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Recent determinations by the Pension Funds Adjudicator

01 July 2011 Pension Funds Adjudicator
Dr Elmarie de la Rey

Dr Elmarie de la Rey

Advert was only a guide and not to be relied upon, says PFA

An advertisement showing a return of 28,2 % for a member of a retirement annuity fund could not be relied upon to illustrate the maturity value for another member, the acting Pension Funds Adjudicator has determined.

Dr Elmarie de la Rey also determined that the return of 11,99% that was paid to a complainant was “fair and reasonable”.

ADS Watt became a member of the South African Retirement Annuity Fund (first respondent) on 1 March 1988. His chosen maturity date was 1 March 2010. His retirement funds were invested in the Smoothed Bonus Portfolio of Old Mutual Life Assurance Company (SA) Ltd (second respondent)

The complainant said a financial advisor advised him that the Flexipension product was “a good investment”. The financial advisor showed him an advertisement which reflected an illustration of the maturity value of another member who had invested in the Flexipension. This person received a return of 28.2% per annum after 14 years of membership.

On 1 March 2010 the maturity value of the complainant’s contract was R939 441.48. He was, however, unhappy with this figure.

The complainant claimed he became a member on the basis of the advertisement. He submitted that while he was aware that the returns on his policy would be determined by market conditions, it was reasonable for him to assume that the return would be 28.2% or just below 28.2%.

His policy achieved a return of only 11.99%, which he said was considerably less than the level of return that was indicated to him.

Watt said the advertisement created a reasonable expectation in his mind that his vesting value at maturity date would be 28.2%. Therefore, the second respondent had a contractual obligation to adjust his vesting value to be in line with the return of 28.2%.

In its response, the second respondent said the complainant was not entitled to a return of 28.2% as it related to a different policy and was an illustration.

The second respondent said it called the complainant on 12 March 2010 and explained the inflation scenario as it was in 1987. It averred that a comparison between two products was only possible if the contract data was exactly the same in all aspects, i.e. package type, investment portfolio, same contractual term and premiums.

The detail in the advertisement that was presented to the complainant was factual in relation to a policy that vested on 1 October 1987. The advertisement did not guarantee a return of 28.2% for future investments.

Further, the second respondent submitted that the South African inflation rate had progressively been managed downwards with the result that nominal returns were generally lower when compared to the original illustrative assumptions. Thus, over the years the life assurance industry adjusted these illustrative assumptions in line with the actual inflation rate.

The Smoothed Bonus Portfolio comprised approximately 25% interest bearing assets, 65% equities and 10% property. Up to 15% of the overall portfolio may be invested in international assets. Bonuses were declared annually and these bonuses were influenced by the investment return on the underlying assets.

The Smoothed Bonus Portfolio was subject to an underlying guaranteed rate of return of 4.78% per annum. The complainant made total contributions of R463 410.85 and his policy was subject to a guaranteed vesting value of R584 692.00. The complainant received R939 441.48 at an internal rate of return of 11.99% per annum.

The complainant increased his premiums quite substantially in 2002 and as a result he paid around 80% of the premiums during the last seven years of the policy. The average bonus rate for the last 10 years of the policy was around 11.5% while it was around 17% during the first 10 years. During the years when the premiums were increased, the policy had a lower bonus rate, resulting in the overall bonus rate being closer to the lower average for the last 10 years.

The second respondent, therefore, submitted that the complaint should be dismissed as the complainant’s vesting value of R939 441.48 represented a true reflection of the value of the policy between 1988 until the maturity date.

In her determination, Dr De la Rey said in terms of law, any benefit due to a fund member was computed and payable in accordance with the fund’s rules or the terms of any policy contract.

“It is common cause that the actual vesting value of the complainant’s policy was subject to the market performance of the underlying investment portfolio i.e. the Smoothed Bonus Portfolio, during the term of the policy.

“The actual return of the policy is determined by the rate of bonuses declared on the policy, which is also influenced by the investment return on the underlying assets.

“The complainant’s policy was subject to a guaranteed return of 4,78% per annum. He paid total contributions of R463 410.85 and his guaranteed vesting value was R584 692.00.

“As at the vesting date on 1 March 2010, the maturity value was R939 441.48. This represented an internal rate of return of 11.99% per annum, which was higher than the guaranteed return.”

Dr De la Rey said the second respondent submitted a schedule which reflected the performance of the Smoothed Bonus Portfolio during the policy term. The facts indicated that the rate of bonuses declared during the last 10 years of the policy amounted to 11.5% per annum. The final vesting value of the policy was affected by the rate of bonuses declared and the rate of inflation during the policy term.

She said the complainant was dissatisfied because an advertisement presented to him reflected a return of 28.2% per annum on a 14 year membership that ended in 1987.

“However, it is clear that the advertisement that was provided to him was for illustrative purposes only and the complainant was not guaranteed a similar return on his retirement.

“The underlying assumptions for the policy in the advertisement were different to the actual set of factors that produced a return of 11.99% on the complainant’s investment.

“The policy was invested between 1973 and 1987 while the complainant’s policy commenced on 1988 until 2010.

“He would have been informed of his policy values by means of annual benefit statements, so he cannot claim that he was not informed of the rates of return achieved on his investment.

“Therefore, a comparison between the two policies was not reasonable or justifiable and could not have created a legitimate expectation that the complainant would receive a 28.2% return.”

In dismissing the complaint, Dr De la Rey said she was satisfied that the actual vesting value paid to the complainant was fair and reasonable.

Therefore, the complainant was not entitled to the illustrative maturity value that was provided to him at inception, or any other illustrative value that was quoted to him.


