John Murphy, the Pension Funds Adjudicator, has cracked the whip at retirement funds and administrators for the widespread practice of not adhering to the law when doing so proves to be difficult.
This practice has also met with the stern disapproval of the Supreme Court of Appeal, and Murphy says it is time to call for sanctions, criminal or otherwise, against offenders.
Pension fund administrators have to act within the rules of their fund. If they want to change the rules, the change has to be registered by the Registrar for Pension Funds at the Financial Services Board (FSB). But delays in obtaining registration have resulted in a number of funds going ahead and acting as if the rule change has been approved.
In his annual report for 2001, Murphy deals with several cases in which funds have acted outside the law in this way, and he welcomed the decision of the Supreme Court of Appeal, which decisively rejects the "worrying trend".
The Supreme Court judgment reveals the existence of a culture of expediency at the highest level within the pension funds industry, and is described by the court as "breathtaking" and "cynical".
In the Supreme Court case, the retirement fund administrator, who made a dodgy payment of about R40 million to an employer from the fund in which it was participating, told the court that there was a practice - which supersedes the law - in which the rules and registered status of a fund can be considered as having been changed pending rule amendments filed with the Registrar of Pension Funds.
The administrator told the court that the industry justified this approach because the office of the registrar is understaffed and it takes a long time to get a rule change registered. So, the industry treats rule amendments that it has informed the registrar of, but which the registrar has not yet registered, as having full legal effect.
This justification, Murphy says, is tantamount to saying that pension funds should only obey the law when it suits them.
In one case before Murphy, a member of the public complained that his fund - the Sage Schachat Pension Fund - would end up cross-subsidising two other funds, and that the surplus in his fund would effectively be diluted if a proposed amalgamation of three pension funds took place.
Murphy says this case is troubling because despite the fact that the Registrar of Pension Funds had refused to certify the transfer of assets and the rule amendments that were necessary for the amalgamation until the surplus had been appropriately ring-fenced, the administrators of the fund had been operating the three funds as if they were one scheme under an unapproved set of rules.
Murphy ruled that the Sage Schachat Pension Fund was still an independent legal entity and that the fund should be restored to its correct legal position.
In another case, a senior member of Continental Linen complained to Murphy that his fund did not transfer his retirement benefit to a preservation fund immediately and the amount eventually transferred was less than he had expected.
However, Murphy discovered that the Corporation Selection Retirement Fund, perhaps influenced unduly by the member's position as a director of the company, had calculated the member's retirement benefit as a withdrawal benefit. This then enabled him to transfer his money to a preservation fund.
Effectively, the member, in collusion with the administrator of the fund, had structured his exit from the fund in breach of the fund's rules with a view to minimising his tax liability, Murphy says.
Murphy dismissed the complaint on the grounds that it concerned an unlawful dealing and said that even if the fund had been guilty of maladministration by delaying the transfer of the member's benefit, he was not prepared to assist the member.
"We are not prepared to assist any party with unclean hands, no matter what the merits of the claim," he says.
In a third case investigated by Murphy, the Hospitality Industry Provident Fund was rapped over the knuckles for making illegal educational loans to one of its members.
When questioned about the educational loans, the fund advised Murphy that it had been making such loans for some years since meeting with officials at the FSB and finding them sympathetic to fund members' requests for such loans. The fund then went ahead and made loans for educational purposes, but only amended its rules to provide the necessary authority three years later in 1998.
Murphy says the practice of providing educational loans, and the subsequent rule authorising these, were contrary to the Pension Funds Act and the FSB's Registrar of Pensions Funds should not have registered the rule. The registrar subsequently sent a letter to the fund to rescind the relevant rule.
Making loans from a retirement fund for any purposes other than for housing, is in contravention of the Pension Funds Act, Murphy says.