Did you leave your last employer with a bitter taste in your mouth because you received less than a fair share of your retirement fund benefits? If it happened in the last 20 years, you may be in for a windfall under new legislation.
Retirement fund members acquired rights they never had before when the Pension Funds Second Amendment Act - arguably the most significant piece of retirement fund legislation to date - became law on December 7 last year.
The enactment of this legislation brought an end to the squabble between organised labour, business and the government as to who is entitled to share in the surpluses that have built up in retirement funds over the years.
Importantly, the legislation recognises that all stakeholders have a right to share in any surplus - and this includes current fund members, former members and pensioners, deferred pensioners and employers.
It is estimated that South African retirement funds have a surplus of R80 billion - although many believe the figure may be considerably higher.
Jeremy Andrew, chief actuary at the Financial Services Board (FSB) and a member of the government team that drafted the legislation, says the new law:
- Attempts to rectify past inequities by stipulating that former fund members and pensioners get first bite of any surplus in a retirement fund. Only after this can the remaining surplus be shared out among all stakeholders; and
- Sets minimum benefits for pension fund members for the first time in South Africa.
How a surplus arises
There are three major reasons why surpluses accumulated in retirement funds:
- When members transferred to other funds, they were paid out less than fair value of their investments in the pension funds they were leaving. Fair value would have been their contributions, plus their employers' contributions, plus a reasonable rate of interest based on the funds' returns on investment. This caused what organised labour calls an extraordinary surplus;
- The actuarial assumptions on which funds based their pension payout calculations were conservative relative to the performance of the funds' investments. For instance, anticipating poor market performance, a fund might have pegged pension increases and interest to members who resigned from the fund relatively low. Then market performance of the fund's assets might have exceeded expectations; and
- Employers who offered their employees defined benefit funds might have paid in more than they should have done to protect themselves in case markets did not perform as expected. With defined benefit funds, employers make a promise to pay you a certain pension and they have to foot the bill if the fund's investments do not perform as expected.
Minimum benefits
The new legislation also provides for minimum benefits. This has two implications for fund members:
- If you were a member of a retirement fund in the past 20 years (the cut-off date is January 1, 1980) and you got a less-than-fair withdrawal benefit, your benefit should now be topped up to the minimum level. The minimum benefits apply to all early withdrawals from a fund, whatever the reason - retrenchment, dismissal or resignation - and whether or not you transferred your money to another fund, possibly because your company was sold.
- Pensioners who did not get inflation-linked pension increases over the past 20 years are first in line to get their benefits topped up to bring their pensions in line with inflation to the present day. Any fund that cannot afford to give pensioners inflation-related top-ups will have to pay as much as it can afford from its investment returns.
Only after the benefits of former members and pensioners have been topped up, may any remaining surplus be shared out among all stakeholders.
How much can you expect?
The critical questions are: Does the fund still exist? And: Does it have a surplus?
If the answer is yes to both those questions, the amount that you can expect to receive will depend on whether you belonged to a defined benefit or a defined contribution fund.
- Defined contribution funds
In terms of the new minimum benefits set out under the Pension Funds Second Amendment Act, when you, as a member of a defined contribution fund, leave the fund - for whatever reason - you should receive the full value of your contributions, plus the contributions of your employer, as well as a reasonable amount of interest on your and your employer's contributions.
Andrew says a reasonable amount of interest would be the interest that the fund's trustees declared each year. Based on research over the last 20 years, this should be four or five percent more than the inflation rate at the time you were a member of the fund.
The fund is allowed to deduct a proportional amount for expenses and tax.
- Defined benefit funds
It was these old style pension funds that typically underpaid members who left the funds. In many instances, members left with their own contributions and a minimum rate of interest - say three percent.
It was also common in years gone by for members to receive only a share of their employers' contributions, unless they were employed at the same company for a very long time.
So, for instance, if you left the fund within the first five years of joining, you received only your own contributions. If you were a member of the fund for between five and 10 years, you received your contributions plus 10 percent of your company's contributions for each year of service in excess of five years. Only if you had been in service for, say, 15 years, did you receive both your contributions and the company's.
