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PFA : Ruling concerning the calculation of withdrawl benefits

29 November 2006 Pension Fund Adjudicator

Landmark ruling concerning the calculation of withdrawl benefits

The pension funds adjudicator issued another important ruling concerning the calculation of a withdrawal benefit in a defined benefit pension fund and the application of rule amendments.

The complainant, after 16 years of service was unhappy with the withdrawal benefit which he received from the fund and lodged a complaint with the adjudicators office.

The fund had calculated the complainants benefit based on his final average salary over the last two years of membership. However final salary was defined in the rules to mean the average annual salary earned and bonus received by a member during the last year of membership.

Old Mutual, the administrator of the fund, explained that at the time of the complainants withdrawal, the fund was not in a financially sound position.  A scheme of arrangement was accordingly submitted to the Registrar of Pension Funds in terms of section 18 of the Pension Funds Act. The proposed scheme provided for, among other things, a change to the calculation of final salary from the average salary over the last year of membership to the average salary over the last 2 years of membership.

According to Old Mutual the proposed scheme had been approved in a letter dated 12 May 2003 received from the Specialist Pensions-Actuarial Department of the Financial Services Board, the relevant part of which read:

"In principle I do not have any problem with the proposed funding plans and the benefit changes that you propose. I am however unclear about the legal aspect associated with the proposed reduction of benefits. I recommend that you satisfy yourself that they are in line with the Pension Funds Act and where relevant the Labour Law."

The adjudicator examined the provisions of section 18 and stated that, what is clear from the section is that the Registrars approval is required before a scheme submitted in terms thereof can be implemented.  The adjudicator found that there were 2 problems with the letter of 12 May 2003.  Firstly, the letter was not from the Registrar but from one of the actuaries of the specialist pensions department. Secondly the content of the letter did not constitute approval as required by section 18.  As such, the adjudicator found that the proposed scheme had not been properly approved in terms of section 18 and the fund therefore had no authority to implement it.

The fund sought, in the alternative, to rely on a section in the rules which provided for the reduction of future benefits in certain circumstances. However the adjudicator found that such reliance required the registration of a rule amendment before the reduction to the benefit could be effected. Although, the requisite rule amendment was obtained redefining fund salary, since it was only approved on 5 July 2006 (all be it with retrospective effect from 1 July 2003) some two years after the complainant withdrew from the fund, it could not be applied to the complainant whose right to the benefit in terms of the pre amended rule had already vested.

The fund was ordered to pay the complainant R11 487.86, being the difference between the benefit he received and the benefit he would have received had the correct definition of "final salary" been used in its calculation.

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