Members of defined-benefit pension funds should be aware that the rules of such funds can restrict increases in your pensionable salary (the part of your salary used to determine your pension contributions) because large increases in your salary may result in the fund owing pensions in the future that it cannot afford to pay.
A defined-benefit fund is one that guarantees you a pension at retirement based on your final salary and the number of years you have been a member of the fund.
Your employer has the responsibility to ensure that the pension fund contributions you and it make, and the investment growth on these contributions, are sufficient to ensure that your pension is in line with the formula agreed to when you started work and with your final salary.
Three similar complaints against the defined-benefit Johannesburg Municipal Pension Fund, the fund administrator NMG Consultants & Actuaries, and the Johannesburg municipality were dismissed by the acting Pension Funds Adjudicator, Elmarie de la Rey, this week.
In 2001, the Johannesburg municipality introduced new uniform retirement fund arrangements to establish a single fund for all its employees. In November 2001, the municipality issued a notice that it would stop its participation in the Johannesburg Municipal Pension Fund and its sister fund, the City of Johannesburg Pension Fund. However, there was a dispute between the municipality and the two funds about the municipality’s alleged obligation to fund “certain substantial unfunded benefits in the funds”.
During the negotiations to settle the dispute, the funds’ liabilities increased rapidly as a result of annual salary increases, and the funds’ liabilities outstripped their assets.
In 2003, the Johannesburg Municipal Pension Fund, with the approval of the majority of its members, reached an agreement with the municipality that pensionable salaries would, in future, increase only according to the average level of salary increases for all employees across the board. In other words, salary increases above the average (for example, those that included merit increases) would not be taken into account for the purposes of calculating pension fund contributions.
However, an administrative error resulted in the municipality erroneously calculating and deducting pension contributions based on the higher salaries granted to some employees, which were not in line with the general salary increases.
The pension fund and the municipality then undertook to repay the affected fund members the additional contributions they had made to the fund, with interest.
All three complainants – Pieter Durand, Rianna Rossouw and Hendrina van der Berg – complained that they had not been advised that their pensionable salaries had been restricted. They asked the Pension Funds Adjudicator to determine whether or not the Johannesburg Municipal Pension Fund and the municipality were liable to pay their pension benefits on the basis of the actual contributions deducted from their salaries.
In her ruling, De la Rey found that the fund’s rules gave it the right to limit annual increases in pension contributions if they exceeded inflation.
“This rule is important for a defined-benefit fund such as the Johannesburg Municipal Pension Fund, since increases in pensionable salary can place onerous additional liabilities on the fund,” she says.
De la Rey says the decision by the fund to refund the overpaid contributions was just and equitable.
She found that all three complainants had been informed of the restriction on pensionable salaries in 2003 and again in 2008.
De la Rey dismissed all three complaints.