PFA ruling re rights of pensioners and the purchase of a "living annuity option"

05 December 2006 Pension Fund Adjudicator

The pension funds adjudicator issued an important ruling concerning the rights of pensioners and the purchase of a pension in the form of a living annuity.

The complainant was a pensioner of the Cape Municipal Pension Fund and in receipt of a pension from the fund.  Prior to an amendment to the rules, which came into effect on 1 March 2003, the trustees had a discretion to offer members and pensioners of the defined benefit section of the fund an "alternative pension benefit." However on 10 December 2002 the trustees purported to amend the rules such that the defined benefit pensioners, including the complainant, were no longer entitled to be considered for the "alternative pension benefit." This was the basis of the complaint. For his own reasons, the complainant wanted to convert his pension to a living annuity.

According to the complainant members were neither consulted regarding the amendment nor was the fact of the amendment communicated to them. On this basis the complainant contended that the amendment ought to be declared null and void. He also requested an order directing the fund to grant defined benefit pensioners the option of a living annuity.

The issue for determination was whether the amendment which excluded defined benefit pensioners from the alternative pension option had been implemented in accordance with the rules. In terms of rule A2.5.2, "any amendment which may alter the benefits payable to any one or more category of defined benefit members shall require the approval of two-thirds of Defined Benefit Members voting in referendum. According to the fund the amendment did not alter the benefits payable. Therefore it had not held a referendum nor had it acted contrary to its rules.

The adjudicator held that the proper interpretation was to be found in the purpose behind the rule as a whole, namely, to ensure both employer and member participation in and approval of any proposed rule amendment which may have the effect of altering the funds obligations to the members. The adjudicator stated that prior to the purported amendment, the trustees had an obligation to the defined benefit pensioners to exercise their discretion (in respect of an alternative pension) properly in relation to them. After the purported amendment the trustees ceased to have any such obligation to the defined benefit pensioners. Therefore the effect of the purported amendment was to alter the funds obligations to the defined benefit pensioners. Thus the trustees were obliged to obtain the members' approval first. Given that the amendment had not even been communicated to members, the adjudicator held that the fund had acted contrary to the requirements of rule A2.5.2 and the amendment was of no force or effect. Therefore the rule prior to its amendment was the applicable rule, in terms of which the trustees had a discretion to offer pensioners of the defined benefit section of the fund, including the complainant an alternative pension benefit."


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