1. BACKGROUND
1.1. There has been a long history of debate around the issue of
pension fund surpluses. However, concerns were heightened after
decisions in the cases of Tek Corporation Provident Fund vs.
Lorentz and the Paarl Municipal Widows and Orphans Pension Fund vs.
Registrar of Pension Funds. In the first case, the Supreme Court of
Appeal ruled that neither the employer nor members had any rights
in law to surplus assets and recommended that, in the absence of
anything specific in the rules, the stakeholders should negotiate
the distribution of surplus. It also ruled that an employer could
not be prevented from suspending contributions where the rules
allowed it and a surplus existed.
1.2. In the second case the Financial Services Board's
(hereafter referred to as FSB) Appeal Board overruled an earlier
decision by the Registrar of Pension Funds to refuse the
repatriation of surplus assets to the employer on liquidation of
the pension fund. The appeal board ruled that, as the Pension Funds
Act was silent on the question of distribution of surpluses of
liquidated funds, there was nothing to prevent a change in the
rules giving employers access to them.
1.3. There were concerns that this ruling would set a precedent,
which might result in a flood of applications to repatriate
surpluses to the employer. In order to address this concern in the
interim, the FSB produced Circular PF No 105 (Rule changes enabling
the repatriation of surplus assets in pension funds to the
participating employer).
1.4. As the current Act was silent on the issue of repatriation
of funds on liquidation, a draft Pension Fund Amendment Bill was
tabled in 1998 to consider this and other aspects of the
legislation. However, although labour had participated in the
drafting of this Bill, the degree of protest from Cosatu on this
area resulted in the Bill's withdrawal. (The Bill would have
granted employers, members and pensioners a right to share in the
negotiated distribution of surpluses).
1.5. After the withdrawal of the Bill, a series of bilaterals
were held between Cosatu and the FSB. Certain of these bilaterals
were facilitated by the Minister of Finance. There were two draft
Bills under discussion:
1.5.1. One proposed by labour, which would prohibit repatriation
altogether.
1.5.2. The FSB's draft Bill, which would allow pension fund
trustees, acting on the advice of an independent actuary, to split
a surplus in an equitable manner between members and the employer.
Each party would have the right to use the surplus however they
wished. The employer surplus could also be used for a contribution
holiday.
1.6. Although agreement had been reached between the FSB and
labour on various areas of the legislation, the key area of
continued dispute was whether the employer had any right to any
part of the surplus. Labour's position has been that employers have
no such rights except perhaps a limited right to reduce
contributions to a fund if the fund is in surplus and the rules so
permit. Labour argues that all surpluses should be used for the
sole benefit of members as retirement funds were formed to benefit
members and not employers.
1.7. The FSB has maintained that a portion of the surplus was
often the consequence of conservative assumptions by actuaries,
which resulted in the employer contributing in excess of the amount
necessary to ensure that assets exceeded liabilities. Both parties
agreed, however, that surplus may have been released on conversion
between past transfers and retrenchments when former members
received values that were lower than amounts that were fair, and
that any surplus should first redress such past inequities.
1.8. The FSB, with the agreement of the National Treasury,
referred the issue to NEDLAC in January 2000. This was as a result
of a proposal by labour in the Public Finance and Monetary Policy
Chamber.
2. PROCESS IN NEDLAC
2.1. At a NEDLAC Management Committee meeting held on 28 January
2000, labour and business agreed that there should be a process at
NEDLAC to engage on the pension funds' surplus issue.
2.2. The objective of the NEDLAC process on pension funds'
surplus was to attempt to reach agreement between business,
government and labour on policy principles that would shape and
inform new pension legislation, as well as address past
practices.
2.3. The negotiations in NEDLAC were conducted in the pension
funds task team, under the auspices of the Public Finance and
Monetary Policy Chamber. A committee comprising the lead
negotiators from each of the constituencies managed the
process.
2.4. The task team representatives from business, government,
and labour were as follows:
2.4.1. Business: B. Shipman, A. Pienaar, J. Hayward, J. Buys, W.
Scheffler, and A. McGinn
2.4.2. Government: E. Masilela, C. Malan, J. Andrew, D. Tshidi,
and U. Bunsee.
2.4.3. Labour: J. Mahlangu, P. Theunissen, J. Maqhekeni, R.
Wellsted, N. Howard, A. Nduru and D. George.
2.5. Additional relevant expertise was brought in by
constituencies to address particular issues.
