Pension Transfers

South Africa

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Extract of the Pension Funds Second Amendment Bill 2001

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ANNEXURE A

THE QUANTUM AND DISTRIBUTION OF ACTUARIAL SURPLUS

AMONGST SOUTH AFRICAN RETIREMENT FUNDS.

South African retirement funds in the private sector contain significant amounts of surplus, concentrated within defined benefit funds which contain relatively few active members. (An active member is defined as one who is below retirement age and who is still contributing to the fund, or on whose behalf the employer is contributing to the fund.) The Chief Actuary to the Financial Services Board has estimated this surplus to be approximately R80 billion as at the end of 1999.

The reason for this is as follows:

Twenty years ago most retirement funds were defined benefit pension funds. That is, the retirement benefit was expressed as a pension of a certain percentage of earnings at or near retirement age for each year of pensionable service. The funds were governed by employer-appointed trustees and were perceived largely as an extension of the employer.

Retirement benefits were often good, but early leaver benefits were deliberately little more than a refund of the memberís own contributions with a low rate of interest. This encouraged staff retention by penalising resignation.

In the 1980ís and early 1990ís most employees moved from these defined benefit pension funds to defined contribution funds. The defined contribution funds had retirement benefits equivalent in value to the accumulated member and employer contributions rolled up to retirement, nett of expenses, using the investment return earned by the fund. The resignation benefits were often substantially better than their defined benefit predecessors.

The reasons for this shift had little to do with the subject matter of this Bill, but suited both members and employers.

Members usually got

* better resignation and retrenchment benefits

* a funding structure which they would find easier to understand,

* the possibility of managing contributions more flexibly within a package approach to remuneration,

* a share in the management of the funds, and

* the reward of the high real returns earned (that is the difference between the rates of investment return and salary increases).

The employer enjoyed

* a transfer of the investment and expense risks from the employer to members

and

* employee benefit costs were capped.

In the early transfers, members often moved with only their resignation benefits leaving behind the balance of the interest earned and the employer contributions. Later they moved with their accrued liability, representing the present value of benefits expected to be paid in future as a result of service prior to the date of transfer. Seldom were members given any benefit of the provision held within the fund to protect the fund against a fall in the stock market, or of any actuarial surplus.

This left behind not only excess assets but also any provision in the defined benefit fund for a fall in the stock market (which can loosely be described as the rationale for the difference between the fair value of the assets and the value placed on the assets by the actuary, which has normally been less than the fair value). Surplus was therefore released by such transfers, resulting in a concentration of surplus within the residual defined benefit funds.

At the same time, many industries experienced considerable contraction of their workforce, resulting for the first time in our economy in significant numbers of no-fault job losses. Retrenchment benefits had previously not been defined. Often members then received only the poor resignation benefits. Gradually practice changed until it became commonplace for the accrued liability to be paid. 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.