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

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Media Coverage

A decade ago, Government acknowledged that some R80 Billion had been unfairly taken from pension fund members.  It was a major breakthrough in disclosure, prompted partly by Financial Mail’s cover story on the subject.

In the May 19th 2000 edition of the Financial Mail’s cover story, “The Sting”, details of how members and pensioners transferring from pension to provident funds were apparently ripped-off. Many pensioners lost up to one third of their pensions in the process. 

The cover-story, based on Roger Wellsted’s article published in the British actuarial magazine, sets out details of how the transfers were made. Effectively, an amount equal to the “book value” instead of the “market value” for each member’s pension fund holdings was transferred.

The Financial Mail article begins:

By financial sleight of hand, employers of some of SA’s best-known companies have gained access to more than R80 Billion in pension fund assets. Most of this money should belong to members and former members of the funds. But unless lawmakers urgently amend the Pensions Act, most of it will accrue to the employers, with large chunks sticking to the fingers of senior executives.”

This difference between book or actuarial value and market value was known as the “investment reserve”. After transfer, this investment reserve was immediately re-designated as “surplus” in the fund.  By the late 1990’s Government had estimated these surpluses collectively to be around R80 Billion.

Responding to Roger Wellsted’s article published in “The Actuary” in November 2000, the Chief Actuary of the South African Financial Services Board, Jeremy Andrews, wrote:

Seldom were members given the benefit of any provision held within the fund to protect the fund against a fall in the stockmarket, or of any actuarial surplus.”

Regulation 15 of the Pension Funds Act specifically requires the actuary to place a realistic value on assets.   Stock market investments fluctuate daily, as do property values. This “realistic” value is referred to as the “actuarial value” placed on assets.

The market value of the assets is referred to as “fair value” in Regulation 15. It is this “Fair Value”, measured on a particular day, that finally is used to establish if a Pension Fund has sufficient assets to fund the pension liability, or promise of a pension.

2nd June 2000 Financial Mail published an article "Digging Deeper into Dubious Methodologies - A way of calculating transfer benefits leaves much to be desired. The article points out:

"A hornets' nest has been stirred by the FM's Cover story on Pension Funds .... The story struck a chord, with letters, e-mails and telephone calls flowing in from members of pension funds, actuaries and benefit fund consultants. No caller or writer so far has tried to defend the dubious mythology so often used to calculate transfer benefits."

The Pension Funds Second Amendment Bill was published on January 24th 2001. The last paragraph of the Annexure in the Bill reads as follows:

”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. Having decided this, it is necessary to legislate in order to give them any share, because,

·         once a member is paid his benefit, the member loses any right to any further claim against the fund; former members have no rights in terms of the Act as it is currently written;

·         secondly, most of the transfers had occurred more than three years ago, and, even though members may now feel that they did not get what was promised in whatever agreement was signed between the union and the employer, they would be unsuccessful in claiming anything through the courts because their claim would have become prescribed.” 

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.”

Actuarial Society confirms assumptions were changed - 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.

Trustees

Trustees of many pension funds were shareholders of their companies. They, according to the Chief Actuary of the Financial Services Board, had “unfairly” removed large sums of money from pension members. Then, with new surpluses in their pension funds, these trustees wished to benefit their companies and through their company shareholding, themselves.  

Roger Wellsted

 

 

NOTICE 248 OF 2001

 

THE PENSION FUNDS SECOND AMENDMENT BILL, 2001

 

http://www.info.gov.za/view/DownloadFileAction?id=67300

 

Annexure A … page 22

Still, members were seldom considered for any share of the provision against a fall in the

stock market or of any actuarial surplus. Indeed, most members did not understand that they might have a claim in respect of more than their accrued liability. This aggravated the concentration of surplus in the residual defined benefit funds.

 

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. Having decided this, it is necessary to legislate in order to give them any share, because, * once a member is paid his benefit, the member loses any right to any further claim against the fund; former members have no rights in terms of the Act as it is currently written; * secondly, most of the transfers had occurred more than three years ago, and, even though members may now feel that they did not get what was promised in whatever agreement was signed between the union and the employer, they would be unsuccessful in claiming anything through the courts because their claim would have become prescribed.