2.6. The task team and the lead negotiators met 10 times between
March 2000 and March 2001. Meetings were held on the following
dates:
9 March 2000
24 March 2000
13 April 2000
8 June 2000
20 June 2000
27 June 2000
28 July 2000
6 February 2001
16 February 2001
6 March 2001
2.7. The terms of reference of the task team required that it
examine and attempt to reach agreement on the principles underlying
the distribution of surplus in pension funds.
2.8. There was a concurrent process to the NEDLAC negotiations,
where parties were involved in a number of bilaterals and three
trilaterals, which involved principals from all sides.
2.9. Each of the constituencies made a number of written
submissions during the negotiations (see Appendix 1)
2.10. The pension funds task team mandated the formation of a
technical sub-committee, which comprised two or three
representatives per constituency. The terms of reference of the
technical sub-committee was to consider issues such as methods,
assumptions, minimum benefits payable to employees, the definition
of "fair value" to be used in the future, the obligation of
employers and the effect on financing of the funds. Thereafter, the
technical sub-committee was mandated to report back to the plenary
on the outcome of deliberations. Meetings were held on the
following dates:
6 July 2000
13 July 2000
19 July 2000
21 September 2000
2.11. During the technical sub-committee negotiations a proposal
was drafted by the sub-committee regarding fair value for the
future. A draft report was produced. However, the draft report was
never presented to the plenary for discussion. Labour subsequently
raised concerns that a report had been distributed outside NEDLAC
as a report of the technical sub-committee.
2.12. Due to the considerable differences in the positions of
business and labour, and the urgent need to address the surplus
issue and future dispensation, it was agreed that government would
proceed and draft legislation to facilitate further discussion. A
Pension Funds Second Amendment Bill, 2001 was drafted in a
concurrent process to the NEDLAC negotiations. Government
negotiators conveyed the outcome of the discussions in the task
team to the drafters of the Bill.
2.13. After a break in discussions of five months, the task team
met again in February 2001 to examine the Draft Pension Funds
Second Amendment Bill, 2001, which had been submitted to Cabinet in
December 2000.
2.14. The NEDLAC partners confirmed areas of agreement and
reaffirmed their disagreement with aspects of government's stance
as reflected in the draft legislation. Government undertook to
forward reservations and comments made by business and labour
regarding the draft bill to the Minister of Finance and the
chairperson of the Portfolio Committee on Finance (Appendices 2 and
3).
2.15. This report (the Nedlac report on Pension Funds Surplus) has
been mandated by business, government and labour. This report was
endorsed by the Public Finance and Monetary Policy chamber
convenors (J. Buys for business, E. Masilela for government and T.
Phadu for labour) on 20 March 2001.
3. ISSUES GIVEN CONSIDERATION
The following issues were raised and discussed during the
negotiation process.
3.1. Former member's benefits (viz. whether assets should be
used to increase benefits paid to, or transferred in respect of,
former members where such payments were inequitable);
3.2. The right of the employer to take a contribution
holiday;
3.3. Window period before introduction of minimum benefits and
the right of the employer to terminate the fund without adverse
consequences;
3.4. All uses of surplus for the benefit of the employer;
3.5. Whether the redress of inequitable benefits paid to former
members should be allowed to push a fund into deficit;
3.6. Repatriation of surplus to employer;
3.7. Basis of distribution of surplus;
3.8. Valuation basis for the proposed minimum benefits;
3.9. Employer liability for deficit in a defined benefit
fund;
3.10. Member's existing rights;
3.11. Dispute resolution procedures and mechanisms;
3.12. Social development, growth and investor confidence
4. AREAS OF AGREEMENT
4.1. Future Dispensation
Business and labour agreed that a new dispensation should be
introduced for the future, which would incorporate minimum benefits
subject to details such as prescribed methods and other related
conditions and safeguards.
4.2. Dispute resolution mechanisms
It was agreed that it would be necessary to establish an
effective, efficient and accessible dispute resolution
mechanism.
4.3. Incorporation of principles in draft legislation
Parties agreed that draft legislation should incorporate the
principles that would govern the distribution of surplus, and that
these should not be left to regulation.
5. AREAS OF DISAGREEMENT
Parties did not reach agreement on the following areas:
5.1. Whether past inequities should be addressed, and if so, how
far back the trustees should go and what should be the quantum of
any adjustment.
5.2. The rights the employer should have in respect of surplus
apportioned to it.
6. BUSINESS RESERVATIONS
6.1. Principles business submits should inform draft
legislation
6.1.1. It proposed that the distribution of the surplus should
be regulated by legislation. It has pointed out that developing
rules by case law would be time consuming and expensive.
