Surpluses have accumulated in many pension funds around the country and
the issue of who is entitled to this money - you or your employer - is a
thorny one. The Tek Corporation Provident Fund and 10 others Supreme
Court judgment handed down on September 3 is widely regarded as the test
case on the matter. Here is the full judgment.
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
Case No: 490/97
In the matter between TEK CORPORATION PROVIDENT FUND AND 10 OTHERS Appellants and ROY SPENCER LORENTZRespondent
CORAM: VAN HEERDEN DCJ, SMALBERGER, GROSSKOPF, HOWIE et MARAIS JJA
DATE HEARD: 6 May 1999
DATE DELIVERED: 3 September 1999
Pension scheme - surplus in fund - entitlement thereto - competing claims by employer and employees - "contribution holiday" - when permissible - effect of registrar`s approval in terms of sec 14 (1) of Pension Funds Act 24 of 1956 considered.
JUDGMENT
MARAIS JA:
Simple sounding catch-phrases designed to capture elusive concepts in a few easily remembered words are useful in daily discourse but they have their dangers. They may mask the complexity of the concepts or provide a springboard for leaps into the drawing of inaccurate or fallacious analogies. "Contribution holiday" and "pension fund surplus" are such catch-phrases and it is with them that this appeal is concerned. They owe their genesis to the phenomenon of surpluses (both notional and real or actual) arising in pension funds. What may legitimately be done with such surpluses is an intensively debated topic in the pension industry.
Much as the pension industry may wish to have this court decide the many issues which can arise in that connection, the court is not at large to do so and must confine itself to the specific problems which arise in this case. The answers to those problems depend of course upon the particular facts and circumstances of the case. While some of this court`s conclusions may be of general application, others will not.
There is no need to provide a detailed account of the history of the matter and the rules of the relevant funds. That was done by Navsa J in the court a quo. His judgment is reported in 1998(1) SA 192 (W). When it is necessary in order to understand the import of what is said in the present judgment, appropriate reference will be made to the relevant rules and circumstances. I shall continue to use the abbreviations of the names of the companies involved which were used in the judgment of the court a quo. I shall also dispense with the use of unessential capital letters.
In the hope that jettisoning unnecessary detail will bring the problems into sharper focus, I abbreviate the history of the funds. The Tek Corporation Pension Fund (1991) was established on 1 January 1991. It is a defined benefit fund - one which undertakes to provide its members with the benefits defined in its rules: primarily (there are also other benefits) a pension expressed as a percentage of final salary and based on years of service. The rules of the fund required the employee-members to make a recurring fixed contribution. (Rule 4.1.1.) The amount, if any, to be paid by the employer had to be agreed with the fund`s trustees from time to time but it could not be less than an amount calculated by the fund`s actuary to be necessary to ensure the financial soundness of the fund. (Rule 4.2.1.) A stage was reached when a substantial surplus existed in the fund. A surplus in such a fund is the amount by which the actuary`s assessment of the value of the fund`s assets exceeds the actuary`s assessment of its liabilities. The existence of the surplus relieved the employer of any liability to contribute to the fund for as long as the surplus continued to exist. That was the inexorable effect of Rule 4.2.1. The consequence was that as from 1 December 1991 the employer made no further contribution to the fund. This is what is referred to in the pension industry as taking a "contribution holiday". In the context of the rules of this pension fund the usage of the expression may be somewhat misleading. The word "holiday" implies a temporary respite from duties with which one is ordinarily burdened. It postulates that there is an existing and enduring obligation of some kind. In this pension fund the effect of rule 4.2.1 is that, depending on the circumstances, the liability of the employer to contribute may never arise and, if it does, it may be of limited duration. Be that as it may, the expression is convenient and I shall continue to employ it.
In October 1992 the establishment of a defined contribution provident fund (as opposed to a defined benefit pension fund) was mooted. Unlike the position in a defined benefit fund, it is inherent in a defined contribution fund that no "surplus" can arise. That is because there are no predetermined benefits payable. Instead, the members are entitled to whatever the fruits (be they sweet or bitter) of the investment of the defined contributions may prove to be. It followed that if such a fund was established there could be no prospect of the employer being relieved of its obligation to contribute to the provident fund because of the existence of a surplus in that fund.
The Tek Corporation Provident Fund was established on 1 June 1993. The pension fund continued to exist but over a period of time the overwhelming majority of the pension fund`s members elected to transfer to the provident fund. There is some dispute as to whether all of them did so but that is not of great moment . What is quite plain is that there would continue to be persons, especially pensioners, for whom the pension fund would have to provide but its potential liability would be greatly diminished. The provident fund, on the other hand, would have to provide for all those employees who elected to transfer to it. The two funds existed side by side thereafter.
