John Murphy, the Pension Funds Adjudicator, told the pensions industry to get its fund rules in order during his quarterly briefing to the Pension Lawyers' Association recently.
Murphy says when his office is called on to arbitrate, prudential issues and accepted industry practice will seldom take preference over the rule of law.
"While prudential issues and accepted practice play an obvious role and could be a mitigating factor in the governing of pension fund decisions," Murphy says, "they most often do not override the rules when it comes to decisions handed down by the adjudicator."
His advice to the pension fund industry as a whole was to get its rules right as soon as possible.
Murphy said there has been a disturbing trend of funds and their trustees or administrators attempting to ignore or bend the rules when these become inconvenient or financially uncomfortable.
Of particular concern to the adjudicator is the widespread belief that if a common practice exists within the industry, it can be used to supersede the law, such as the practice that it is possible for an employer to alter the rules and registered status of a fund and act on it, before the rule amendments have been registered.
Murphy said the practice is invariably justified by the argument that the office of the Registrar of Pension Funds at the Financial Services Board is understaffed and rule amendments are subject to inordinate delays, hence the informal amendments may be treated as having full legal effect, before they have been registered by the Registrar. Essentially, this argument means that even though rule amendments have not gone through, the fund can act as if they have been registered, in anticipation of the Registrar eventually making them.
"This exasperating argument has been presented to me by various administrators over the years," Murphy says, "and I welcome the Supreme Court of Appeal's decisive rejection of it in the recent Mostert versus Old Mutual case, as it essentially amounts to an argument that we may obey the law only when it suits us."
In the Mostert versus Old Mutual case, the curator of a pension fund challenged Old Mutual's decision to pay the proceeds of a fund under its administration to Corporate Acceptance Finance (CAF). This happened while an application concerning the fund was with the Registrar. CAF was owned by Laurie and Jan Korsten, who used the money to finance their com-panies, which were later placed in liquidation.
While this rules-centred approach may work in favour of members of funds whose trustees are not vigilant in maintaining their rules, it does not augur well for former fund members who may attempt to stake their claim in a share of surpluses declared after their departure from the fund, Murphy says.
His approach to surplus claim issues is also rules-based, but, for the most part, these rules appear to favour the fund or employer rather than the former member. The majority of recent judgments have pointed towards former members now having little or no claim to surplus amounts, because their claim ends when they leave the fund, especially when their departure is on a voluntary basis.
On the subject of preservation funds and the ongoing dilemma regarding single withdrawals, Murphy said the confusion regarding members' entitlement to withdrawals often arises from a failure to appreciate the status of pension fund rules in relation to practice notes issued by the South African Revenue Service (SARS).
"What funds, employers and SARS fail to recognise is that the rules of the preservation fund regarding withdrawals are determinative of the members' entitlement," he explains. "In other words, if the rules are at variance with the SARS practice note, once again the rules prevail."
Kobus Hanekom, senior manager of consulting services at Sanlam Employee Benefits, said that "as in many other countries, law is coming to prevail over practice in the South African pension industry".
Hanekom said fund administrators and trustees need to be far more wary of making any fiduciary decision without first seeking the correct authorisation and checking it thoroughly against the rules.
How to contact the Pension Funds Adjudicator
Telephone: (021) 674 0209
Fax: (021) 674 0185
Postal address: PO Box 23005, Claremont, 7735
E-mail: [email protected]