6.1.2. It has argued that the security of the rights of pension
fund members and other beneficiaries in the rules of pension funds
should be protected in any legislation on the distribution of the
surplus. It believes that a funds primary obligation is to its
members, their dependents and pensioners. It is of the view that in
principle its obligations should not be extended beyond the persons
provided for in the rules whether to former members or other
interested persons.
6.1.3. It has argued that the ability of an employer to vary its
contributions to a defined benefit fund, subject to maintaining a
minimum funding level, has been recognised in law in the TEK case
and should continue to be recognised in the proposed
legislation.
6.1.4. It has pointed out that because of the employer's benefit
guarantees common in the rules of defined benefit funds the
employer may have to meet a shortfall of assets in relation to
liabilities and equally the employer should be entitled to any
surplus that may arise.
6.1.5. It is of the view that legislation should distinguish
between surplus assets clearly available for distribution and other
assets required for other purposes such as financing contingency
reserves and meeting reasonable benefit expectations.
6.1.6. It believes that distribution of the surplus should
comply with procedures laid down by law to avoid abuse of the
facility.
6.1.7. It has proposed that rather than single out former
members for benefiting from a surplus distribution, the State
should collect part of the surplus through income taxes. The monies
collected could be used to assist the State in uplifting
disadvantaged persons through carefully targeted social security
payments.
6.1.8. It has cautioned that care should be taken to ensure that
the Bill respects property rights and does not undermine investor
confidence.
6.2. Retrospectivity
6.2.1. The proposed section 15B(3) in the Bill states that in
apportioning an existing surplus the board of the fund must
determine certain matters after taking account of the financial
history of the fund in such a manner as may be prescribed by notice
in the Government Gazette. This provision will authorise the making
of regulations that will require the board of a fund to consider
whether former members should benefit from any distribution.
6.2.2. Business has pointed out that no indication is given in
the Bill as to how far back in time the board may be required to go
and it must be assumed that the retrospectivity would be for an
indefinite period.
6.2.3. It believes that it would be wrong in principle to
attempt to assess retrospectively whether benefits paid in the past
were equitable or not. In principle the law should require the
board of a fund to deal only with current members and persons who,
although no longer members, might be regarded as having a claim
against a fund which is still current. It has suggested that a
provision to this effect should be written into the Bill
itself.
6.3. Basis of distribution of
surplus
6.3.1. The proposed section 15B(3)(a) states that the board must
determine who may participate in the surplus and shall include in
such apportionment such former members as may be prescribed.
6.3.2. Business argues that the Bill should authorise the
trustees to decide on the basis of the distribution of the surplus.
In the event that they are unable to do so, the matter should be
referred to the special tribunal contemplated in the proposed
section 15K.
6.4. Valuation basis
6.4.1. The proposed definition of a "minimum individual reserve"
states that in determining the present value of a benefit payable
from the member's normal retirement age the present value must be
determined on assumptions prescribed in the Government Gazette.
6.4.2. Business is of the view that this important aspect should
not be dealt with by regulation. Instead the Bill should provide
that the Actuarial Society of South Africa should develop proposals
which should be applied for purposes of the Bill. The Bill should
also spell out the main assumptions to be used in determining the
present value.
6.5. Repatriation of surplus to the
employer
6.5.1. Business agrees with the provision in the Bill by which
an employer may benefit from a surplus by means of a contribution
holiday or a repatriation of its portion of the surplus on
liquidation of a fund.
6.5.2. Its view is that an employer should also be permitted to
repatriate its share of the surplus during the life of a fund as no
good reason has been advanced for denying an employer such a
repatriation. If there is a concern that financial markets might be
affected by a major repatriation, the Bill could require that it be
spread over a period of a few years.
6.6. Employer liability for
deficit
6.6.1. In terms of the proposed new section 30(3) of the Act if
a fund has been terminated or dissolved and the fair value of its
assets is less than its minimum individual reserves, as defined,
the shortfall would represent a debt payable by the employer to the
fund.
6.6.2. Business argues that it would be unreasonable to require
an employer to meet such a deficit as the board of trustees and not
the employer would have been responsible for investment decisions.
It believes that the provision should therefore be deleted.
6.6.3. It proposes that as a compromise applicable in the case
of defined benefit funds only; it might be acceptable to require an
employer to meet the deficit if the following requirements are
met:
-
The employer has already benefited from a repatriation of
surplus assets;
-
The liability for the deficit should not extend for a period of
more than three years from the date of repatriation and
-
The amount of the liability should not exceed the amount of the
surplus actually repatriated to the employer.
