Pension Transfers

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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

Anthony Asher



Roger Wellsted

P O Box 21 Paulshof 2056

South Africa


April 25, 2000 

Mr Mervyn Bryn-Jones

Institute of Actuaries

Staple Inn Hall

High Holborn


Tel: +44(0)20 7632 2100

Fax: +44(0)20 7632 2111 

Dear Mr Bryn-Jones 

Subject: South African Actuarial Practice - Financial Services Board 

The Chief Actuary of the Financial Services Board (South Africa) has responded to my letter of April 7, 2000, addressed to you. I have inserted Mr Andrew’s response and need to make further comments. Again, as with my first letter, I would appreciate you passing this letter on to the President of the Institute. 

Bases of Dispute: Combining Investment Reserves with Actuarial Surplus 

Mr Andrew’s statement in paragraph 5.6 of his letter sums up the basis of our complaint against actuarial practice in South Africa. The statement refers to combining actuarial surplus with investment reserve as one item, simply referred to as surplus:  

“The Pension Funds Adjudicator has found that there is no difference in principle between various amounts that make up this total amount: all represents surplus and the members have no right to this surplus”. ... J Andrew 

Propaganda - 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. 

British Actuarial Practice differs from South African Actuarial Practice - Ignoring definitions and terminology for the moment, the underlying difference between British and South African actuarial practice is determined by GN11. This Guidance Note requires transfer values to take into account the Market Value of Assets on transfer.  

South African Pension Funds Adjudicator, The Actuarial Society of South Africa and the Chief Actuary of the Financial Service Board say transfer values need not take into account the Market Value of Assets on transfer. 

Chief Actuary Andrew goes one step further; he states (paragraph 1.1 of his letter) that if the trustees want to pay more than an amount equal to the liability of the member, the trustees may have to change the rules of the fund! 

Definitions - Separately, Mr Andrew has stated that there are no definitions qualifying these various aspects of pension calculation. According to Mr Andrew, lawyers are currently working on developing appropriate definitions. 

Note: It was discovered shortly after this letter was written that Regulation 15 (2) (d) of the Pension Funds Act [provision is made is Section 16 of the Act for Regulations] describes precisely what constitutes a surplus.

If the definitions being developed bear any resemblance to current application of South African actuarial terminology used determine transfer values, I would urge the Institute to use its influence to persuade South African actuaries to reassess their stance and to bring their practice more in line with British practice. 

In the absence of formal definitions for South African actuarial practice, I would have expected South African actuaries to use British actuarial definitions. Certainly, the GN 26 definition for actuarial surplus is unambiguous, as is the Funding Ratio definition. 

In the absence of formal definitions, South African actuaries should be persuaded to use common English language interpretations. This would go a long way towards preventing English speakers from misunderstanding the interpretations of the language as applied by some South African actuaries.  

“Surplus”, is generally understood to mean "an amount left over when requirements have been met". 

“Reserve”, on the other hand, generally means and amount put aside or kept back for a later occasion or special use. 

Value” means, inter alia, “the amount of money or goods for which a thing can be exchanged in the open market; purchasing power”.

 “Liability” means the state of being liable; or what a person is liable for - debts or pecuniary obligations. 

Simple, but clear meanings. 

South African Actuarial Interpretation of English - South African actuarial terminology in common use (Ac-speak) totally ignores the standard English meanings of some words: 

An “actuarial reserve” means “actuarial or accrued liability”.  

An  “investment reserve” means “surplus”.  

The South African “surplus” or “excess funding” consists of a combination of  reserve and surplus funding: 

1.    It includes the actuarial surplus - defined in reports as amounts above the required 100% funding requirement; 

2.    It also includes the investment reserve, or the portion of assets set aside to accommodate fluctuations in the stock market and which forms part of the funding requirements to achieve a 100% funding level - as declared in valuation reports to the Financial Services Board. 

Actuarial Definitions can change - The definition of Funding Level, according to GN 26, means the ratio of the Actuarial Value of Assets to the Actuarial Liability.  

According to South African Pension Funds Adjudicator, there are two definitions for Funding Level.  

1.    The first is the same as British definition set out in GN26; 

2.    The second definition, according to Murphy, is if you view the funding from a market value of assets perspective, then the funding ratio takes into account the market value and not actuarial value of assets. 

