Your employer would not be in breach of your contract of employment if it closed your existing retirement fund and offered you an alternative form of retirement funding, Rosemary Hunter, a director at legal consultants at Edward Nathan Friedland, says.
She was a speaker at the 2004 annual conference of the Institute of Retirement Funds in Cape Town this week.
Hunter says South African law does not require an employer to fund your retirement, although a significant percentage of employers in the formal sector do so.
She says employers who want to change their employees' retirement funding arrangements in order to reduce their companies' exposure to market and other risks (such as the increasing costs of death and disability benefits) must ascertain whether or not the change amounts to an alteration of the terms and conditions of their contracts of employment.
Few written contracts of employment specify exactly what obligations an employer has when it comes to funding your retirement. Those contracts that do so, Hunter says, seldom deal with the issue of whether an employer that exercises its rights, in terms of the rules of your fund, to stop contributing to the fund has any further obligations to you regarding your retirement funding.
In the past, she says, the rules and practices that governed defined benefit funds effectively limited the exposure of employers who contributed to those funds. The rules and practices allowed employers to manage the risk of retirement funding as easily as they could manage any other employment-related cost.
Hunter says the rules and practices included the following:
- Employers had the right to appoint all the trustees of the fund;
- Employers could use surplus assets to smooth out their contribution rates;
- The adoption of conservative investment strategies ensured that employers incurred limited risk;
- An actuarial surplus was treated as the asset of the employer; and
- Employers had the right to veto pension increases and benefit improvements that would increase a fund's liabilities and, by extension, the contributions the employers were required to make.
The rules and practices were the terms under which employers were prepared to contribute to defined benefit funds, Hunter says, and thus can be seen as constituting part of their employment contracts insofar as retirement funding was concerned.
Since 1990, employers' powers have been restricted, and many of the limits on an employer's exposure to the investment risks of contributing to a fund have been removed. The restrictions include:
- Employers may only appoint up to 50 percent of the members of a fund's board of trustees;
- The courts and the Pension Funds Adjudicator have warned trustees that they have a fiduciary duty towards their funds, and not to their employers;
- The right of an employer to benefit from surpluses has been severely restricted in terms of the Pension Funds Second Amendment Act;
- Both defined benefit and defined contribution funds are required by law to phase in certain minimum benefits, and this has increased the funds' liabilities; and
- If a fund is liquidated, the contributing employer is liable for any shortfall in the assets required to ensure the provision of minimum benefits to fund members.
Hunter says that few, if any, of these changes could have been foreseen by employers who agreed to pay the balance of the costs required to provide defined pension benefits to members, after member contributions have been taken into account.
As a result of these changes, she says employers cannot be bound to continue contributing to their employees' retirement funding on the same balance of cost basis.
The pension promise
In their earliest form, Hunter says, pensions were awarded to individuals out of a company's revenue. Pensions were given only to long-serving employees who reached retirement age while in the com-pany's employ.
Later, pension schemes were established in the form of trusts. The trusts were vehicles through which employers gave effect to their promise to provide pensions, she says. This promise was made to employees as a group rather than to certain individuals.
The Pension Funds Act of 1956 stated that retirement funds must be legal entities separate from the employers that sponsor them, and that a fund's liabilities must be pre-funded. Pre-funding means the employer does not provide the actual pensions, but pays contributions to the pension fund.
If managed properly, the fund should have sufficient money to pay pensions, Hunter says.
She says the employer is liable for making contributions, which constitute part of an employee's remuneration package, and not for providing the pension benefits themselves. The rate of contribution to defined benefit funds fluctuated over time, but the scale of fluctuation was not significant.
If, for any reason, the defined benefit target could not be reached, because, for instance, the employer could not afford to increase the rate of contribution to meet the benefit, the benefit could be adjusted by changing the fund's rules.
She says this exposes the "lie" of defined benefit funds, which many employees believe guarantees them a pension. It also reveals something of the unspoken, or tacit, agreement that an employer makes with its employees regarding retirement funding.
Hunter says the implication is that if your employer's "pension promise" amounts only to an obligation to maintain a fixed or reasonable contribution to a retirement fund - and not to provide you with a specific pension benefit - it is unlikely that your employer is obliged to contribute to a single fund throughout your term of employment. Your employer may stop contributing to one fund and instead contribute to another fund, she says.
Changing the retirement funding vehicle does not entail a change in the terms and conditions of employment, Hunter says.
However, your employer has a duty of good faith to you, as a fund member and an employee, she says. This means it should only restructure your fund if there is good reason to do so and after properly consulting you.
If your employer does not have a good reason to restructure your retirement fund and does not consult you, Hunter says you can ask the Pension Funds Adjudicator or the Commission for Conciliation Mediation and Arbitration to stop your employer from proceeding with the changes.
Furthermore, she says, your employer's duty of good faith to you means it must replace your existing fund with a reasonable retirement funding vehicle.
Your employer must also contribute to the new vehicle at a rate that will provide reasonable retirement benefits for all the employees, taking into account the retirement savings accumulated in your former fund, Hunter says.