For legal and actuarial minds
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."
"not fair" mean illegal or simply "not fair"?
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.
The Pension Fund has 5 000
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.
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.
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
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”.
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.
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.”
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.
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.
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.
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
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
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
What are the legal obligations and responsibilities of a trustee?
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?
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
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:
actuary's role in communicating the numbers involved is now being
questioned. Was the actuary to the employer-sponsored fund concealing
(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.