So, if the Actuarial Liability is $100m and the Actuarial Value placed on the Assets is $100m and the Market Value of Assets is $120 million, then the “funding Ratio”, according to Murphy’s Law, is 120%.  

I understand that if the market value of assets equaled the actuarial value of assets, it may be 120%, but this was not clarified in the example given by the adjudicator in one of his judgments. This second definition is also the version applied once the investment reserve is defined as a surplus. 

Actuarial Inconsistency - In summary, sometimes a South African surplus consists of a portion of the value of assets forming part of the 100% funding level, and a portion of the value of assets above the 100% funding level.  

But this only becomes the case if a member is moved from one pension fund to another. If the member stays in a fund, the actuarial surplus remains a surplus, and the investment reserve remains part of the actuarial value of assets set aside or reserved to fund the members’ benefits. 

Financial Services Board to monitor Transfer Values - In Mr Andrew’s letter, paragraph 1.4, he makes note that if the actuary weakens assumptions in order to minimize transfer values, the Registrar has the right to refuse to sanction the transfer.


In practice, and confirmed by Mr Andrew, I have found no evidence of the Registrar rejecting any transfer values where the actuarial assumptions, as reported in the valuation reports, have been weakened.  

Revlon - In the case of the Revlon Fund, which I was party together with actuary Peter Theunissen, to referring to the Pension Funds Adjudicator, the actuary claimed he reduced the valuation base at the request of the client. The Registrar approved the transfer. 

Unilever - In the Unilever case, pensioners were offered a 10% pension enhancement if they agreed to their pensions being transferred to a financial institution.  

But on transfer, the post retirement interest rate assumption was adjusted from 4.5% to 5.5%. No explanation of the long-term disadvantage of this weakening of the valuation base was given to the pensioners. (I now need to establish if this is an isolated case!) 

Sentrachem - In the Sentrachem Group Pension Fund, on transfer the assumptions used to value the liabilities were not adjusted, but the assumptions used to value the assets were implicitly weakened. 

At the time the transfer was negotiated, the actuary placed a value on the assets of some 36 percent lower than the current market value. The actuary wrote as follows:

“Accordingly, it is considered appropriate to bring equities into account at 64 percent of the market value at 1st March 1992. At the valuation date, the dividend yield on the JSE All Share Index was approximately 3,2%. By bringing equities into account at 64% of market value we are effectively assuming that the underlying long term value of an equity investment is consistent with a dividend yield of approximately 5.0%. Alternatively, the discount in equity values at the valuation date can be considered to be an investment reserve which can be utilized in future to smooth out fluctuations in equity market values.  

All other assets have been brought into account at the full value at the valuation date in view of the relatively secure nature of these investments and the relatively low probability of capital appreciation or depreciation, assuming there is no material change in long term interest rates.” ............G Kerrigan

Shortly afterwards, when the transfers took place, the assets were implicitly re-valued, adjusting the market value assets equal to the actuarial value assets. No corresponding adjustment was made to the Liabilities.  

This implicit revaluing of the assets was achieved (South African actuarial methodology) by calling the actuarial reserve a liability and paying a market value of assets equal to the actuarial liability. This weakening of the valuation base left behind more than 40% of the original assets set aside for the funding of benefits.  

A 40% reduction in the valuation assumptions, be they on the side of the liabilities or assets, is significant. The Registrar approved the transfer. 

Common South African Practice - Many South African pension fund transfers have followed the route of reducing the actuarial assumptions used for valuing the assets. This is verified by Mr Andrew in his letter (paragraph 1.1) where he describes an actuarial reserve as the liability. 

These examples do not support Mr Andrew’s statement that weakening of the actuarial base on transfer might not be allowed by his department.  

The exact opposite applies as Mr Andrew actively defends the right of trustees to weaken the actuarial base on transfer. He goes one step further and states that if the trustees wished to transfer liabilities with corresponding actuarial reserve of assets at market value, they may have to change the rules of the fund! 

Semantics of Liability versus Reserve - My understanding of Professor Asher's view is that an actuarial liability is a theoretical calculation of a promised benefit as per the rules of the fund. The value placed on the liability is not a market value of assets; it is a theoretical unit value or actuarial value.  

Likewise, the “actuarial value” placed on the assets is a theoretical unit value.  

The only real value of assets expressed in the equation is the market value of the assets. 

Transferring the “liability” means transferring the obligation to provide a benefit.  