Those employees who transferred from the pension to the provident fund were required to take with them into the provident fund the actuarially assessed value of their interest in the pension fund and they did so. Despite that there remained a substantial surplus in the pension fund. It was thought that it would be permissible in law to transfer the surplus in the pension fund to the provident fund for use in one, or other, or both of two ways: first, to enable the employer to take in the provident fund the "contribution holiday" which it had enjoyed in the pension fund; secondly, to fund a stabilization account to be used to meet future cost increases in the provision of death and disability benefits.
As a fact the surplus was not transferred to the provident fund. However, on the strength of advice it had been given, the employer commenced taking a "contribution holiday" in the provident fund as from 1 November 1993. For reasons upon which it is unnecessary to dwell, it ultimately became common cause that the employer had not been entitled to do so.
Consequent upon the sale of the Defy Division of the employer (Tek) to Malbak, with effect from 1 April 1994, approximately two-thirds of the members of the provident fund (who had not long before transferred to that fund from the pension fund) ceased to be employed by the Tek group and ceased to be members of the Tek provident fund. Instead they became members of the Malbak provident fund taking with them into that fund "the full amount of the current credit held in respect of each such member in terms of rule 5.1(a) and (b) of provident fund". (Cl 10.6 of the relevant Sale Agreement.)
It was at this stage that the erstwhile Defy/Tek (now Malbak) employees began to question the legitimacy of the use to which Tek intended putting the surplus which had arisen in the Tek pension fund and to advance the contention that once the surplus in the pension fund had been transferred to the Tek provident fund at least some of it should "follow" them into the Malbak provident fund. The issue was debated in an exchange of correspondence and the employees` contention was rejected.
The position taken by the chairman of the board of trustees of both the Tek pension fund and the Tek provident fund was quite unequivocal. In a letter dated 3 October 1994 he said (a) that it had been their "consistent view that any surplus existing in the pension or provident fund lies within the control of the employer company", (b) that there "is nothing in law (in the Pension Funds Act or elsewhere) which requires that amounts in excess of actuarial reserves be transferred" in the prevailing circumstances, (c) that "whatever may have been decided regarding the application of surplus in the pension fund, there is nothing in the rules of the provident fund which requires the trustees to pay amounts in excess of actuarial reserves", (d) that in comparable circumstances "it has not been the practice of the Tek Corporation Provident Fund to transfer amounts in excess of actuarial reserves", and (e) that "in the absence of any formal agreement which is binding on the provident fund, the company cannot support the transfer of amounts in excess of actuarial reserves in respect of employees of the Defy Appliances Division". In a letter dated 18 October 1994 he declined to give an "undertaking that should the surplus be used at any time in the future for the enhancement of Tek employee benefits Defy ex-members of the fund will benefit to a proportionate extent", adding that "it is our view that the surplus falls under the control of the company and any such undertaking could potentially inhibit our access to it".
These proceedings were then instituted on 6 September 1995 by Mr Lorentz as a former member of both the pension and the provident fund and a present member of the Malbak provident fund. Because it was thought that the surplus had already been transferred from the Tek pension fund to the provident fund the declaratory orders claimed were attuned to that situation. It became clear when answering affidavits were filed and after oral evidence was given pursuant to an appropriate order that that be done, that the surplus had not been transferred. Indeed, the trustees and the employer had by then altered their stance substantially. On 15 September 1995 it was decided that the pension fund which had already undergone one change of name should be renamed yet again due to group restructuring as the Plessey Corporation Pension Fund. It was now to be the fund which all new employees in the Plessey group would be obliged to join. The surplus in that pension fund was to remain where it was to enable the employer to continue enjoying the contribution holiday in that fund. The Tek provident fund was to continue to exist. The amount which the employer should have contributed to the provident fund but failed to contribute in the belief that it could use the surplus in the pension fund to provide a contribution holiday in the provident fund, was largely made good.
This change of stance prompted a revision of the declaratory orders sought and Navsa J ultimately granted declaratory orders which I paraphrase thus:
(1)An order declaring that the trustees of the pension fund are not entitled to use the surplus in the pension fund to enable the employer to avoid paying contributions to the provident fund " or otherwise for the benefit of" the employer.
