The Pension Funds Adjudicator, Vuyani Ngalwana, made a ruling against the South African Local Authorities (SALA) Pension Fund regarding the calculation of withdrawal benefits in a defined benefit pension this week. He ordered the fund to pay the member a further R11 487.86.
After working for the Cape Town municipality for 16 years, the complainant resigned in July 2004. He received a withdrawal benefit of R234 105.22.
Administrator of the fund, Old Mutual explained that SALA had not been in a financially sound position when the complainant made his withdrawal.
Withdrawal benefits should have been calculated by multiplying the member's final annual salary by eight percent and by the number of years of service.
But the fund calculated the complainant's benefit based on his final average salary over the last two years of membership. However, "final salary" was defined in the fund's rules to mean the average annual salary earned and bonus received by a member during the last year of membership.
According to Old Mutual, a scheme of arrangement providing for a change in the calculation of final salary had been submitted to the Registrar of Pension Funds in terms of section 18 of the Pension Funds Act.
The fund had submitted its proposed changes to the then chief actuary of the Financial Services Board (FSB), Jeremy Andrew.
A reply received from an FSB actuary, Tapiwa Maswera, stated: "In principle, I do not have any problem with the proposed funding plans and the benefit changes you propose. I am, however, unclear about the legal aspect associated with the proposed reduction of benefits. I recommend that you satisfy yourself that they are in line with the Pension Funds Act and where relevant, the labour law."
The adjudicator found two problems with the letter.It was not from the registrar and the contents did not constitute approval of the changes as required by section 18 of the Pension Funds Act.
The fund then tried to rely on a section in the rules which provided for the reduction of future benefits in certain circumstances.
However, the adjudicator found this required the registration of a rule amendment before the reduction to the benefit could be effected. Although the requisite rule amendment was obtained redefining fund salary, it was approved in July 2006, two years after the complainant withdrew from the fund. It could not be applied to the complainant, who had left the fund before the rule was approved.
Ngalwana ordered the fund to pay the complainant R11 487.86, which is the difference between the benefit he received and the benefit he would have received had the correct definition of "final salary" been used in its calculation.
Deputy adjudicator Naleen Jeram says in terms of the law, pension benefits are regarded as special assets worthy of enhanced protection and cannot be reduced. Trustees of funds or fund administrators cannot simply reduce an accrued or vested benefit due to financial difficulties and must apply the registered rules at the time the member leaves service.
Funds cannot apply a rule amendment until it is approved by the Registrar of Pension Funds and members are well advised to check whether the correct rule has been applied in the calculation of their benefits, Jeram says.