The transfer of the “reserve value” is the transfer of the assets prudently set aside to fund the obligation or liability. The value of this “reserve” is dictated by the formula and assumptions used by the actuary to place a value on the assets. 

While not necessarily expressed in the same way, the end result of transfer values as described in GN11 is the same as described by Professor Asher. 

Therefore, a member cannot be paid the liability. 

A member can only be paid a market value of assets equal to the liability.

Semantics perhaps, but failure to be precise about this interpretation has led to millions of South African pension fund members being left far short of their original pension funding as a result of transfers. 

Actuarial Reserve versus Accrued Liability - In the Sentrachem case that Mr Andrew refers to in his letter, paragraph 1 - Transfer value, the rules of the Sentrachem Pension Fund, as with most other Funds, refers not the transfer of the members accrued liability, but to the transfer of the actuarial reserve value. In the Sentrachem case, members were advised in writing that their full actuarial reserve value in the Fund would be transferred. 

On transfer, the actuarial assumption used to value the assets of the Sentrachem Pension transfers was implicitly reduced by more than 40% and this was approved by the Financial Services Board.  

The R650 million Sentrachem Fund moved from a deficit position in February 1995 to a R400 million surplus position in 1998, after having transferred out the majority of its members and pensioners.


Swedish Social Responsibility Funding - For the record, the complainant in the Sentrachem dispute has referred the case to the High Court.  

Initially, the complainant could not afford the huge expense of taking the case to the High Court. Fortunately, however, Swedish social responsibility funding has been allocated to fight this case.  

It is sad that the Swedish nation has to fund attempts to bring South African actuarial practice in line with its parent body in Britain! 

The Tek Case - Mr Andrew refers to the judgment of the Tek case where frequent reference is made to surpluses. But the judgment does not define what a surplus is nor were the judges asked to define what constitutes a surplus. 

One must assume that the judges took for granted that surpluses referred to were real or actuarial surpluses. I would be very surprised if the judges were referring to assets, originally set aside for prudent funding of members’ liabilities, as surplus.  

This judgment did not specifically approve the stripping out of investment reserves from transferring members and renaming these reserves surpluses. The judgment simply uses the term “surplus” at face value. 

It is this very point that forms the founding argument in the articles written about the alleged surpluses headed ‘R80 Billion - employers’ surpluses or members’ reserves?” 

Misrepresentation - On the question of Mr Andrew stating that I misrepresented facts, I have attached copies of my correspondence to Mr Andrew - Annexure 2, and his response - Annexure 3. Mr Andrew's response must be read in context with the question, and the reasons for the question, set out in Annexure 2. 

Essentially, I wrote to Mr Andrew asking him to define what Sentrachem’s rule “reserve value” meant - see paragraphs 1.5 and 2 of my letter of September 7, 1999. This question was in respect to the interpretation of the reserve value transferred, inter alia, on behalf of the union’s mass transfer. Mr Andrew responded, in writing, that he did not know what the exact interpretation of the rule was. He said only the actuary of the Fund could interpret the rule “reserve value”. 

I have not misrepresented the facts on this issue.   

Purchase of Annuities -  Mr Andrew’s statement “Pensioners are not entitled in law to a proportionate share of any investment reserve held with the fund when the fund purchases annuities on their behalf.” 

I have not seen any law that prevents a fund from transferring the full value of reserves set aside to fund pensions. On the contrary, British actuarial practice requires the receiving fund to accept no less than what was provided for in the transferring fund. Again, GN11 sets out very clearly that the transfer value must take into account the market value of assets. 

Conflict of Interest - Mr Andrew refers in paragraph 1.6 that the Registrar is not aware of manipulation by trustees, acting in collusion with the actuary, to enhance the residual surplus in the fund for the benefit of the employer. 

It is highly likely that the majority of trustees were totally unaware that their decision not to transfer the full actuarial reserve at market value may result in huge surpluses being created in the fund.  

What is very surprising, however, is why more trustees have not queried the sudden appearance of huge surpluses after members have been transferred.Again, in the Sentrachem case, R400 million surplus arose in a R650 million fund in a period of three years. This must have been a very pleasant surprise for some of the trustees who not only were granted improved pension benefits, but who enjoyed increased company share values as a result of the company pension contribution holidays.  

So, while Mr Andrew says it is unlikely that the trustees, with the support of the actuary, knew they were creating huge surpluses to the resulting financial benefit of themselves as shareholders, the question which must be asked is why, after the fact, have they not queried the fairness of the decisions and tested their impartiality and equity? 

