PFA: Pension Fund not liable for poor financial market performance

31 October 2011 The Pension Funds Adjudicator
Dr Elmarie de la Rey

Dr Elmarie de la Rey

Pension funds were entitled to adjust projected benefits in keeping with poor financial
market conditions, the Office of the Pension Funds Adjudicator has ruled.

Losses suffered on investments by retirement funds can be passed pro rata onto members,
resulting in decreased policy values.

Dr Elmarie de la Rey, the acting Pension Funds Adjudicator, dismissed a complaint brought
by FG Duze against South African Retirement Annuity Fund (first respondent) and Old
Mutual Life Assurance Company Ltd (second respondent).

Mr Duze complained he was not satisfied with the amount of early retirement benefits paid
from two retirement annuity fund policies.

He said in January 2009 he was quoted early retirement benefits of R43 000 in respect of two
retirement annuity policies. He was paid a decreased amount of R36 812.79 on 23 March

He was informed that the benefits payable to him had decreased due to the poor financial
markets. He submitted that he should not be made to bear the consequences of the poor
economic conditions of the country.

The complainant was a member of the first respondent, and two retirement annuity fund
policies were issued by the second respondent for his benefit. The first policy was issued on
1 January 1992 and the second policy was issued on 1 July 2003.

The first policy invested in the Smoothed Bonuses portfolio was envisaged to mature on 1
January 2017 and the second policy invested in the Smoothed Performance Fund portfolio
was set to mature on 30 June 2022.

On 1 June 1995 the complainant ceased paying contributions for the first policy. It was
converted to a paid-up policy on 1 December 1995.

On 1 March 2009 the complainant advanced his contractual retirement dates in respect of
both policies to 1 March 2009.

The first policy’s fund value before the advancement of the contractual retirement date was
R14 266.77 (pre-causal event fund value). As a result of the advancement of the contractual
retirement date, the second respondent imposed a causal event charge of R880.11 and a
Market Value Adjuster (MVA) of R713.34, resulting in the first policy fund value decreasing
to R12 673.32 (post-causal event fund value).

The second policy had a fund value of R32 515.42. With a causal event charge of R7 126.34
and an MVA of R1 269.45, the fund value decreased to R24 119.63.
The net early retirement value of R36 812.79, which included interest of R19.84, was paid to
the complainant on 23 March 2009.

With effect from 1 December 2006, the Minister of Finance, in terms of section 72 read with
section 54 of the Long-term Insurance Act, no. 52 of 1998 (LTI Act), amended the
regulations to make provision for maximum limits regarding the values and charges that
may be imposed on long-term policies such as the complainant’s retirement annuity fund

Pursuant thereto, the second respondent evaluated the complainant’s pre- and post-causal
event fund values and concluded that no adjustments to the complainant’s fund values
were required because the charges fell within the permissible range stipulated in the

In responding to the Office of the Pension Funds Adjudicator, the second respondent said
the early retirement benefits payable to the complainant reduced due to the conversion of
the first policy to a paid up status, the advancement of the contractual retirement dates of
the policies and the application of an MVA on the policies as a result of the poor
performance of fund investments at the time.

The lump sum charges were imposed because due to the early termination of the policies,
the second respondent would no longer be able to recover the charges incurred at inception
of the policies from the recurring contributions.

The second respondent submitted the application of the MVA was intended to accurately reflect the actual value of underlying assets when markets were low. This was to ensure that there was equity between ongoing policyholders and members who withdrew their funds prior to the contractual retirement date.

The end result was the provision of the true market value of the policy rather than the smoothed market value, for members who exited the fund prematurely.

Dr De la Rey said in her determination that the nature of the portfolios the complainant was invested in was that bonuses were declared on the investments at regular intervals and were added to the contributions paid.

“These bonuses are declared at the discretion of the underwriting insurer and are based on the net return of the investment portfolio.

“A member who disinvests during periods of bad market conditions could be paid more than what his actual fund value is at the time of his disinvestment because the actual value of the assets backing the smoothed bonus portfolio may have decreased in value below the book value of the pooled investments in the portfolio.

“If the second respondent pays the inflated fund value it will be to the detriment of continuing members. With this in mind, the insurer applies the MVA to determine the member’s true fund value at the time of his discontinuance and pays this to him.
“It is common cause that in 2008 and 2009 world financial markets experienced a
severe recession, which had negative effects on invested policies. It was during this
period that the complainant elected to advance his contractual retirement dates to 1
March 2009.

“As a result the second respondent had to determine the true value of the complainant’s
fund values at the early retirement date.

“It, therefore, applied a MVA of five percent on each policy and paid the complainant
his true fund values as at 1 March 2009.”

Dr De la Rey said the second respondent had acted in accordance with generally
accepted actuarial practice, the provisions of the rules, the provisions of the policy
document, the provisions of the LTI Act and the regulations in imposing the causal
event charges.

She added the causal event charges levied on the complainant’s fund values were fair and

She said the retirement fund could not be held responsible when market conditions were
poor. Benefits payable to members were linked to the investment returns earned.

If the financial market investments performed well, the members enjoyed the benefits
directly and their fund values grew accordingly. If the underlying assets in the portfolio
performed poorly, the member had to bear the negative returns.

“The second respondent acted lawfully in considering the prevailing market conditions at
the time when computing the early retirement values due to the complainant,” said Dr De
la Rey, whilst dismissing the complaint.

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