and registered.
The “Mudau” case has been the talk of the retirement fund industry because it undermined the vested rights of fund members by allowing an amended rule to apply retrospectively (to past events) before it had even been approved or registered.
Pandelani Mudau resigned from his fund, the Municipal Employees Pension Fund, on May 31, 2013. The rules at the time allowed for members to receive a benefit equal to three times their contributions.
In June 2013, the fund was advised to reduce the withdrawal benefits, so it changed the rule on benefit calculations, reducing the benefit to a member’s contributions multiplied by 1.5. This change applied retrospectively from April 1, 2013.
When Mudau received his payout in October 2013, it was under the retrospectively applied new rule and less than half the amount he was expecting. But the rule had not even been registered by then: the fund had applied to the Registrar to register the new rule in July 2013, and it was registered only in April 2014.
Mudau complained to the PFA, who ruled that Mudau was entitled to a benefit under the original rule. The fund appealed to the High Court, which again found in favour of Mudau and the PFA. Not content to let the matter rest there, the fund took the case on appeal to the SCA, which, inexplicably, in the view of pension fund experts, upheld the appeal and found in favour of the fund.
This puzzling outcome raised pertinent questions. Can a pension fund pay a member based on a rule that has not yet been registered? And can a fund make rules to cut members’ vested benefits that apply retrospectively?
On August 2, the Constitutional Court handed down judgment. In a unanimous decision penned by Justice Jody Kollapen, the court set aside the SCA decision and confirmed that a retroactive rule amendment may not apply before it is registered. Although amended rules may have retrospective effect after registration, they do not have binding effect before registration by the FSCA in terms of the Pension Funds Act. Thus, the original rule applied when Mudau’s withdrawal benefit accrued.
“A pension is a crucial instrument through which individuals plan and anticipate a period in which they will no longer be working to generate income. Pensions also contribute towards fulfilling the right to social security as they are a means by which individuals can secure financial stability through monetary contributions,” Judge Kollapen said.
He ordered Akani Retirement Fund Administrators (the company administering the pension fund) to pay Mudau the balance of his benefit calculated under the original rule, together with interest from October 2013 until the date of payment. He also ordered the Municipal Employees Pension Fund and Akani Retirement Fund Administrators to pay Mudau’s legal costs.
Commenting on the judgment, Deirdre Philips, pension lawyer and partner at Bowmans, wrote: “It has always been understood in the retirement fund industry that retrospective rule amendments may not impact on accrued benefits and that a fund cannot act upon or implement unregistered rules before the FSCA registers the rules. Therefore, whilst this decision by the Constitutional Court may come as no surprise to many in the retirement fund industry, it was critical that the apex court confirm this decision to provide much needed certainty on an important socio-economic subject. The Constitutional Court’s decision thus has a fundamental impact on the security of retirement fund benefits and, importantly, the faith which members contributing to retirement funds have about their financial security.”
* Martin Hesse is the former editor of Personal Finance.
– PERSONAL FINANCE