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PFA ruling regarding the failure of a pension fund to act in the best interest of members in a matter involving a section 14 transfer

01 July 2008 Mamodupi Mohlala (pictured), Pension Fund Adjudicator

The Pension Funds Adjudicator has issued an important ruling in the matter of THOMSON-CSF SOUTH AFRICA PENSION FUND Vs ALTRON GROUP PENSION FUND AND ALLIED ELECTRONICS CORPORATION LIMITED regarding the failure of a pension fund to act in the best interest of members in a matter involving a section 14 transfer of members from one fund to another. The effect of the determination is that pension funds who fail to act in the best interest of members and who failed to ensure that their reasonable benefit expectations are protected in the event of transfer to another fund may be held liable to compensate members for any loss they incurred plus interest.

The facts of the matter are briefly the following:

Facts

African Defence Systems (Pty) Ltd (“ADS”) was a participating employer in Altron Group Pension Fund (“the first respondent”). ADS was owned in a 50/50 share split by Altech and Thomson-CSF. From 1 September 1996 the first respondent converted from a defined benefit (“DB”) arrangement to a defined contribution (“DC”) arrangement. Thomson-CSF purchased the remaining Altech shares in ADS. This agreement necessitated the transfer of 267 members from the first respondent to the complainant.

At the time of the transfer to the DC fund members were given a guarantee that they were not going to be worse-off at retirement than if they had remained with the DB fund. To give effect to this promise a guarantee reserve account was created as part of the reserve account. The reserve account also constituted the risk reserve account. Its duty was to cover excesses in death and disability benefits which could not be covered by the member’s share. The reserve account constituted the guarantee reserve, the risk reserve, the equalization reserve and the asset reserve.

Complaint

The complainant submitted that the first respondent refused to transfer proportionate shares of the guarantee reserve relating to future costs and the risk reserve. The complainant stated that the 267 members that were transferred to it are entitled to proportionate shares of both the guarantee reserve, in relation to future costs as well as the risk reserves.

Response

The respondents submitted, inter alia, that the reason why only a share of past guarantee reserve was transferred was due to the fact that this provisions covers those employees who were members of the first respondent before the conversion in case they elect to be paid in terms of the DB rules. That the in first respondent experience most of their members do not remain with Altech until retirement and that transfer value should only take into account past service as this is the benefit that has vested.

As to the reason why the first respondent refused to share the risk reserve it was submitted that there are indications that its membership may increase, which will also necessitate the risk reserve should be increased. Further, it was pointed out that the risk reserve constitutes an indirect benefit to members, therefore, if it were to be transferred to members’ share accounts it will be providing them with a direct benefit which they did not enjoy before transfer and which was also not enjoyed by the non-transferring members.

Determination

After considering all the evidence and section 14 of the Pension Funds Act read together with the rules of the first respondent the Adjudicator held the following:

With regards to the risk reserve, the Adjudicator held that this benefit serves as an insurance policy against unforeseen specified contingencies, which the fund calls self-insurance. The argument of the first respondent is that it cannot share this reserve since the complainant does not provide an equivalent self-insurance. It was held that this has the unfortunate result that the transferred members lose out on this benefit. It was held the argument advanced by the first respondent does not hold water since the transferred members still have to be insured for those contingencies that this risk reserve is meant to cover. Further, it was held that the transferred members have a reasonable expectation, prior to the transfer, to share in this benefit, which they have subsequently been denied. Thus, it was held that the first respondent is not entitled to refuse to proportionally share the risk reserve with the transferred members.

As regards the guarantee reserve, it was held that the reasoning of the first respondent regarding the use of old salary scales and not the new ones is flawed. This is due to the fact that the time it took for this matter to be resolved (from 2000 when the attempt to the negotiations started), far outweighs in proportion the effort to recalculate the updated salary values. It was held that of paramount importance is the interest of the members to be treated fairly by the scheme, which would entitle the members who are to be transferred to point out any inequities in the scheme at any point before the transfer is made. Further, it was held that there is no logic in the first respondent’s submission that the guarantee reserve is only applicable to past service since that is the only benefit which has vested. It was held that this guarantee reserve is a conditional provision, meaning, if in future, a member decides to elect to retire by the DB rules he will get the benefit. Held that there is nothing which excludes the transfer of future benefits for the transferred members in the first respondent’s rules. Moreover , it was held that the reasons proffered by the first respondent as to why it refuses to share proportionally the future values of the guarantee reserve do not address the members’ reasonable benefit expectations.

The Order

  • The first respondent was directed to calculate within 4 weeks from the date the determination the proportional share of the guarantee sub-reserve (R85 103 000.00) in relation to past and future costs, taking into consideration the retrospective salary increase applicable from 1 January 2000, for the 267 members transferred to the complainant as at 29 February 2000.
  • The first respondent was further directed to calculate within 4 weeks from the date of the determination the proportional share of the risk sub-reserve (R18 718 000.00), taking into account the retrospective salary increase applicable from 1 January 2000, for the 267 members transferred to the complainant as at 29 February 2000.
  • The first respondent was further ordered to lodge an application in terms of section 14 of the Pension Funds Act, with the Registrar of Pension Funds, for the transfer to the complainant, of the guarantee sub-reserve and the risk sub-reserve accounts as determined in paragraphs above, together with interest earned from 29 February 2000.

Click here to read the full determination (PDF file  78kb)

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