The tricky issue of who should benefit from free shares handed out by
Sanlam and Old Mutual to pension funds is the subject of three new rulings
by the Pensions Adjudicator - one in favour of the fund member and two
against.
Ironically, two complaints concerning the allocation of Old Mutual shares
were brought by members of the Old Mutual Staff Retirement Fund.
In one case, A N Whitelock-Jones, a former employee of Old Mutual, argued
that he was entitled to some of the proceeds when the Old Mutual Staff
Retirement Fund received 47 million free shares on Old Mutual`s
demutualisation.
The fund decided to distribute the benefits of the free shares among
various categories of members, former members and the employer. But no
shares were to be distributed to people who had withdrawn from the fund
between the end of 1997 and July 1999, when Old Mutual`s shares were
listed. Whitelock-Jones fell into this category.
The fund`s trustees argued that people who withdrew from the fund during
that time did so in the knowledge that demutualisation shares were on the
way, though they didn`t know what the shares would be worth.
They said it would be hard to trace all former members (there had been 3
800 resignations since December 1997).
Whitelock-Jones said this was not fair: since the fund was a defined
contribution fund he expected all investment returns to be passed on to
members as they had carried the investment risk.
Murphy dismissed his complaint, pointing out that though the trustees of
the fund have a duty to act impartially and not to discriminate unfairly
against different categories of members, they are entitled to treat members
and former members differently, provided that in making distinctions they
``pursue a legitimate purpose by rational means``.
``It is the trustees` discretion that has to be exercised in this regard. It
is not for the judge or the Adjudicator to exercise that discretion. The
Adjudicator or judge may very well disagree with the choices made ... but
unless the board can be seen to have taken into account irrelevant,
improper or irrational factors, the Adjudicator should not interfere,`` he
said.
In another complaint against the Old Mutual Staff Retirement Fund, former
Old Mutual employee A Warner also argued that he was entitled to part of
the benefits from the free shares. He had resigned just about six weeks
before the cut-off date of July 31 1999. Murphy dismissed this application
too, repeating his opinion that the trustees had fully debated the issue of
how to share the proceeds of demutualisation and had come to a legitimate
and rational conclusion in excluding Warner and others.
``The complainant`s assumption that he was entitled to the benefits of
demutualisation simply by virtue of his membership of the fund is mistaken
and a commonly held erroneous view,`` said Murphy.
``Members of a pension fund do not own the assets of the pension fund any
more than the shareholders of a company own the assets of a company. The
assets belong to the pension fund to be managed by the trustees in
accordance with their fiduciary duties.``
But he did find that Warner had not been properly informed about the
consequences of resigning from the fund so short a time before the
distribution of the proceeds of the free shares.
A member of a pension fund negotiating his departure from the fund could be
expected, Murphy said, to expect the fund`s trustees to warn him that there
might be a risk to him in leaving at that time. He concluded that there had
been a breach of fiduciary duty.
Though the rules about excluding people who had resigned were lawful and
reasonable, Warner had lost out financially because he probably would not
have resigned then if he had been properly informed about the consequences
of doing so. Murphy ordered the fund to pay Warner his share of the
demutualisation proceeds.
In a third case, C Orpen and eight others complained that the trustees of
the Sentrachem Group Pension Fund used a flawed basis for sharing out a
R350 million surplus in the fund and failed to distribute to pensioners
Sanlam free shares.
Murphy dismissed the complaint, finding that the trustees had exercised
their powers properly, taking into account the needs of members of the
fund, former members, pensioners and the employer.