6.7. Right to terminate fund
6.7.1. The proposed section 14A(3) states that if an employer
terminates the fund in certain circumstances, the members may not
seek redress against the employer in respect of any increase in the
value of benefits that would occur as a result of the application
of the minimum individual reserves proposed in the Bill.
6.7.2. Business's view is that the provision should make it
clear that it would apply also in favour of the employer despite
the redress given to members of funds by the Labour Relations
Act.
6.8. Time limits
6.8.1. The proposed section 14A(3) requires an employer who is
not prepared to continue with a defined benefit fund under the new
dispensation to terminate the fund prior to the date on which the
Bill comes into operation.
6.8.2. Business argues that this provision appears to be
unreasonable since there is no onus on the authorities to produce
regulations prior to that time. Its view is that the Bill should
afford the employer a reasonable time after the regulations have
been promulgated in order to conduct the necessary investigations
to enable it to make an informed decision.
6.8.3. The proposed section 15B provides that the board must
within three months of the completion of the statutory actuarial
valuation performed at the surplus apportionment date submit a
scheme for the proposed apportionment to the Registrar. In this
period the board would not only have to conduct investigations,
seek professional advice and obtain the approval of members of the
board but, in terms of section 15B(6)(e), give members four weeks
in which to submit their comments on the proposed
apportionment.
6.8.4. Business believes that the period is unreasonably short,
since most triennial valuations would be brought forward once the
Bill becomes law and professional services would be over extended.
It has proposed therefore that the period should be considerably
longer.
6.9. Members complaints
The Bill requires the Registrar to refer a member's unresolved
complaint to a tribunal and to involve an independent actuary.
Business argues that this provision could be costly and ineffective
in the case of small surpluses. Its view is that it should be
possible to refer such complaints to an arbitrator agreed to by the
parties.
6.10. Social development, growth and investor
confidence
Business has expressed reservations that surplus distribution
under the Bill could damage investor confidence by the liabilities
it creates retrospectively while benefiting only a relatively small
group of former members. It argues that the Bill should not require
retrospective enhancements of benefits paid out. It has proposed
that the State should rather use its fiscal powers to benefit
society at large from the distribution of surplus.
6.11. Draft Bill
In view of the reservations outlined business has indicated that
it is unable to support the draft Bill in its current form.
7. LABOUR RESERVATIONS
7.1. Former members
7.1.1. Labour has pointed out that although the principles that
should be applied in compensating former members who left their
investment reserves and actuarial surplus in the funds are
explained in the memorandum, the Bill does not capture these
principles. It argues that the Act must contain the principles
according to which benefits should be paid to former members, even
if regulations that are passed contain greater detail regarding the
implementation of these principles.
7.1.2. It has also pointed out that the memorandum suggests that
only where surpluses still exist will funds be required to pay
former members the benefits they should have received at the time
of leaving the fund. It believes that this will result in a
situation where employers who have already utilised the assets,
which were left behind by members and former members, will not be
required to pay former members their benefits. Its view is that
this approach unfairly prejudices those former members and members
of funds in which employers have ensured that the surpluses created
by transfers, conversions and retrenchments have already been
utilised. It argues that this could create an absurd situation
where only those former members lucky enough to have been members
of funds that have not depleted the surplus for the benefit of the
employer will be paid their benefits.
7.1.3. It is of the view that it is necessary for the Bill to
explicitly state that former members will be paid the present value
of the benefits they should have received at the time of leaving
the fund. It has proposed that the process of paying former members
their benefit should be separate from the process of apportioning
existing or future surplus.
7.1.4. It believes that in the event that the former members'
assets are no longer in the fund due to the fact that they have
been utilised for the benefit of the employer, the employer must be
required to fund, over a period, any deficit that arises when
former members are paid their benefits.
7.1.5. It argues that employers are not entitled and have never
been entitled to utilise the difference between the fair value of
the assets of a fund and the actuarial value of the assets, i.e.
the investment reserve, to fund contribution holidays or
contribution reductions. Its view is that to the extent that
employers have utilised these monies to their own benefit, it is
not unfair to require the monies to be re-paid to the funds. This
would constitute a situation where the employer has unduly
benefited at the expense of the former members.
