If you transfer your pension fund benefits to a preservation fund, you are entitled to make one withdrawal before you retire, unless your pension fund expressly prohibits this in its rules, according to rulings made by John Murphy, the Pension Fund Adjudicator.
Murphy recently dealt with four complaints in which pension fund members were prevented from withdrawing the benefits they had transferred to preservation funds. In each case he ruled that the funds from which the members had transferred their benefits were not allowed to limit withdrawals from preservation funds, because the rules of the funds the benefits came from did not provide for this.
The first case involved two former employees of First National Bank (FNB) who were members of the FNB Group Pension Fund. Both had resigned and transferred their benefits to a preservation fund administered by TMA Investment Product Services.
Both tried to withdraw their full pension benefits (including the contributions they and the employer made) by means of a single withdrawal from the preservation fund, but their former employer tried to restrict the withdrawal to an amount equal to their employee contribution only. The two believed they were entitled to withdraw all their benefits and lodged a complaint with the Pension Funds Adjudicator.
Normally, you are entitled to make one withdrawal from a preservation fund before the maturity date, which is set by the rules of the fund you are transferring from (and the earliest maturity date is the day you turn 55). This withdrawal can be a part or all of your benefits in the fund. The trustees of the fund you are transferring from can restrict your withdrawals, but as Murphy emphasised in these cases, the rules of the fund must enable its trustees to do so.
After examining the rules of the FNB Group Pension Fund, Murphy found that the rules did not provide the trustees of the fund with such authority. The rules stated that it was obligatory for defined contribution members with more than 10 years' service to preserve their share either in the fund, an approved retirement annuity fund or an approved preservation fund in which the employer agreed to participate.
He said the rules were "silent" on trustees' rights to impose such a restriction and that there was nothing to suggest that such a restriction was implied.
Murphy therefore ruled that the former members of the fund were entitled to a single withdrawal of the full amount of their pension benefits that had been transferred from the FNB Group Pension Fund to the preservation fund administered by TMA.
In the second case, a member of the De Beers Pension Fund complained to Murphy after he had elected to transfer his full actuarial value to the Old Mutual Protektor Preservation Fund. The De Beers Pension Fund imposed a restriction on the transfer, saying no withdrawals could be made until the former member turned 55.
Again, Murphy said the issue was whether the fund had the authority to impose this restriction. He found the rules of the fund did not provide this authority and made an interim ruling to the effect that no restriction should be placed on the fund member.
This was challenged by the De Beers Pension Fund on the grounds that members were allowed to transfer their full benefits, provided they preserved them. And if former members were then able to make withdrawals through the preservation fund, they would not be preserving their funds. The fund also argued that if former members were allowed to make withdrawals through preservation funds, this would be unfair on those who opted for a cash withdrawal from the fund directly, because in terms of the fund's rules they were entitled to less of the actuarial value.
Murphy said that while he agreed with the fund about the meaning of preservation, the fund's rules said nothing explicit about a restriction and left the period for which the benefits had to be preserved "at the instance of the member and the rules of the fund to which he or she subsequently transfers".
He said while the fund's rules - which allowed those using a preservation fund's early withdrawal to get more than those who took the original fund's cash benefit - was an "anomalous consequence", it was not the role of the adjudicator's office to interfere.
Murphy said the rules of the fund were paramount, as long as they were not unconstitutional or unlawful, and had to be adhered to.
He issued a final order, allowing the complainant to transfer his benefits to the preservation fund without restrictions on withdrawals.
In the third case that came before Murphy, seven FNB employees whose services were terminated opted to transfer their benefits in the FNB Pension Fund to a preservation fund. Their benefits included their accumulated contributions plus a portion considered to be the employer's portion, which amounted to five percent of their contributions for each year they had been a member of the fund.
When the benefits were transferred, the FNB Pension Fund placed a restriction on withdrawals from the preservation fund, limiting the members to their contributions only until they turned 55. The seven former employees asked Murphy to make an order directing the fund to remove this restriction.
Murphy once again found that there was no rule either expressly, or by implication, allowing the fund to impose the restrictions.
In the fourth case, Murphy made final an earlier preliminary ruling removing a restriction that the Sanlam Preservation Fund had placed on a member, preventing him from withdrawing the benefits he had transferred to the preservation fund from the FNB Pension Fund before he was 55. Murphy said the preservation fund's rules only allowed it to make such a restriction if the transferring fund's rules allowed a restriction to be imposed - and, in fact, the FNB fund's rules did not allow this.
The preliminary ruling was challenged by Sanlam, which said that although the FNB fund's rules did not provide for this restriction, they also did not prohibit it.
Murphy said he did not accept this. He said what the trustees may do with the fund's assets is set down in the rules. The FNB fund did not have the power, in terms of its rules, to impose the restriction and therefore the preservation fund, in turn, did not have the power to impose the restriction.
Sanlam also tried to argue that there was agreement between all the parties about the restriction. They contended that if Murphy disagreed, then he should find that there was no contract at all, as the preservation fund was mistaken in thinking the FNB fund was authorised to impose a restriction. Because of the mistake, there was no proper consensus and therefore no contract.
Murphy said the question he had to determine was whether or not the preservation fund's mistake was reasonable.
"In my view it was not," he said. The alleged restriction was "sufficiently vague that it is reasonable to suppose that the representative of the preservation fund should have sought further clarification from the FNB fund as to whether this was actually a restriction".
"Even if it had not been vague, reasonableness requires that it be checked whether the restriction was properly imposed in terms of the 'rules of the existing fund', as required by the preservation fund's own rules," Murphy said.
Since the Sanlam preservation fund's error was not reasonable, Murphy upheld the contract.
The preservation fund was ordered to allow the member a withdrawal from the preservation fund.
What all these cases reveal is that your pension fund can only impose a restriction on the transfer of your benefit to another fund if the rules of the fund allow or authorise the trustees to impose the restriction.
Therefore, it is essential for all members leaving a fund to carefully examine the rules of the fund to establish whether any conditions may be imposed on their benefits.
Health warning
* A preservation fund is intended to preserve your retirement savings until the day you retire. You can transfer your pension or provident fund benefits to a preservation fund, where it will be preserved until you reach retirement age (which is set by the fund you transfer from) and can draw a pension.
* You are entitled to make one withdrawal before your retirement age and can withdraw all or part of your benefits. However, this withdrawal is intended as a safety net, allowing you access to your money in a time of crisis. You should use it with caution.
* When you withdraw money from any retirement savings vehicle, you should immediately make plans to repay it.
* Remember that very few employer funds will provide you with sufficient money for a financially comfortable retirement and you will probably always need to make additional retirement savings. Withdrawing from your existing savings will compound your problems. Also remember that only the first R1 800 you withdraw from your preservation fund is tax free. The balance is taxed at your average rate of tax.