PFA ruling concerning the rights of pensioners and pension increases

26 October 2006 Pension Fund Adjudicator

The pension funds adjudicator issued an important ruling dealing with pension increases for pensioners of pension funds.  The complainant, a pensioner of the Parmalat Group Retirement Fund (the fund), had elected to have his pension paid by Sanlam in the funds name i.e. he remains a member of the fund and the fund is ultimately responsible for the payment of his pension. The crux of the complaint related to the complainants dissatisfaction with the annual pension increases granted by the fund in 2003 and 2004, which were 0% and 0.6% respectively.

The fund and its administrator were of the opinion that since Sanlam was contracted to provide pensions to these pensioners, the funds duty to provide pensions, and any increases, has been effectively taken over by Sanlam.  The matter was referred to the adjudicator.

The adjudicator firstly held that the complainant is a pensioner of the fund and the fund, not Sanlam, is responsible for the payment of the pension.   Furthermore, the Pension Funds Act was amended in December 2001 and requires all pension funds to have a pension increase policy. Funds also need to comply with the requirements of section 14B(4) of the Act when determining minimum pension increases. Section 14B(3)(a) of the Act requires the board of management of funds to establish and implement a pension increase policy that, at the very least, aims to award a percentage of the consumer price index, or some other measure of price inflation, as a pension increase to its pensioners. Apart from establishing a pension increase policy, section 14B(4) establishes the basis of a minimum pension increase for pensioners. So, what is contemplated by these 2 sections are minimum pension increases for pensioners of funds that take into account the pension increase policy of the fund, as well as the funds ability to afford any pension increases.  If the funds investments have performed well in a reporting period, then the pensioners may also benefit from the funds financial windfall.

The adjudicator concluded that the fund failed to comply with the requirements in respect of a pension increase policy and minimum pension increases. The adjudicator found that there is no ring-fencing of pensioners liability to the extent that the board of managements discretion on pension increases can be delegated in total to an insurer and there cannot be an unquestioning acceptance of the pension increases granted by Sanlam to its pensioners.

Consequently, the adjudicator ordered the fund to establish and implement a pension increase policy within 6 weeks. It also has to compute and pay to the complainant and other pensioners of the fund pension increases as determined by its new pension increase policy, within 4 weeks of the establishment of its pension increase policy, together with interest at 15.5% from the date any pension increases became payable.

This ruling sends an important reminder to trustees to comply with the minimum pension increase policies and at the same time pensioners must monitor their pension increases and whether it is in line with funds pension increase policy.

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