SCA may not have the final say on unclaimed benefits distribution

A subset of South Africa’s retirement fund members could be in for a small windfall following a 2 November 2020 Supreme Court of Appeal (SCA) ruling. The matter was taken up on appeal by three retirement funds that were unhappy with a recent decision handed down by the Gauteng Division of the High Court. The High Court had blocked the funds’ decisions to distribute part of their contingency reserves for unclaimed benefits to ‘already traced’ fund members. The SCA overturned the High Court decision and ruled that Regulation 35(4) of the Pension Fund Act (PFA) was invalid. This ruling could have a significant impact on how pension funds manage contingency reserves, which include unclaimed benefits and unclaimed surpluses.

Defining surpluses and contingency reserves

An actuarial surplus is best described as capital held within a retirement fund that exceeds the capital needed by the fund to meet its legislated minimum benefits to fund members whereas a contingency reserve is an amount ring-fenced by the fund to meet a potential liability. The SCA ruling notes: “To the extent that the regulation speaks of a ‘contingency reserve account’ it must be understood that it is to a specific purpose and that it was meant to recognise a fixed liability towards former members”. Funds have had great success in recognising their liabilities… The latest FSCA data points to almost R43 billion in unclaimed pension benefits being held in the names of 4.77 million ‘untraced’ beneficiaries in South Africa. Could this money be redirected to other fund members? 

A report on Moneyweb.co.za welcomed the SCA decision as a ‘watershed’ ruling. “The decision is a positive upshot for pension funds in South Africa [that] could see members benefitting from billions of rand in unclaimed funds,” they wrote. These billions will, of course, dilute as they filter to thousands of historic fund members, assuming all funds approach the matter similarly. Pension funds could certainly benefit from the removal of the extremely prescriptive Regulation 35(4). The regulation sets out the conditions under which pension funds may distribute their contingency reserves to former fund members; but in the case of unclaimed benefits, difficulties in tracking beneficiaries led to large amounts accumulating in the contingency reserve accounts of retirement funds instead. 

Contravening regulation 35(4)

It would appear that the only way for retirement funds to draw against these reserves was to trace so-called untraced beneficiaries. The SCA wrote in its judgement: “Regulation 35(4) intrudes upon the [pension fund] board’s wide discretion by compelling the board to place the entire allocation in a contingency reserve account and freezing it in perpetuity”. A statement issued by law firm Bowmans offered some insight into the SCA ruling. They said that the Financial Sector Conduct Authority (FSCA), which opposed the pension funds in court, was of the view that the release of any fund surplus would be in contravention of Regulation 35(4) and the PFA. 

The FSCA argued that the regulations “did not give the fund discretion to hold a lesser liability, even if the fund believed it would be unlikely that untraced members would ever come forward to claim their surplus benefit”. They preferred a situation where funds would have to ring-fence these contingent liabilities forever. Bowmans reminded us that the High Court challenge occurred after the FSCA rejected a fund’s actuarial valuation report, in which the fund stated its intention to redistribute unclaimed benefits among former members who had been traced. 

Distributing contingency reserves

How might a pension fund board of trustees apply the accumulated capital in their contingency reserve accounts following the judgement? An expert told moneyweb.co.za that there were various possibilities, such as paying a top-up to former members’ pensions or offering a ‘contribution holiday’ to current fund members, with the caveat that any unclaimed benefit liabilities would still have to be met if and when they arose. Bowmans opined that “the judgment was a substantial step in the right direction [that went] a long way to resolving the long standing problem of unclaimed benefits being locked up in funds where there is no realistic possibility of them ever being claimed”. They said that funds could release these assets to pay former members that have already been traced. 

But the FSCA could still have the last laugh. The Conduct of Financial Institutions (COFI) Act, published as a second draft on 29 September 2020, has significant implications for the Pension Funds Act, starting with its renaming to the Retirement Funds Act. COFI also proposes inserting section 37A(5) to require that “unclaimed benefits may not be reduced or utilised for any other purpose by a fund”. This would restore the status quo, requiring funds to hold these reserves into perpetuity. 

Playing bank to ghosts

Bowmans’ conclusion: “It could be argued that if section 37A(5) comes into effect as currently proposed, that funds will not be entitled to utilise unclaimed surplus benefits for the benefit of former members who have been traced, irrespective of the fact that a fund may be of the view that it would be highly unlikely that a beneficiary will come forward to claim the benefit”. 

Writer’s thoughts:
The latest FSCA data confirms almost R43 billion in unclaimed pension benefits being held in the names of 4.77 million ‘untraced’ beneficiaries in South Africa. It seems uncanny that the untraced beneficiary issue has become so significant given recent technology improvements, especially in the field of data and big data analytics. Have you had success in retrieving unclaimed pension fund benefits on behalf of any of your clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.