 

PENSION FUNDS ACT NO. 24 OF 1956

http://www.workinfo.com/free/sub_for_legres/data/pension/act24of1956.htm

 

Section 16

 

16. Investigations by a valuator.-(1) Save as provided in section 17, a registered fund shall, once at least in every three years, cause its financial condition to be investigated and reported upon by a valuator, and shall deposit a copy of such a report with the registrar, and shall send a copy of such report or a summary thereof, prepared by the valuator in a form prescribed by regulation and signed by him, to every employer participating in the fund

 

Regulation 15

 

(In terms of the Pension Funds Act 24 of 1956)

 

PART IV

 

REPORTS BY VALUATOR AND STATEMENTS OF ASSETS AND LIABILITIES

 

15.       (1)        Whenever the pension fund sends a summary of a report of a valuator in terms of subsection (1) of

section 16 of the Act to every employer participating in the pension fund, the pension fund shall cause any such summary to be prepared by the valuator concerned in a form corresponding substantially to the form of Schedule J to these Regulations.

 

(2)     The report referred to in subsection (7) of section 16 of the Act shall include, where applicable, the following particulars:

 

(a)     The number of persons in respect of whom liabilities have been calculated, subdivided into active members, deferred pensioners and vested pensioners, with their corresponding annual pensionable emoluments, annual deferred pensions, and annual vested pensions,  respectively: Provided that where the number of active members, deferred pensioners or vested pensioners in any group is less than five, the corresponding annual pensionable emoluments, annual deferred pensions or annual vested pensions, as the case may be, need not be shown;

 

(b)     (i)    a description of the classes of assets held by the pension fund;

 

(ii)      the fair value of the net assets of the pension fund after deduction of current liabilities and any liability arising from the pledge, hypothecation or other encumbrance of the assets of the pension fund, together with full particulars of such deductions;

 

(iii)     the actuarial value of these net assets, for the purposes of a comparison with the pension fund’s accrued liabilities; and

 

(iv)     a description of the basis employed in calculating the actuarial value of each of the various classes of assets together with adequate particulars of each basis to enable an independent valuator to judge the financial soundness of such basis;

 

(c)     (i)                 the value of the pension fund’s accrued liabilities, with the same subdivision as that contemplated in paragraph (a), but if the number of persons in any group is less than five, such a group may be combined with any other group, and for the purpose of this subparagraph “accrued liabilities” means-

 

(aa)    the actuarial liabilities in respect of past service benefits (including accrued bonus service) of active members, with due allowance for future salary increases where these affect the benefits in respect of past service, and with due allowance for increases in pensions and deferred pensions at rates consistent with past practice, the current policy and the reasonable benefit expectations of members;

 

(bb)    the actuarial liabilities in respect of pensions in course of payment and deferred pensions, with due allowance for increases at rates consistent with past practice, the current policy and the reasonable benefit expectations of pensioners; and

 

(cc)    any other accrued actuarial liability;

 

(ii)      a description of the basis employed in calculating the actuarial value of the accrued liabilities together with adequate particulars of the basis to enable an independent valuator to judge the financial soundness of such basis;

 

(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;

 

(e)    (i)     in the case of a deficiency, the causes or probable causes thereof; and

 

(ii)      the measures taken or recommended to eliminate any deficiency referred to in paragraph (d) and the expected period within which this will be achieved;

 

(f)      a comparison of contribution rates recommended for the future with those prevailing immediately before the valuation, subdivided for the various categories of members as appropriate and into rates for members, normal rates for employers to meet liabilities in respect of future service, and special rates for employers to amortise any deficiency as contemplated in paragraph (d), and showing the expected variations in contributions with the passage of time and the extent to which any surplus as contemplated in paragraph (d) has been taken into account; and

 

(g)     such other particulars as the valuator may deem relevant for the purposes of these regulations.

[Reg. 15 substituted by GN R1790/85 and by GN R2324/93]