(2)An order that the trustees of the pension fund determine what portion of the surplus is to be transferred to the provident fund pursuant to the transfer of members of the pension fund to the provident fund;
(3)An order that, in so determining, the trustees must have regard to
(a)the extent of the surplus as it existed during the period 31 August 1993 to 1 November 1994, and
(b)the returns on the investment of that surplus achieved by the pension fund from 1 November 1994 to the date of their determination;
(4)An order that within two months of that determination the trustees effect payment of the amount so determined to the provident fund;
(5)An order that within one month of receipt of payment from the pension fund the trustees of the provident fund must "determine the manner in which the said funds are to be used for the purpose of increasing the benefits payable by the provident fund" to those who became members on 31 August 1993 and other beneficiaries whose benefits are derivative - widows, children, etc;
(6)An order that the pension fund and the provident fund pay the costs of the application jointly and severally, including the costs of two counsel. The applicant (Mr Lorentz) was denied the costs attendant upon the citation of individual trustees as parties to the application.
Leave to appeal to this court was granted by the court a quo. In essence what the appellants would have us say, is this:
(1)For as long as a surplus in the pension fund exists, the employer is under no obligation to contribute to the pension fund and that is so irrespective of the source of the surplus. (Navsa J had held that this is so only to the extent that the surplus is attributable to overfunding by the employer);
(2)While such a situation exists, members and erstwhile members of the pension fund have no right to demand that the surplus or any part of it be used to increase the benefits payable either upon retirement or upon transfer to another fund;
(3)On the facts, the trustees and the employer did transfer "a sufficient and proper" portion of the surplus to the provident fund in respect of each of the transferring members;
(4)The rules of the pension fund do not empower the trustees to do what the court a quo ordered them to do;
(5)The court a quo should have dismissed the application with an appropriate order as to costs.
A number of propositions are either axiomatic or not in dispute. The pension fund, the powers and duties of its trustees, and the rights and obligations of its members and the employer are governed by the rules of the fund, relevant legislation and the common law. The fund is a legal persona and owns its assets in the fullest sense of the word "owns". (Sec 5(1)(a) and (b) of the Pension Funds Act 24 of 1956.) The object of the fund is "to provide retirement and other benefits for employees and former employees of the employers in the event of their death". (Rule 1.3.) The trustees of the fund owe a fiduciary duty to the fund and to its members and other beneficiaries. (Sec 2(a) and (b) of the Financial Institutions (Investment of Funds) Act 39 of 1984 and Rule 18.1.4.) The employer is not similarly burdened but owes at least a duty of good faith to the fund and its members and beneficiaries. (Cf Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd 2 All ER 597 (Ch) at 604g - 606j.) The rules of the fund spell out the circumstances in which the employer must contribute to the fund and how the quantum of the contribution is to be determined. (Rules 4.2.1 and 19.5.) The existence of a surplus in this case cannot be ascribed solely to past overfunding by the employer. The sources of that surplus are diverse. They have not been identified and isolated nor have their respective contributions to the surplus been quantified. However, on any view of the matter, the surplus must be attributable at least in part to contributions from sources other than the employer.
I move to controversial terrain. Some preliminary observations seem necessary. Defined benefit pension funds do not exist to generate surpluses but they may arise when reality and actuarial expectation do not coincide. In assessing the financial health of a pension fund an actuary is gazing into the proverbial crystal ball to see what the future will hold. The use of the metaphor is not intended to demean the exercise; it is highly sophisticated and requires considerable training and skill,yet it remains, when all is said and done, an exercise in prophecy. Some of the data available may be relatively immutable and provide a secure foundation for predictions. Much of it is not. There are a host of factors about which assumptions have to be made because they lie in the future. Examples are rates of return upon different categories of investment, the rate of inflation, governmental fiscal policy, increases in salary, mortality rates for active and retired members, the rate of employee turnover, the incidence of disability, and the extent to which early retirement options may be exercised. The list is not exhaustive but it suffices to show the very considerable role that assumption plays in the assessment of the financial soundness of a pension fund and explains why even the most meticulously assessed valuation may be confounded by subsequent experience. While it is obviously so that the funds necessary to ensure that the defined benefits which the pension fund must provide are paid and will continue to be paid, are sacrosanct and may not be used for the benefit of the employer, that is not necessarily so of funds which are plainly surplus to that requirement. I say "plainly" advisedly because the existence of a surplus at any particular point in the history of a fund may be so potentially transitory that it would be imprudent to diminish the fund by eliminating the surplus.