Instead many trustees, in their roles as company executives and shareholders, have applied for repatriation of surpluses to the companies. So many, in fact, that special negotiations to agree on how much the companies may take out of this windfall situation has been ongoing for some time now with Mr Andrew at the helm of the negotiations.  

If trustees are shareholders of the guarantor companies, they will benefit financially from these windfall profits. Whether it has been inadvertent or deliberate actions that have relieved millions of pension members of reserves originally set aside for them, allocating it to the financial benefit, inter alia, of the trustees, then the matter of potential conflict of interest must be investigated! 

Mr Andrew’s comments in paragraph 1.7, that “trustees must have acted in this way because they believed they were entitled to do so in law and in equity”. That I believe. But how did they come to this belief. Was it accidental, or was it advice from their actuaries, who are Fellows of the Institute of Actuaries and/or Faculty of Actuaries?

British Practice Unknown in South Africa - What I found very surprising was in the Kransdorff versus Sentrachem case, the Adjudicator noted the applicants evidence of GN11 is a fundamental requirement.. market value ..etc ..., but stated that his staff were unable to confirm this practice!  

The actuary relied on British practice for all other assumptions used. The Adjudicator affirmed these assumptions (with the exception of GN11) to be fair because they had been approved as fair by the British judicial system. But using only part of the recipe changes the total nature of the cake.

Vigorous Checking by Financial Services Board - I understand from Mr Andrew that as part of the vigorous checking of a fund prior to approval for liquidation, the Financial Services Board investigates the fund history up to 12 months prior to the application for liquidation. 

This means in the case of the Sentrachem Pension Fund, where the surplus of R400 million was created at the direct cost to members over a period some five years ago, the creation of the surplus will not be investigated. The transfer of assets at 40% below the valuation has already been approved. Executives have been granted additional benefits; the company has enjoyed contribution holidays. Pensioners have been transferred to a financial institution, again at a transfer value of assets well below the official valuation of assets at the time of transfer. Pensioners have been granted inflation adjustments some 6% below the going inflation rate while R400 million surplus is held in the fund. 

Mr Kransdorff is one of many bemused complainants who has reported the trustees for mal administration to both the Financial Services Board and the Pension Funds Adjudicator. He has highlighted the extent of his loss of benefits and pointed out how executives have been treated more favourably than general members.


On all counts, Mr Kransdorff’s complaints have been rejected. Mr Kransdorff, understandably, is one person who has little confidence in the alleged “checks and balances” of the Financial Services Board. He will now be relying on Swedish Social Responsibility Funding to correct what, in his view, is a gross mal administration of not only his own pension fund benefits, but of the industry. 

For the record, the rules of the Sentrachem Fund require the approved actuary of the fund to be a Fellow of the Institute of Actuaries of London or The Faculty of Actuaries in Scotland. 

Educating the Public - In the meantime, I must do all I can to educate the South African public on the fundamental differences in actuarial practice between the South African Actuarial Society and its parent body, the Institute of Actuaries.  

Conclusion - An estimated R80 billion has systematically been removed from working South Africans’ retirement benefits. The cost of this enormous problem will only be realized in the future when the under-funding starts to impact on millions of workers and as inflation eats away at the purchasing power of pensions.  

It is unacceptable to argue that past wrongs will be left and only the future funding requirements will be revised. The current R80 billion, plus all the company contribution holidays taken, will impact on the future. It must not be swept under the carpet.

 Fellows of the Institute and the Faculty  - While accepting that the Institute and the Faculty have no general jurisdiction over South African actuaries, I really need to know if the Institute’s code of conduct and ethics applies to South African actuaries registered as Fellows of the Institute of Actuaries and the Faculty of Actuaries.


Keep in mind that the Pension Funds Adjudicator is accepting that British actuarial methodology was applied in the Sentrachem case. He used the apparent "fairness" of the methodology as justification for rejecting the argument that the actuarial reserve value should be transferred at market value.

On the surface, this R80 Billion surplus was created largely under the banner of British actuarial practice, yet in Britain this practice is illegal.

 Yours sincerely,



Roger Wellsted


The Actuarial Society of South Africa

The Financial Services Board

The Pension Funds Adjudicator

Professor Anthony Asher

Actuary Peter Theunissen