Pension Transfers

South Africa

Home 2001 Submission Roger Wellsted Chief Actuary Case Study Who owns Surplus Regulation 15 Media Coverage Pension Fund Bill Reserve Value Defined Letter to Actuaries Liability





Case Study

For legal and actuarial minds

In the following hypothetical case, readers are asked to consider if any laws have been broken. This case study is based on the comment published in the Pension Funds Second Amendments Bill of 2001 which reads:

"With the benefit of hindsight it was not fair to have given transferring or retrenched members no share of this provision against a fall in the stock market."

Does "not fair" mean illegal or simply "not fair"?

  1. Company  - You are the CEO of a large international company operating in South Africa during the 1990s. You are also the chairman of the company's Defined Benefit Pension Fund. As the CEO of the company, you own a number of company shares and you have share options.

  2. The Pension Fund has 5 000 members.

  3. Concerned that the high incidence of AIDS deaths and ill-health retirements will place considerable strain on the Pension Fund, you decide to offer pension members a transfer to a Money-Purchase Provident/Pension Fund.

    1. In terms of the rules of the Defined Benefit Pension Fund, if death benefits and ill-health retirement claims exceed the provisions set aside for funding these benefits, the company may need to make up the shortfall and put right any deficit these increased payouts may cause in the Fund.

  4.  The Trustees of the Defined Benefit Pension Fund offer staff a transfer to a Money-Purchase scheme. It is pointed out to members that under the new scheme, they the members will carry the risk of Death and Ill-Health benefits. In all communication with members, it is implied that a member's "full value" in the Pension Fund will be transferred to the Money Purchase Provident Fund

  5. After the members agree to the transfer, your Trustees approve a transfer rule which sets out the value to be transferred and which reads as follows:

    “… an amount equal to the member’s actuarial liability”.

  6. There is a two-year delay in transferring the funds from the Defined Benefit Fund to the Money Purchase Fund. Reasons given to your members is that you were waiting for the transfer-rule approval from the Financial Services Board.

  7. Immediately prior to the transfer of funds, your Trustees approve another "transfer" rule that applies only to yourself, trustees of the Pension Fund and a few other company executives, The rule reads as follows:

    "When a Member is transferred to the Executive Pension/Provident Fund in terms of Rule 36 (1) (a) the amount to be transferred to the Executive Pension/Provident Fund shall be the Member’s actuarial reserve, as determined by the Actuary, plus the Member’s proportionate share of any actuarial surplus in the Fund at the date of transfer.”

  8. After the transfer out of the 5000 members, the Fund is left with a R300 million surplus. This is a significant improvement over the situation prior to the transfer when the Fund had a R50 million deficit.

  9. Members complain - After the transfer, members of the general fund complain that they received too little, that their transfer values were lower than expected. You explain that in terms of the transfer rule, members were entitled to receive a cash value equal to the member's actuarial liability in the Fund.

  10. Regulation 15 attached to the Act states:

    • Section 2 (d) - a comparison of the actuarial value of assets with the accrued liabilities, on the bases contemplated in paragraphs (b) (iv) and (c) (ii), showing the resultant surplus or deficiency and, in the case of a deficiency, the percentage ratio of assets to liabilities;

      • This clause makes it clear that when valuing a Fund, the "Actuarial Value of the Assets must match the "Actuarial Value of the Liabilities".

      • The "Market" or "Fair" value of the assets may be higher or lower than the actuarial value placed on the Assets.

      • You are aware that at the time of the transfer of the general members of the Fund, only an amount equal to the "Actuarial" value of the Assets, rather than the Market Value, was transferred. Thus the massive surplus, which had arisen immediately after the transfer, was created.

      • You are also aware that in the case of your own transfer, that the separate rule made for yourself and your fellow executives included the "Reserve" value. In other words, the "market" value of assets set aside to fund your pension was transferred.

  11. Surplus - It was initially your intention for the company to benefit fully from any remaining surplus in the Fund. However, in 2001 an Amendment to the Pension Funds Act made provision for members and past members to enjoy a portion of the surplus. Your company was limited to acquiring only 50% of the remaining surplus.

  • Due to the change in the accounting requirements to meet international standards, your company had to set aside funding for the company's pensioners' medical aid obligations. The 2001 Pension Amendments Act thus allowed you to allocate 50% of the Pension Fund surplus to replace company funds in the Medical Aid reserve account, thus releasing those funds into company profits.

  • You were assured by your actuary that the practice of using different transfer rules for your general members as was used for your transfer was common practice in the Pension Funds industry.

  • You were also assured that withholding the general members share of Investment Reserves, thus creating a surplus in the Fund, was common practice in the industry. It was pointed out that some R80 Billion surpluses were created as a result of these transfers, therefore it was perfectly in order to enjoy the resulting profits for yourself and your shareholders.

  • Effectively, the only difference between the transfer values of your pension and those of your general membership was that you got the full market value of assets set aside to fund your pension, whilst your general members received a "cash" value of their pension liability. According to your advisors, this was perfectly legal and an accepted norm in the industry.


  1. What are the legal obligations and responsibilities of a trustee?

  2. Members, and their unions, were told that their "Full value" in the Pension Fund would be transferred. Based on the transfer rule for general members, was the full value funding each member's pension liability transferred?

  3. As a trustee of the Pension Fund and shareholder of the company, would there be a conflict of interest in moving funds, previously used to meet the legal funding requirements of pensions, to the company and improving its profits?


Actuarial Society - In a letter to a past pension fund member, the South African Actuarial Society confirms that on transfer, the actuary changed one of the assumptions in relation to a pension fund transfer. The letter reads:

There is no merit as such in using the same assumptions.  Using different ones could have been the correct way of dealing with the matter. In any event, apart from the issue of the relative share of the market value of the assets over the actuarial value of the assets (the ‘investment margin’), the assumptions were the same as those at the most recent valuation and in the circumstances this was not, in the opinion of the Committee, unreasonable

(Note: In practice, by changing the "relative share of the market value", the pension transfer value was reduced by 35%.)


Financial Mail – On March 2 2001 the Financial Mail published a cover-story titled “The Grab for Pension Surplus goes on”. Again, reference to the unfair transfer values was made. General Secretary of the Chemical Workers Union is quoted saying:  

“We negotiated the transfer of the full value of the members’ benefits in the funds. Trustees of the various funds issued brochures telling members they would receive their full value in the fund on transfer. For the chief actuary to tell us now, more than three years later, that the actuary changed the assumptions and transferred less than was agreed is unforgiveable. To say that it is too late to correct and instead allow our members’ benefits to be repatriated to companies is just totally unacceptable.

Chief Actuary of the Financial Service Board  - In his letter to the British Actuarial journal, Chief Actuary Jeremy Andrews writes:

"The actuary's role in communicating the numbers involved is now being questioned. Was the actuary to the employer-sponsored fund concealing information?"

Propaganda - (2000) Anthony Asher, professor of actuarial science and mathematics at the University of Witwatersrand disagrees with the Adjudicator’s view. In the March edition of The Actuary, Professor Asher states: 

“ ..... His principal complaints were that his retrenchment payout was based on a reduced actuarial reserve. First, it did not include the investment reserve (being the difference between the actuarial and market value of assets), .......... 

These practices are common, although - in my opinion, for what it is worth - the reasoning that defends them belongs to the category of propaganda; believed only for its frequent repetition.

Where actuarial values differ from that of the market, they cannot be traded for cash; if the investment reserve is required to stabilise the contribution of the employer, it is similarly necessary to preserve the reasonable benefit expectations of the members (these are written into our Pension Act). Payment of actuarial reserve should, therefore, be at market value.