It has often been argued that in a situation like the present (sometimes described as "balance of cost" pension schemes) where the employer is the ultimate guarantor of the financial soundness of the fund, any surplus should enure to its benefit as the members of the fund carry no risk in that regard. The contention seems to me to be unduly simplistic but whatever its merits (if any) may be in equity, it begs the question whether any such entitlement exists in law. As Warner J observed in Mettoy Pension Trustees Ltd v Evans 2 All ER 513 (Ch) at 551b "One cannot in my opinion, in construing the rules of a `balance of cost` pension scheme relating to surplus, start from an assumption that any surplus belongs morally to the employer." Once a surplus arises it is ipso facto an integral component of the fund. Unless the employer can point to a relevant rule of the fund or statutory enactment or principle of the common law which confers such entitlement or empowers the trustees to use the surplus for its benefit, the employer has no right in law to the surplus. It goes without saying that whatever negotiations may be taking place behind the scenes to cater for such situations by way of legislation, as has been done in some other countries, this court can judge the matter only in accordance with existing law. In Schmidt v Air Products Canada Ltd 2 SCR 611 Cory J, writing for the majority, said: "Regrettably a comprehensive approach to the issues arising from pension surplus has yet to be enacted in any part of this country. The courts have on a number of occasions been required to determine the allocation of pension surplus. Yet the courts are limited in their approach by the necessity of applying the sometimes inflexible principles of contract and trust law. The question of entitlement to surplus raises issues involving both social policy and taxation policy. The broad policy issues which are raised by surplus disputes would be better resolved by legislation than by a case-by-case consideration or individual plans. Yet that is what now must be undertaken." (At 652d - e) I echo those sentiments.
It was not suggested that there is any principle of the common law which would enable the employer to lay claim to a surplus arising in the way in which this one did, either during the life of the fund or upon its liquidation. Nor am I aware of any such principle. There is no relevant statutory enactment which confers such a claim. What is left are the rules of the pension fund. To those I now turn.
[19 The first point worthy of note is that there is nothing in the rules which explicitly entitles the employer to lay claim to a surplus either during the life of the fund or upon its liquidation. Yet it is plain that the possibility of a surplus arising was contemplated. Rule 19.5.1 requires an actuarial valuation of the fund to be made at intervals not exceeding three years. Rule 19.5.2 reads:
"If the valuation discloses that there is a substantial actuarial surplus or that there is a deficit that requires to be funded, the manner of dealing with the surplus or funding the deficit shall be considered by the trustees and recommendations made to the principal employer for a decision. The principal employer`s decision shall be made within the limitations imposed by the Act and the Registrar`s practice and shall be final. Where necessary, the trustees shall alter the rules to give effect to such decision."
This provision appears to be the only one in the rules which deals expressly with a possible surplus. A number of features strike one. The rule is to operate only where a substantial surplus exists. The same rule governs a deficit but the deficit need not be substantial. It seems reasonably clear that the rule contemplates valuations made during the continuing existence of the fund and provides for what is to happen where substantial surpluses or deficits arise while the fund continues to exist. It does not appear to be aimed at dealing with surpluses or deficits arising upon liquidation. There are other rules dealing pertinently with the realization of the assets of the fund and the apportionment of the proceeds after payment of all liquidation expenses. (Rules 16.1 and 16.2.) It is significant that any balance then remaining must go to members, pensioners and other beneficiaries on an equitable basis recommended by the fund`s actuary and approved by the liquidator. No part of it goes to the employer. Indeed, the employer has no say at all in the process.
During the continuance of the fund the employer is certainly accorded a good deal of say by rule 19.5.2 but there are limits to it. The limitations imposed seem to me to be designed to ensure that the objects of the fund are realized. Why else would the trustees have to play a role by making appropriate recommendations and the power of the employer be made subject to the limitations of the Pension Funds Act and the Registrar`s practice? It is difficult to reconcile those provisions with any suggestion that the employer is free to take a decision which is solely in its own interests but not that of the fund and its members. If it had been intended to confer upon the employer an unfettered power to do what it liked with an identified surplus, I would have expected the framers of the rules to say so clearly and unambiguously. In so far as it was contended in the pre-litigation correspondence that any surplus "lies within the control of the employer company" in the sense that the employer has uninhibited access to it, I consider the contention to be wrong.
That does not mean that the employer can derive no benefit whatsoever from the existence of a surplus. A recommendation by trustees that a surplus be retained to counter a perceived risk of future adverse volatility in the investment environment, if accepted by the employer, will benefit the employer in as much as it will not be liable to make contributions to the fund for so long as the surplus exists. But that would be a fortuitous and incidental advantage flowing from a recommendation made by the trustees in the interests of the fund and its members. In so recommending the trustees would not be acting in breach of their fiduciary duties nor would they be acting ultra vires. Nor would the employer be acting in bad faith towards its employees in accepting the recommendation.
