The Financial Services Board (FSB) is taking Pepkor and its various retirement funds to court in Cape Town on Monday to reverse its own decision to allow the restructuring of Pepkor's retirement funds, which may effectively give Pepkor access to a R100 million surplus.
Pepkor is comprised of the operating companies Ackermans, Pep Stores and Shoprite/Checkers,
The FSB gave permission to the Pepkor pension fund to unbundle into three free-standing daughter funds in 1994, leaving the bulk of the surplus in the original mother fund.
The original fund now only has 14 pensioner members left, who have been offered a lump-sum settlement equal to ten times their annual pension benefits, and a continuance of their pensions with escalations being provided by a life assurer.
In return, these members have agreed not to make any further claim on the fund when it is liquidated. The fund is currently under liquidation which, if successful, will see Pepkor getting all the money.
The FSB wants the court not only to reverse its earlier decision to permit the liquidation, but also to instruct the liquidator to compile a surplus distribution plan. This plan should see stakeholders, including existing and former fund members, as well as the employer being entitled to a portion of the surplus.
The FSB says the plan should be modelled on the draft legislation on the distribution of surpluses currently before Parliament.
The FSB has changed its mind because, it claims, Pepkor did not correctly disclose information regarding the funding levels of the mother fund at the time the application to restructure was made. Alternatively, the FSB did not properly understand the transfers.
Pepkor and the fund trustees followed the law as it existed at the time, Lourens van Staden, the lawyer representing the funds, says.
They took into account the benchmark Lintas case, which said that negotiation among all interested parties was the key to distribution of a surplus.
There was, and still is, nothing to prevent the creation of daughter funds before negotiations take place. In this case, negotiations took place with all the existing members, who were pensioners, and whose pensions were brought up to parity with the inflation rate.
Also at issue is R8.8 million, which was paid by the mother fund to the Pepkor retirement fund to bolster the pensionable benefits of various long-
serving members and employees, who had provided services to the fund and the Pepkor group.
The R8.8 million was transferred to the Pepkor retirement fund without the approval of the FSB. At the time, actuarial consultants Alexander Forbes and Sanlam said that FSB approval had not been required as the money was going from one defined benefit fund to another, with all of the liabilities of the new funds covered in terms of regulations.
The FSB now says that its approval was required, and that the money must be paid back to the mother fund.
In 1996, the trustees of the fund placed it into liquidation and applied to the FSB to have a particular rule of the fund amended - this would have allowed the mother fund to pay the bulk of the surplus to Pepkor. All of the trustees of the fund at the time were nominated by the employer.
Since then, consumer protection has been enhanced. In 1998, an important amendment to the Pension Funds Act was brought in, which says that at least half the trustees of a fund must be appointed by employees, so that employees' interests will be taken care of.
The precedent for the repatriation of surpluses where a fund is liquidated, had already been set back a few years when the Financial Services Board Appeal Board overturned a decision by the Pension Funds Registrar not to allow the the Paarl Widows' and Orphans' Fund to repatriate a money to the Paarl Municipality.
The Pepkor Pension Fund was unbundled into defined benefit and defined contribution funds for each of the main operating companies in the Pepkor Group, Elmarie de la Rey, senior manager in the legal department at the FSB, says.
The proposed liquidation account showed that, in 1996, the fund had 17 members, all of whom were drawing pensions. The fund had actuarial liabilities of about R2.43 million, but had assets valued at R52.3 million.
The proposal was to pay the surplus assets of R49.9 million to Pepkor. On reviewing the files, the FSB came to the conclusion that the fund's actuary had mis-stated the funding level of the fund after the initial unbundling, saying that it was at 137 percent - when it was actually closer to 606 percent.
The Pension Funds Registrar is of the view that trustees were unable to explain satisfactorily what the fund planned to do with the surplus after the unbundling.
The trustees also did not fully disclose the surplus to the fund members, who were transferred out into the other funds formed when the
Pepkor fund unbundled.
The result was that in 1996 the Pension Funds Registrar refused to register the rule amendment as requested by the Pepkor pension fund, or to approve the proposed liquidation account. Following the refusal, the fund approached the Appeal Board of the FSB for a decision in 1997, but subsequently withdrew its appeal.
The FSB claims that Pepkor entered into illegal agreements with all the pensioners by asking them to forfeit any further claims against the surplus should the fund be liquidated.
The Pension Funds Registrar believes that these agreements amount to a cession of an interest in a pension fund, which is prohibited under the Pension Funds Act.
Van Staden says that Pepkor and the several funds deny the allegations made by the FSB, particularly that the agreements with the pensioners are prohibited by law, or that there was any failure to make any required disclosure fully.
The withdrawal of the appeal by Pepkor from the FSB Appeal Board followed on a fruitless period of approximately a year, during which Pepkor tried to have the matter heard before that Board, and which appeal was then pre-empted by the issue of summons in the present case, he says.
The bigger picture so far
- There is currently R80 billion in surplus assets sitting in retirement funds around the country.
- There are various reasons that a surplus can arise in a retirement fund. These include less than a fair share being paid to members who left funds when, for example, they moved to other funds or were retrenched; low pension increases; low returns attributed to fund members; and a conservative approach to funding by employers who paid in more than they should into funds to take care of possible market fluctuations.
- The controversial issue of who is entitled to surplus assets in funds has been raging for many years. Only a few weeks ago, the Parliamentary Portfolio Committee on Finance decided that all stakeholders have the right to share in a surplus. This includes fund members, pensioners and employers. The decision has taken the course of deliberating draft legislation, known as the the Pension Funds Second Amendment Bill, before the committee.
- The draft legislation also spells out exactly how existing surpluses in funds are to be shared out amongst all interested parties, with various checks and balances in place to see that the distribution of the surplus is done in a fair manner.
- The draft bill introduces, for the first time, minimum payouts for people who leave funds.