PFA Ruling: Fund ordered to effect payment of a withdrawl benefit

The Pension Funds Adjudicator has issued a ruling in the matter of MTSHIXA (the complainant) vs MINE EMPLOYEES PENSION FUND (the respondent) regarding the decision of the respondent failure to effect payment of a withdrawal benefit even though the rules of the fund did not prohibit or forbid such payment .

Summary of Facts  

At issue in this complaint is the refusal and/or failure by the Mine Employees Pension Fund (“the fund”) to effect payment of Mr. Mtshixa’s withdrawal benefit on his cessation of membership of the Sentinel Mining Industry Retirement Fund (“the second fund”) on 30 May 2005. The complainant is aggrieved by the fund’s refusal to effect payment of his withdrawal benefit. The complainant contends that at the time the he transferred to the second fund, he was informed that his benefits from the fund would be transferred to the second fund and that no mention was ever made that the complainant would only access his monies in the fund when the he reached the age of retirement or became permanently disabled. The complainant states that in August 2003 the he made an attempt to claim a withdrawal benefit from the fund and his request was denied on the basis that the he was still in service of the employer. The complainant avers that the fund’s conduct in failing to consult with its membership; its failure to address correspondence to the complainant; to mislead the complainant into believing that his fund benefit has been transferred to the second fund and deferring his membership of the fund without his written consent, at the time the rules of the fund were amended, constituted negligence on its part.

Response

The fund submitted that on the restructuring or conversion of the fund into a pure defined contribution scheme on 1 March 2003, category 1 members were, in terms of the rules insisted upon by SARS for continued tax approval, allowed to withdraw their fund credits or transfer to an approved fund within 9 months from the date of conversion. On expiry of this window period, beginning from 1 December 2003, a category 1 member could no longer withdraw his fund credit and could only transfer it to a current employer fund, a retirement annuity fund or in terms of section 14 of the Act. Transfers to preservation funds were not allowed. As regards category 2 members, such a member could only transfer his benefit to a current employer fund, failing which it would be retained in the fund until he reaches pensionable age. The fund further states that it amended its rules which were registered on 15 November 2004 (“the 2004 rules”) pursuant to changes introduced by SARS when it issued General Note GN 35 .The fund concedes that the basis on which “non-contributory members” were refused permission to withdraw or transfer their benefits subsequent to the 2004 amendments was not legally sound. The fund’s argument is that such members had become “non-contributory members” in terms of the definition in the 2004 rules by failing to terminate their memberships upon leaving service and that GN 35 and the rule amendments precluded the fund from allowing them to terminate their memberships prior to retirement.

Determination and reasons thereof

The Adjudicator had to inquire as to whether, in terms of the rules of the fund, the fund is entitled to refuse to effect payment of the complainants withdrawal benefit upon him leaving the service of the employer and in the absence of him electing in writing to become a deferred member of the fund. Rule 2 of the 2004 rules defines a “non-contributory member” in the following terms:

“NON-CONTRIBUTORY MEMBER shall mean a MEMBER:

(a) who ceased to be eligible for membership of the FUND and elected to become a non-contributing member in terms of the rules in force prior to the CONVERSION DATE and in respect of whom the FUND has retained his benefit entitlement in terms of Rule 5 or 6, or

(b) who, after the CONVERSION DATE, ceased to be a CONTRIBUTORY MEMBER of the FUND in terms of the Rules and who elected not to withdraw a benefit from the FUND, but rather to defer the payment of benefits until he qualifies for a benefit in terms of Rule 5 or 6.

The option to remain a NON-CONTRIBUTORY MEMBER must be notified in writing to the FUND within six months of leaving the SERVICE of the MEMBER’S last Employer”. (my emphasis)

The fund has submitted that the Adjudicator should declare the amended definition of non-contributory member as invalid or void ab initio in that it materially defeats the purpose of the rules .The Adjudicator ruled that , in her view, there is no ambiguity in the wording of Rule 2 because Rule 2 has expressly stated that members are to choose in writing if they want to continue as NON -CONTRIBUTORY MEMBERS and that the cardinal rule of interpretation is that , if there is doubt as to the meaning of a law it is presumed that the legislature or public body did not intend an inequitable or unjust or unreasonable result, in the instant matter there as no doubt. Secondly , the Adjudicator held that , the complainant had a legitimate expectation that, after withdrawing from the respondent, he will be paid his benefits .The Adjudicator emphasized that the concept of legitimate expectation determines that where a person has a legitimate expectation , he must be given an opportunity to be heard prior to a decision being taken which may adversely affect the expectation. The respondent had submitted that;

“The Rules clearly diminished the rights and expectations of existing non contributory members.”

The Adjudicator held that, Section 39(2) of the Constitution directs her when interpreting legislation (including pension fund rules) “to promote the spirit, purport and objects of the Bill of Rights “of the constitution. She held that the admission by the respondent that the rules diminished the rights and expectations of existing non contributory members is not in line with Section 33 of the South African Constitution and the Promotion Administrative Justice Act 3 of 2000. Section 3(1) of the PAJA Act of 2000 states that,

“Administrative action which materially and adversely affects the rights and legitimate expectations of any person must be procedurally fair.”

The respondents submission was that SARS had given them a short time frame in order fro them to be compliant to GN 35.The Adjudicator decided that the 12 weeks period that SARS had given the respondent was sufficient and that SARS instruction did not erode the rules of natural justice. The Adjudicator held that , in law , she is not satisfied that the fund is entitled to refuse to effect payment of the complainants withdrawal benefit because such refusal falls foul of the rules of the fund. The fund conceded that it could, by applying a “literal interpretation” of the rule, pay or transfer the complainants and other complainants’ withdrawal benefits but that such an interpretation would, have adverse financial consequences for the fund. This was rejected by the tribunal on the basis that the respondent has had a great deal to argue his case before the tribunal; however his argument has not been substantiated with facts in this regard. Secondly the Adjudicator found that the respondent has not been able to illustrate, how the approach they had taken in dealing with this matter has been able to meet the requirements of suitability, necessity, and proportionality. The Adjudicator held that , the respondent had contended that the numbers of non contributing members had declined .This is in contradiction with their argument that if the withdrawal benefits are paid to the complainant , and inadvertently all members in a similar position , that will negatively affect the funds solvency.Finally, the Adjudicator found that the respondent had admitted that they had infringed Section 33 of the Constitution , the Promotion of Administrative Justice Act of 2000 and the rules of the fund .

The Adjudicator quoted from the address to the Pension Lawyers Association in 1998, by Justice O’Regan, of the Constitutional Court of South Africa who had said that;

“The fundamental premise of group pension schemes is of course pooling and sharing of risks .For that pooling to be effective , it is necessary to have a sufficiently large number of individuals to ensure that some of those individuals subsidise others .In a sense , there is an inevitable conflict between individual fairness and the pooling of risks “

The Adjudicator ruled however that, individual fairness to the complainant in this case outweighed the pooling of risks and rejected the argument of the respondent to the contrary as being unsubstantiated.

The Adjudicator ordered that;

The fund should compute the value of the benefit to which the complainant is entitled in terms of Rule 2 of the fund rules within 14 days of the date of the determination .Secondly, the fund was ordered to pay the complainant within four weeks of the date of the determination the value of his withdrawal benefit less any deductions permitted by the Act, together with interest thereon at the rate of 15, 5% per annum reckoned from 30 May 2005 until date of payment.

The determination can be read here (PDF file 116kb).