While on this topic it would be as well to correct a misconception which led Navsa J to hold that it was not permissible for the employer to avoid making contributions by reliance upon the existence of a surplus save to the extent that the surplus was attributable to past overcontribution from the employer. With respect to the learned judge, I do not think that is correct. It overlooks the distinction between a defined benefit scheme in which the employer`s contribution is fixed and must be paid irrespective of the state of the fund, and a scheme like the present in which it is not and liability to contribute arises only when it is necessary in the estimation of the fund`s actuary to ensure the financial soundness of the fund. In the former class of case there is an existing and continuing liability to contribute and using the existence of a surplus to avoid the making of contributions could not be justified. In the latter class of case, of which the present is an example, there is no predetermined and continuing liability to contribute. The liability arises only when need arises. Present a surplus, absent a need and absent a liability. The employer is therefore not being relieved of a liability and is receiving no benefit to the detriment of the fund or its members. It is irrelevant how the surplus arose and whether or not it is attributable to overcontribution in the past by the employer. There is simply no liability to contribute in such circumstances.
It is another matter whether the employer is entitled to insist upon the trustees preserving a surplus even if only to allow it to take or prolong a contribution holiday. Rule 11.1 empowers the trustees "to review the level of pensions being paid from the fund and may direct that pensions be increased". It provides that the "amount of the increase shall be determined by the trustees in consultation with the ................. employer and the actuary". It is far from clear to me that the imposition of the obligation to consult with the employer as to the amount of any increase is tantamount to conferring upon the employer a power of veto which would enable it to prevent the trustees from directing that any increase at all be given. It may be, I express no opinion on it, that the employer may legitimately require the trustees not to exhaust a surplus to such an extent that an easily foreseeable deficit will arise in future which will render the employer liable to contribute to the fund. But that is a far cry from accepting that the employer can dictate to the trustees that a substantial surplus be kept intact purely to insure it against any potential future liability to contribute to the fund. Insistence on that being done in the face of a financially rational and well motivated recommendation from the trustees that, for example, pensions being paid be increased, in circumstances in which that would not have the effect of triggering the employer`s liability to contribute, would not be consistent with the good faith which the employer is required to show towards its employees.
Rule 16.4 also has some bearing upon the question of whether or not the employer is entitled to the benefit of a surplus. That rule caters for the case where the employer ceases to be liable to contribute to the fund as a result of a decision to establish, or participate in, another pension fund. No liquidation of the former fund takes place. Instead, the trustees "shall cause the assets .......... to be transferred to the other ........... fund". Again, there is no provision for a refund to the employer if a surplus exists in the former fund.
The focus thus far has been upon the question of whether, and if so, to what extent, the employer is entitled to benefit from the surplus in the pension fund. I turn to the question of what the employees` rights in respect of the surplus are. It was common cause that rule 11.1 authorises the trustees to increase only "pensions being paid from the fund" and that it does not authorise any generally applicable increase in pension benefits payable to active members upon their retirement in terms of rule 5.1. Indeed, one looks in vain for any provision in the rules of the fund which would authorise an increase of the latter kind. Counsel were agreed that rule 11.2 appears to authorise only ad hoc increases in benefits payable to particular individuals. An appropriate amendment of the rules would be necessary and that cannot be achieved without the consent of the employer. (Rule 21.1.)
It is the dearth of appropriate provisions in the rules to govern the situation which arose in this case which, in my view, places an insuperable obstacle in the way of upholding the orders numbered (2), (3), (4) and (5) in paragraph . That lacuna seems to me to destroy the contention that the trustees are bound to transfer from the pension fund an appropriate portion of the surplus to the provident fund. It disables one from accommodating within any of the existing rules of the pension fund that which the court a quo was persuaded to order to be done in that connection.
An unavoidable consequence of the absence of appropriate provisions was that counsel for respondent were constrained to rest their argument upon what they described as analogous provisions in the rules which, so it was said, gave "an indication" as to what should be done in this admittedly different situation. In my opinion there are serious conceptual difficulties in the way of such an approach. What the trustees may do with the fund`s assets is set forth in the rules. If what they propose to do (or have been ordered to do) is not within the powers conferred upon them by the rules, they may not do it. They have no inherent and unlimited power as trustees to deal with a surplus as they see fit, notwithstanding their fiduciary duty to act in the best interests of the me