Calculating what you are entitled to if you belonged to a defined benefit fund is complicated. The minimum withdrawal amount that has been legislated for defined benefit funds is the fair value equivalent of your accrued deferred pension. This is the amount of money that would have been sufficient, if invested under prevailing market conditions until your retirement, to buy you a pension based on the amount of time you were a member of the fund.
In other words, the actual amount you are entitled to will be based on your years of service, your salary at the date you left the fund, and the type of pension you would have received after retirement (depending, for instance, on your marital status). It will also allow for reasonable increases in such a pension had you remained a member of the fund until retirement, for reasonable investment returns over the same period, and for the conditions in the stock market when you left the fund.
So, it comes down to a process in which the benefit provided by the fund and prevailing market conditions at the time you left the fund are put in the mixer with a set of actuarial assumptions. And while the legislation sets out broad principles, those assumptions have still to be worked out and regulated.
In terms of the legislation, a technical committee has been set up under the auspices of the FSB and it has already started work.
Receiving your share
If you are in line for a share of the surplus from one or more of your past retirement funds, you can expect to receive the benefit in the same way you received the benefits when you left the fund.
So, if, after resigning from a company, you received a cash payout, any money due to you now will also be paid out in cash.
If, however, you chose to transfer your pension money to the fund of your new employer or into a retirement annuity (RA) at a life assurer, then the transfer value that was paid out on your behalf will be topped up within that fund or RA.
Worth the wait
All funds that have a surplus now are, by law, required to come up with a surplus distribution scheme after the next statutory valuation of the fund. From the date of the valuation, funds have an additional 18 months in which to draw up a scheme.
So, when exactly you may receive your share of a fund's surplus will depend on when your fund had its last statutory valuation. Assuming your fund had its three-year valuation in January this year, then you might have to wait up to four-and-a-half years before you see a cent.
Bear in mind that, under the new legislation, you do not need the assistance of an intermediary to get your rightful share of a fund. One of the biggest challenges facing funds is tracing former members from as much as 20 years ago.
To help your former fund or funds in tracking you down when it is ready to distribute any surplus, contact the principal officer or officers and provide as much information about your membership (such as your personal details as they were at the time of membership, dates of membership and membership number) as you can.
Right and proper
The new legislation also requires employers who used a surplus improperly to refund the pension fund. Improper use includes improving benefits for certain categories of members, such as executives - unless such improvements were approved by all a fund's members or by trade unions.
The rights of consumers were carefully considered when the legislation was debated in Parliament and strict guidelines have been laid down on how a surplus must be distributed.
Some of the measures include that fund members must be given notice of a surplus distribution scheme and be given 12 weeks in which to object to it; a total of 75 percent of a fund's board have to approve a surplus distribution scheme; and the boards of funds must address all complaints to, and get the approval of, the Registrar of Pension Funds before any of the surplus can be distributed.
The registrar can also refer the scheme to a special tribunal if there are issues that cannot be agreed upon or if the registrar is not convinced that the scheme is reasonable and equitable.
The registrar can be contacted through the Financial Services Board at (012) 428 8000.
Although the legislation addresses only those funds that are currently in surplus, the good news is that minimum benefits will apply to all funds now and in the future, irrespective of whether the funds have a surplus or not. This will ensure that fund members are not short-changed when they leave their funds.
DEFINITIONS
A defined benefit fund
is one that promises you a certain pension at retirement. It takes into account the rate of pension for every year of service, the number of years you have worked and your salary at or near retirement. Actuaries value the fund at least once every three years and advise what the contribution rate should be in order for the fund to pay these benefits. Members' contributions are fixed and your employer bears the risk of any increase in the contribution rate that may be required.
A defined contribution fund
is one in which your contributions, as well as those of your employer, are fixed, usually as a percentage of your salary. When you retire, you get the accumulated contributions, less expenses, plus whatever investment growth the money has earned. It may be more or less than you would have received from a defined benefit fund, but you are not guaranteed a certain retirement benefit. You assume the investment risk because there is no guarantee from your employer.
This article was first published in the 2nd Quarter 2002 edition of Personal Finance magazine See what's in our latest issue