Parliament this week juggled minimum pension benefits and minimum pension increases against potential contribution increases for defined benefit fund members and penalties for employers in resolving the scrap over the R80 billion pension fund surplus.
If you are a member of a defined benefit fund, your pension benefits may be reduced if minimum benefits, currently being considered by Parliament, are introduced.
But people who receive and have received unfair withdrawal benefits on leaving a fund could be in for a windfall, while others can expect minimum pension benefits on retirement.
Parliament's finance portfolio committee this week sifted through submissions from various groups on proposed controversial legislation - the Pension Funds Second Amendment Bill - that will set a formula for dividing the R80 billion in surpluses that exist in many defined benefit funds.
The current draft of the Bill also introduces, for the first time, minimum benefits for members of retirement funds.
Three types of minimum benefits are being proposed: Minimum pension increases; minimum withdrawal benefits; and minimum individual reserves. But the proposals could mean a reduction in overall benefits if you belong to a defined benefit pension fund (where your pension is guaranteed). The reason is that money in the fund will have to be used to supplement the minimum benefits.
If Parliament goes ahead with the proposals, any fund surplus or previous withdrawals by an employer against a surplus will be used to pay for the improved benefits.
Minimum pension increases
If you are a pensioner, the Bill proposes that you will be entitled to a minimum pension increase, which is at least linked to inflation, provided the fund can afford it.
If the Bill is accepted in its present form, you will get the lower of:
* The rate of increase supported by the accumulated pensioner reserve, taking account of the Board of Trustees' intention regarding future increases; or
* The consumer price index from the date of your retirement.
Minimum withdrawal benefits
If you resign and leave a fund, the Bill proposes that you can expect a minimum payout equal to your own contributions plus interest that is reasonable in relation to what the fund earned, as well as a share of your employer's contributions plus the same rate of interest.
Minimum individual reserve
If you leave a fund involuntarily (because your fund is closed, you are retrenched or transferred to another fund because your company has been sold, or you convert from a defined benefit to defined contribution fund), the Bill proposes a minimum individual reserve will be paid to you. The minimum individual reserve will be calculated according to a standard calculation and must satisfy your reasonable expectations.
* Defined benefit fund:
The Bill states that you will be entitled to the fair value equivalent of the present value of your accrued deferred pension.
The calculation will take into account your years of service and final salary, together with the type of pension that would have applied after retirement (for instance, where there is a pension payable to a surviving spouse after the death of a pensioner), and will include reasonable increases before retirement. The actual calculation of your benefit will be based on assumptions which will be prescribed and set by a special committee for all these funds.
The minimum value in a defined benefit fund will therefore depend on the benefit provided by the fund, the assumptions specified by the technical committee and the prevailing market conditions.
* Defined contribution fund
You will be entitled your individual account value (what you and your employer have paid into the fund by way of contributions plus interest earned) as well as a proportionate share of any investment reserve set up by the fund's board to smooth interest rates allocated to members' accounts.
The board will add to your benefit a proportionate share of any contingency reserves that the fund may have, but exclude any share of the surplus set aside for your employer.
When minimum benefits will be paid
Former members of retirement funds - going back 20 years - and existing pensioners can expect to have their withdrawal benefits and pensions to be topped up to the minimums within four years of the legislation coming into effect.
The exact timing will depend on when the fund that you belonged to, or to which you currently belong, does its next statutory actuarial valuation. Funds must have statutory valuations every three years, but the Bill allows a fund a further year in which to implement the minimum benefits.
If, with its current contribution rates, a fund cannot afford to bring the benefits of former members and current pensioners to the required level, employers and employees will have to renegotiate benefit levels within four years of the legislation coming into effect.
Should the fund close down before this date, then the minimum benefits will apply on liquidation.
Equal benefits for all
Several lobby and interest groups have called on the committee for the same benefits to be paid to members who leave funds, what-ever the reason for their departure, and not to differentiate between members who are retrenched and those who resign. These groups included the Congress of South African Trade Unions, the Institute for Retirement Funds, the Pension Funds Adjudicator and the Actuarial Society of South Africa.
Jeremy Andrew, the chief actuary at the Financial Services Board, told the committee that in the case of defined benefit funds, the cost of including such a clause would be significant.
As a rough estimate, it could cost as much as two percent of the payroll in a defined benefit fund. One of two things will happen if employers and fund members cannot afford the additional costs: Either contribution rates will have to be renegotiated by employers and fund members, or there will be a drop in retirement benefits.
Andrew says defined contribution funds would not need to increase contributions as a result of a clause introducing the same minimum individual reserve for members who resign as well as for those who are retrenched.
Barbara Hogan, the chairperson of the Parliamentary finance portfolio committee, says the committee in general endorses the principle that there should be no discrimination in the payment to members and that clauses in the Bill that did discriminate should be removed.
The committee did not take a decision this week on the major issue in the pension surplus debate - and the biggest sticking point between labour and business: Whether or not employers have a right to a surplus.
Important decisions taken by the committee this week include:
* Former members of funds have a right to receive a minimum benefit from their pension funds and to share in any existing surplus; and
* Employers are not allowed to take any of the surplus allocated to them in cash except under the two instances outlined in the draft legislation. These are when the money can be used to avoid significant job losses and when a fund is closed.
The committee hopes to complete its review of the Bill by the middle of September, after which it will go to the National Assembly and the National Council of Provinces.
DEFINITIONS
* Defined benefit funds are funds in which you are promised a certain pension at retirement by your employer. If, at that time, the fund is short, the employer has to pay in to meet the promise to you.
* Defined contribution funds are funds in which your contributions and those of your employer are defined. When you retire, you get the accumulated contributions and whatever investment growth the money earned. It may be more or less than what you would have received from a defined benefit fund, but you are not guaranteed a certain retirement benefit - you take the risk.