Tens of thousands of pension fund members can expect a major windfall following intervention by Finance Minister, Trevor Manuel, to break a deadlock between organised labour and business over who owns the estimated R80 billion held in surplus by many pension funds.
The biggest beneficiaries will be pensioners.
This week draft legislation was published in the Government Gazette which sets down the parameters for the distribution of the surplus.
Manuel took the step after Business South Africa dug in its heels at the negotiating body, the National Economic Development and Labour Council (Nedlac), and would not make any compromise, virtually demanding that any pension fund surplus belonged to employers.
Against this labour made significant compromises over its initial stand that all surplus funds in pension funds belong to members.
The government stands to make a healthy profit from the tax that will be paid on the distribution of the surpluses.
In terms of the new legislation, pension funds will have to meet prescribed minimum benefits, such as keeping pensions level with inflation, before employers can dip into a surplus.
The employer is not automatically entitled to the remaining surplus. Any division of the remaining surplus must be decided by the trustees, with at least 75 percent of them approving a decision.
In terms of the Pension Funds Act, 50 percent of trustees must be elected by members, which will result in hard bargaining over what happens to the remaining surplus amount after the minimum conditions have been met.
And even when agreement is reached employers are restricted in the manner in which they are permitted to withdraw the funds. Neither employers nor fund members will be able to take direct cash payments from a surplus. For employees, any portion of the surplus must be passed on as enhanced benefits - increased pensions for pensioners and an increase in pension savings for contributing members.
The new legislation also prevents employers from creating surpluses by cheating employees who leave their employment. Many funds still only pay out the contributions of the employee with minimal growth. Now employees will be entitled to the full value in their retirement savings.
Many of the details of Manuel's intervention remain fuzzy as regulations accompanying the legislation still have to be published.
It is also not clear whether the legislation will be resubmitted to Nedlac or will now be presented directly to Parliament.
DEPRIVED OF BENEFITS
The delays in reaching agreement on surplus distribution have deprived thousands of pensioners from benefiting from higher pensions - particularly those who have not received pension increases equal to the inflation rate. Standard practice in South Africa is to limit pension increases to 75 percent of inflation.
The legislation will generally force employers to reassess their position on pension fund increases for pensioners because, if a surplus occurs in the future, they will be unable to take advantage of this surplus unless minimum conditions on benefits for members, including pensioners, have been met in previous years.
The minimum withdrawal benefits for a defined benefit member who leaves a fund before retirement will have to be based on a detailed retirement formula. A defined contribution fund member who leaves before retirement will have to receive the value of the investment account (own contributions, employer contributions plus investment growth).
If a fund is in surplus, trustees will have to consider what rights they have to a portion of the surplus.
Employers will only be able to draw on the surplus for the following reasons:
* To take a contribution holiday. In other words, stop making contributions to the fund for active members for a certain period;
* To increase pensions or to meet medical aid commitments of pensioners;
* To pay any expenses met by the employer in the administration of a fund;
* To improve benefits for members;
* On the liquidation of a retirement fund; and
* To avoid retrenchment of a significant portion of the work force.
If an employer has already been drawing on a surplus by taking contribution holidays the value of this will have to be added to the surplus before a decision is made on the division of the surplus. If a fund is in a negative situation, the employer will have to make up the shortfall.
It is not clear from the legislation who will qualify for a share of existing surpluses as these details are contained in the yet-to-be published regulations. This was one of the major sticking points between labour and business, as labour wanted all former members, including those who had withdrawn or transferred to another fund, to be included, while business opposed retrospective claims.
The legislation merely says the board of trustees, must submit to the Financial Services Board a plan to divide the surplus in terms of conditions to be set by the Registrar of Pension Funds. This must be done within three months of a valuation of a fund and not later than 15 months after a date set to divide the surplus.