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PFA: Pension Fund ordered to make good retirement benefit shortfall

06 December 2010 The Pension Funds Adjudicator
Acting Pension Funds Adjudicator Dr Elmarie de la Rey

Acting Pension Funds Adjudicator Dr Elmarie de la Rey

A pension fund and its actuaries have been ordered to recalculate an employee’s retirement benefit following a difference of R261 500 in the quoted value and the actual payout.

Acting Pension Funds Adjudicator Dr Elmarie de la Rey has ordered Pannar Group Pension Plan (first respondent) and NMG Consultants and Actuaries (Pty) Ltd (third respondent) to use the employee’s spouse’s actual age instead of the assumed age in calculating the capital upliftment as at the employee’s retirement date.

GH Kohne, the complainant, had worked for the Pannar Group of Companies from 1972 for almost 35 years. He was a member of the Pannar Group Pension Plan until his retirement in February 2007.

In September 2006, before his retirement, the complainant requested details from Specialist Fund Administrators CC (second respondent) about his retirement benefit, in an attempt to plan his retirement which was due to begin within five months.

In response the complainant received a letter dated 20 September 2006 from the third respondent informing him what his capital “upliftment” figure would be, if he were not to commute one-third of his retirement benefit.

The complainant proceeded with his retirement benefit claim. He commuted only a small amount of his benefit in cash and directed that the remainder of his benefit be distributed equally between Old Mutual Galaxy Underwritten Life Annuity and the Old Mutual Max Income Plan (“Old Mutual”).

Early in March 2007, after his retirement date, the complainant was advised by his financial adviser that the total amount transferred by the first respondent to Old Mutual was R261 500 less than the quoted capital upliftment figure.

The complainant was concerned by the first respondent’s transfer of a retirement benefit amount that was less than the quoted figure. At no stage, neither in December 2006, nor in February and in March 2007, when frequent correspondence took place between the complainant and representatives of the second respondent, was he advised that the quoted upliftment figure had been reduced by R261500.

The complainant told the Office of the PFA that when he queried the shortfall in the quoted and transferred amount with the second respondent, it was suggested that he had to be content with the amount that had been transferred to Old Mutual.

The complainant submitted that he expected a minor reduction from the quoted and the actual value paid, but R261 500 was too large an amount not to raise some concern. Due to the fact that at retirement his final pension payable was not subject to market fluctuations, it was reasonable to expect the final amount not to be significantly different, in the five months between September 2006 and February 2007.

When asked to respond, the second respondent submitted that the complainant was presented with a quote dated 20 September 2006, as calculated by the third respondent.

The second respondent stated that the complainant had never requested a confirmation of the actual values to be paid at or near his actual retirement date and further that the complainant and his financial adviser had based the complainant’s retirement planning on the original values presented in September 2006.

The second respondent confirmed the retirement values paid to the complainant. The second respondent insisted that the complainant took it for granted that the values quoted to him in September 2006, would be finally calculated retirement values to be applied at his actual retirement date of 1 March 2007.

The second respondent submitted that given the importance of retirement as a life event, it would be reasonable to expect a member or his advisers to enquire on the final amounts to be applied, at a time closer to payment.

According to the second respondent, the complainant should have double-checked the actual value to be paid, instead of relying on a value quoted five months prior to the payment date.

The second respondent submitted that neither of the respondents regarded themselves as being guilty of any maladministration. The second respondent submitted further that the first and second respondents would not be in a position to check on the methodology and calculation basis applied by the third respondent, leading to the adjustment in the actual value.

In her determination, Dr De la Rey said the key issue was whether or not the third respondent was justified in its applied method in calculating the complainant’s retirement benefit.

In a defined benefit fund, the employer was responsible for paying in any amount resultant from a shortfall in members’ benefits, thereby assuming the risk of the first respondent being underfunded.

Should the complainant have opted not to uplift his entire retirement benefit as a lump sum payment, the first respondent and ultimately the employer would have had to pay a higher amount to the complainant in the long run.

An independent actuary appointed by the Tribunal of the PFA advised that:

· the first respondent was underfunded as there was not much surplus to cover a shortfall in members’ benefits;

· There were only a few defined benefit category members left in the first respondent;

· If the actual age of the complainant’s spouse was used, then the amount paid would differ from the valuation assumption amount applied by leading to more costs to the first respondent;

· If the complainant had purchased a pension within the first respondent, it would have led to a longer time period in which the employer could have funded the existing deficit in the first respondent; and

· the complainant’s upliftment of the entire retirement benefit led to an immediate cost to the first respondent.

Thus it appears that when the quote was given, as at September 2006, the actuary applied actual data to the calculation of a retirement benefit. However, at the time of the actual calculation before the benefit was to be paid, the actuary used assumed data, resulting in a reduced benefit.

In the opinion of the independent actuary consulted by this tribunal, this method of calculating the complainant’s benefit was difficult to accept, notwithstanding his acknowledgment that different actuarial practices exist.

Dr De la Rey said in her ruling that despite the existence of different actuarial practices, the first respondent and ultimately the employer must make good on the shortfall experienced by the first respondent, in members’ individual cases.

This has the result that not all members will benefit from profits in their respective exit methods, as in the current case wherein the complainant decided to uplift his entire retirement benefit and transfer elsewhere.

Also, the age of a spouse is empirical data and, therefore, has to be more accurate than an assumption. Therefore, the method applied by the third respondent in calculating the complainant’s benefit, cannot be justified as it was in possession of the necessary information enabling the calculation of the benefit to have been carried out using actual data which was available to the first and third respondent.

The first respondent was directed to liaise with the third respondent, in recalculating the complainant’s retirement benefit, using the complainant’s spouse’s actual age, as at the complainant’s retirement date.

The first respondent was also directed to transfer the difference between the amount recalculated and the amount already paid to the complainant to Old Mutual Galaxy Underwritten Life Annuity and the Old Mutual Max Income Plan in equal portions.

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