The feeding frenzy for a share of the estimated R80 billion in surplus assets in retirement funds in South Africa has already begun.
A challenge for funds will be to find genuine former members and to exclude chancers, Alan McCulloch, the divisional director of Liberty Corporate Benefits, says.
The practical implications of implementing legislation and regulations on pension fund surpluses was discussed at the annual conference of the Institute of Retirement Funds in Johannesburg recently.
The Pension Funds Second Amendment Act, which outlines how funds must distribute any surpluses, came into effect in December last year. It stipulates that all funds, which currently have a surplus, must draw up a surplus apportionment scheme.
Under this legislation, former members who received less than a prescribed minimum amount on their withdrawal from the fund will be entitled to a "top-up" payment if the fund can afford it. Pensions which have lost purchasing power over the years likewise will have to be increased if the fund can afford it. Then, if there is a surplus, the trustees may allocate a share of it to current fund members and the employer.
The order and amount of entitlement is set out in the Act and two notices from the Financial Services Board (FSB) still have to be issued by the Registrar of Pension Funds.
One of the major challenges for funds will be tracking down former members because most funds will not have kept records dating back to 1980.
Fortunately for funds, McCulloch says, the onus of proof will be on former members to show that they were genuinely members of a particular fund. The kind of proof which could satisfy the trustees of the fund could be old IRP5 tax slips, benefit statements or even a payslip.
Even with this information, funds will have the huge task of reconstructing records. The legislation obliges funds to leave no stone unturned in an effort to track down members. Funds will have to scour old records, the company's human resources records or staff association records.
When do funds have to share out surpluses?
McCulloch says the Act defines three time schedules in which a fund must come up with a surplus apportionment scheme:
- Within 18 months after the fund's next statutory valuation. Statutory valuations must take place every three years;
- Within 18 months from the date a fund is liquidated; and
- At any earlier time a fund voluntarily wants to do so.
Practical Problems
Howard Buck, a director at Fifth Quadrant Actuaries and Consultants, and Rosemary Hunter, a pension lawyer and director at Edward Nathan and Friedland, highlighted some of the practical problems that funds may face when drawing up plans to distribute their surpluses.
Buck says the Pensions Fund Second Amendment Act is a "social act" in that it is designed to force the distribution of surplus assets only in funds that currently have a surplus. It does not address those funds that have acted improperly in the past and that no longer have a surplus or have been closed down. Although the Act has good intentions, it can have some undesired spin-offs. There are also several uncertainties and ambiguities in the Act, he says.
Improper use
Hunter says funds with a very small surplus have to decide whether they will dish it out. As the law stands, any fund with a surplus will have to come up with a plan and distribute the surplus, even if the costs of doing so eat up the entire surplus.
The law also says that any improper use of a fund's money by an employer must be taken into account in the surplus apportionment plan.
The problem, Hunter says, is that it is not legally clear whether funds that do not currently have a surplus will have to go through a surplus apportionment scheme if funds were improperly used in the past.
The FSB plans to issue a notice to the retirement industry that employers who have used money improperly in the past will have to draw up a surplus-sharing plan, even if the fund does not currently have a surplus. However, Hunter says that FSB notices do not carry the weight of laws and may be challenged by funds.
The Act, as it is currently worded, views past adjustments to benefits, to address gender and racial discrimination, as improper use of a fund's money, although this was not intended, she says.
Improving benefits
Buck questions whether funds can improve benefits to members or give pensioners their normal annual increases before surpluses are distributed? If funds do so, these benefit improvements will reduce a fund's surplus giving former members possible cause for complaint.
Minimum benefits
In terms of the Act, the top up to minimum benefits for people who leave a fund after the distribution date, can only take place 12 months after the surplus apportionment date. This means that people who leave a fund in the 12 months after the surplus distribution date will not be entitled to the payment of minimum benefits.
The legislation requires that funds which currently have a surplus first top up the benefits to former members to minimum levels.
In terms of the proposed FSB notice, former members who left the fund due to retrenchment, being transferred to a new fund or as a result of the fund being converted from a defined benefit to a defined contribution fund, would then get a second bite at the surplus. Only once former members have had both these enhancements would any remaining surplus be shared out among all stakeholders.
Claiming your share of the surplus
If you belonged to a pension fund/s as far back as January 1980, contact the fund to find out:
- If it currently has a surplus;
- Whether you qualify for a share in the surplus;
- When the trustees expect to complete the surplus apportionment process;
- The name of the principal officer and the fund's address; and
- The name and contact details of the person who is appointed (if this has already been done) to look after the interests of former members.
Then write to the fund providing as much detail as you can about your membership of the fund and your employment, because the fund may no longer have records on you.