7.2. Minimum benefits
7.2.1. Labour has pointed out that although the memorandum
states that in a defined benefit fund the minimum benefit is the
market value equivalent of the present value of the retirement
benefit promised, the definition in the Bill does not articulate
this principle clearly. It is of the view that although the
assumptions prescribed by regulations may ultimately require that
the benefit be calculated at market value, this principle should be
clearly set out in the Bill.
7.2.2. In terms of defined contribution funds, it points out
that the memorandum clearly states that the minimum benefit should
include employer contributions, but the definition in the Bill does
not make this clear.
7.3. Member's existing rights
7.3.1. Labour has expressed reservations that the Bill
fundamentally changes the nature of retirement funds and has the
following consequences:
-
The employer is elevated to the status of a "beneficiary" of the
fund and trustees are required to act in the interests of the
employer. This may require trustees to breach their fiduciary
duties to the fund and its members;
-
Employers are given rights to utilise the assets of retirement
funds for purposes for which these assets were not placed in
retirement funds;
-
The Bill gives rights to employers to access the assets of funds
in
an ongoing situation and on termination of the fund,
notwithstanding the rules of the fund. In many funds these dramatic
and far reaching amendments will reduce the benefits to which
members presently have a right or reasonable expectation;
-
It does not believe that employers should be granted benefits to
which they have never been entitled merely because the legislation
now grants members the proper protection by making explicit what
benefits members are entitled to. It argues that employer's access
to these assets is likely to lead to further abuse and manipulation
such as was witnessed in the industry over the past 20 years.
7.4. Dispute resolution procedures
Labour has various concerns regarding the dispute resolution and
deadlock-breaking provisions of the Bill. However, it would prefer
to address these once the issues of principle are resolved. It has
indicated that the reason for this approach is that it advances a
position that requires that the Bill clearly define and prescribe
the payment of benefits to former members and the allocation of
existing and future surplus. It believes that if this approach is
adopted in the Bill, very different dispute and deadlock-breaking
mechanisms are required to those required if the Bill allows the
trustees a broad discretion in paying former and exiting members
benefits.
7.5. Draft Bill
The reservations outlined above are not exhaustive. There are
clauses and definitions in the draft bill which labour does not
support. (see Appendix 1 - labour submissions to NEDLAC, 6 March
2001)
8. RESERVATIONS SHARED BY BUSINESS AND
LABOUR
Both parties expressed a concern about the failure to circulate
the draft regulations covering areas which may be prescribed, such
as how far back the trustees should look, how much should be given
to former members and what method and assumptions should be used to
determine the minimum basis. In the same vein, business and labour
indicated that they would have preferred that all the core
principles be embedded in the Bill rather than in regulation.
9. CONCLUSION
9.1. This report, therefore, completes consideration of the
Pension Funds surplus issue and the Pension Funds Second Amendment
Bill, 2001 in NEDLAC and the report is hereby submitted to the
Minister of Finance and the Minister of Labour in terms of section
8 of the NEDLAC Act, No. 35 of 1994.
9.2. It is acknowledged that the NEDLAC parties may continue to
advocate their views in the public consultation and parliamentary
processes, which will precede the promulgation of the Bill, except
that parties should not oppose principle agreements in this
report.
10. DOCUMENTS SUBMITTED DURING THE NEDLAC NEGOTIATIONS ON
PENSION FUNDS
APPENDIX 1: WRITTEN SUBMISSIONS
10.1. Business submissions
10.1.1. Memorandum to the Financial Services Board on the draft
legislation on the distribution of surplus in retirement funds, 12
April 2000
10.1.2. Business comments on the surplus issue, 27 June 2000
10.1.3. Memorandum to the Public Finance and Monetary Policy
Chamber of NEDLAC on the Pension Funds Second Amendment Bill, 2001,
28 February 2001
10.2. Labour submissions
10.2.1. Cosatu summary of issues to be addressed by the Pension
Funds Amendment Bill, 9 March 2000
10.2.2. Cosatu summary of issues to be addressed by the Pension
Funds Amendment Bill, 13 April 2000
10.2.3. Labour submissions to NEDLAC, 27 June 2000
10.2.4. Labour submissions to NEDLAC, 6 March 2001
10.3. Government submissions
10.3.1. Circular PF No 105, 29 December 1999
10.3.2. Summary by the FSB on the derivation of the R80 billion
estimate of surplus in South African retirement funds, 13 April
2000
10.3.3. Summary of constituency positions prepared by
government, April 2000
10.3.4. Proposed strategy by government, June 2000
10.3.5. Draft of the surplus proposals, 31 July 2000
10.3.6. Pensions terminology