The opening of the sluice gates for claims against the estimated R80 billion in retirement fund surpluses is about to happen. The long-awaited retirement fund surplus distribution legislation has been approved by Parliament, and now only awaits the signature of the State President before becoming law.
However, the process of distributing the surplus in funds could take up to three years, according to one of South Africa's top pension lawyers, Rosemary Hunter of legal company Edward, Nathan & Friedland.
The legislation has widespread implications, particularly for employers who have "inappropriately used" a surplus in the past. Hunter predicts that some elements could be challenged in the Constitutional court.
Hunter, speaking at a meeting of the Principal Officers Association in Johannesburg, says that trustees will have to follow a step-by-step process in allocating any part of a surplus to stakeholders, including employers.
The legislation also states that members of funds are entitled to minimum benefits. These are:
- The bringing of pension payments into line with inflation since a member's retirement; or if the fund cannot afford that, to the extent that it can from its investment returns; and
- The payment of top-ups to members who received unfair withdrawal benefits on leaving a fund, dating back to January 1, 1980.
Hunter says in calculating whether you received an unfair benefit as a member of a defined benefit fund, you are entitled to receive the greater of:
- A fair value equivalent of your accrued deferred pension - in other words how much money would be required to fund your pension based on the amount of time you were a member of the fund; or
- The value of your contributions, less expenses, plus investment returns, plus vested employer's contributions, plus the same interest.
For a defined contribution fund you should receive the full value of your individual account within the fund, plus a pro-rata share of any investment reserve account, any member surplus account, and any contingency reserve accounts that the trustees decide to include.
The minimum benefits apply to all early withdrawals, whether they were the result of dismissals, resignations, retrenchments or transfers.
If a fund is liquidated after minimum benefits have become payable, then members have certain rights:
- If a fund is not valuation exempt and there is a short-fall in the amount required to fund minimum benefits, the employer sponsoring the fund must make up the shortfall; and
- If the fund is valuation exempt the minimum reserve values may be proportionally reduced.
In calculating a surplus, any surplus improperly used by an employer must be added to the actuarial surplus. Unless approved by members and/or trade unions beforehand, improper use includes:
- Additional benefits paid to executives and not to ordinary members;
- The excess cost of granting past pensionable service for selected members with insufficient transfer values;
- The cost of "medical aid subsidy" compensation pensions, or increased pensions used by employers as incentives to pensioners to forgo company contributions to a medical scheme;
- Contribution holidays taken by employers, where the surplus was used to cover employer contributions to the retirement fund between the date on which the surplus legislation comes into effect, and the surplus apportionment date.
- Hunter says that funds will have to go through a number of steps before coming to a decision about what to do with a surplus. These include:
- The appointment of a "former member representative" to keep an eye on what happens, and to draw up a report on the distribution scheme;
- The identification of former members who left the scheme since January 1,1980. They will be entitled to adjustment of benefits paid to minimum reserve value (less amounts paid), plus nett investment return since exit - unless there is not sufficient surplus, in which case they will all receive proportionally less.
- The adjustment of pensions; and
- The board of trustees, taking the history into account, must equitably split the remaining surplus between former members, existing members, and the employer.
The trustees will have to decide whether to increase benefits or transfers to members and former members; whether to allocate funds to a member surplus account; whether to meet expenses that could reduce the share of contributions going to retirement funding; and/or to improve benefits for former members.
Only member-elected trustees may vote on the use of assets in member surplus accounts.
The share of the surplus due to an employer, after corrections for any improper use of the surplus, must go into an employer surplus account.
Any balance in an employer surplus account may be used as directed by the employer, with consent from employer-appointed trustees. The money may be used for:
- Contribution holidays;
- Compensation for loss of post-retirement medical aid subsidies;
- Meeting expenses otherwise payable by an employer;
- Making retirement benefits improvements for categories of members chosen by an employer;
- Paying an employer in order to help it avoid retrenchments. This can be done if 75 percent of members agree, after they have had full disclosure of information and reasonable opportunity to consider it; and/or
- Paying the employer on liquidation, unless the employer has already been liquidated.
Before the money can be used:
- Members must be given details of a surplus distribution scheme, and they must be given 12 weeks to object;
- 75 percent of members must approve the distribution scheme;
- The board of trustees must address all complaints and get the approval of the Registrar of Pension Funds before distribution can take place.
The registrar will require fund to refer matter to a special tribunal if:
- The trustees have been unable to achieve 75 percent support;
- There are complaints which have remained unresolved; or
- The registrar is not satisfied that scheme is reasonable and equitable.