PFA finds pension fund had failed in its duty of care and diligence

A pension fund has the primary responsibility to exercise a rigorous oversight function over its service provider, according to the acting Pension Funds Adjudicator.

Despite the respondents heaping blame on each other, Dr Elmarie de la Rey found that Vista University Pension Fund (first respondent) had failed to act in the best interests of a deceased member’s dependants and did not comply with its duty of care and diligence.

Dr De la Rey also held that the board of the first respondent had failed to comply with its fiduciary duties, as a result of which the deceased’s spouse (the complainant) was prejudiced as a beneficiary of the deceased.

Mrs AJ Booysen complained that the first respondent had refused to pay her a death benefit and a spouse’s pension following the death of her husband, Mr DJL Booysen.

Mr Booysen who passed away on 15 July 2006 was employed by the East Rand Campus of the former Vista University and was a member of the first respondent by virtue of his employment. The first respondent was administered by Sanlam Life Insurance Ltd (the second respondent). The first respondent provided risk benefits, which were reinsured with Old Mutual Life Assurance Company (the third respondent).

On 2 January 2004 the East Rand Campus of Vista University was incorporated into the Rand Afrikaans University to form the University of Johannesburg (the fourth respondent).

In terms of the transitional arrangements the contracts of employment between the former Vista University and its employees were transferred automatically to the fourth respondent from the date of incorporation. All the rights and obligations between Vista University and its employees at the time of the incorporation continued in force as if they were rights and obligations between the fourth respondent and each employee.

The deceased’s employment contract was also transferred to the fourth respondent on 2 January 2004 in terms of the transitional arrangement.

The deceased was in receipt of a disability pension as at the date of his death. Upon the deceased’s death the complainant claimed payment of a death benefit and a spouse’s pension since 2006 without success.

Mrs Booysen said the second respondent was supposed to pay premiums in respect of the deceased’s risk benefits to the third respondent, but failed to do so. The third respondent, in turn, denied liability for the payment of any risk benefits as a result of the failure of the second respondent to pay premiums timeously.

Further, the complainant submitted that she was entitled to a spouse’s pension of four times of the deceased’s annual salary and 35% of his monthly salary, which must be paid to her for the rest of her life.

In responding to the PFA, the first respondent submitted that the second respondent was the administrator of the fund at the time when the Central Campus branch terminated its participation in the fund. The second respondent was responsible for paying disability premiums in respect of members, including the deceased, to the third respondent at the time the Central Campus branch terminated its participation in the fund. It contended that the second respondent was never instructed to discontinue the payment of premiums.

The second respondent stated that the Central Campus, where the deceased was employed, paid the fund contributions including the risk premiums, to the second respondent who, in turn, had to pay the risk premiums to the third respondent.

The first respondent and the former Vista University did not advise it of the fact that there was a group of disability claimants, which included the deceased, under the Central Campus branch.

The second respondent was also not informed of the disability claimants when the Central Campus branch terminated its participation in the fund in June 2004. There was no instruction from the first respondent or from the employer that the risk premiums in respect of the disability claimants still needed to be paid by it to the third respondent.

It asserted that it was never advised that the risk cover in respect of the disability claimants who formerly resided under the Central Campus branch had to continue with the third respondent.

It was only after the deceased had passed away in July 2006 that it came to light that the risk premiums for the death benefit were included in the waiver of contributions, which Momentum Group Ltd had paid to the second respondent.

It also came to light that the second respondent was expected to pay over the same to the third respondent. However, when the second respondent paid the risk premiums to the third respondent following the deceased’s death, the third respondent rejected the claim for the in-service risk death benefit as the deceased was not on its member data and premiums were not paid timeously.

It contended that in terms of the service level agreement, the first respondent was required to ensure that the participating employers established a direct contact with the second respondent to enable it to perform its functions. The first respondent also had an obligation to provide the second respondent with information timeously in order for it to perform its administrative service effectively.

In conclusion, the second respondent contended that it was not liable for the failure to pay the risk premiums to the third respondent.

The third respondent said in a letter to the complainant dated 31 May 2001 that it provided reinsurance for the group life cover provided in terms of the first respondent’s rules. It received a claim on behalf of the complainant, which it declined as the deceased was not included in the member data it received at tender stage. The deceased was also not among a list of eight claimants provided as part of the disability income claims received at that time.

The deceased was excluded at tender stage and then added during the 2002 and 2003 policy periods. However, he was excluded again, together with other disability income claimants in the 2004, 2005 and 2006 member data. Therefore, the deceased was not covered under the risk benefit when he passed away in July 2006 as he was not included in the premium rate renewals and premiums were not paid in respect of the group life cover.

Upon the deceased’s death, arrangements were made to pay the outstanding premiums in an effort to obtain payment of the risk benefit. The claim was declined.

The fourth respondent’s attorneys confirmed that the deceased became an employee of the fourth respondent following the incorporation of Vista University with the Rand Afrikaans University on 2 January 2004. It submitted that the first respondent was at all relevant times in existence and continued to operate as a fund. The fourth respondent paid the deceased’s contributions to the first respondent as required.

Upon the amalgamation of employers, the first respondent chose the option that allowed for the fund to continue with the new company or organisation with the new employer being substituted as the employer. Thus the fund was still in existence despite the incorporation of Vista University with the former Rand Afrikaans University.

The fourth respondent averred that the second respondent acknowledged in its response that it received fund contributions in respect of the deceased. It disputed the second respondent’s submission that there was no effective communication from the first and fourth respondents regarding the deceased’s risk premiums.

The fourth respondent was under no obligation to provide the second respondent with any instructions relating to the deceased’s risk premiums. This was due to the fact that the Central Campus (the employer) never terminated its participation in the fund as alleged by the second respondent. The second respondent also failed to submit any proof that the employer terminated its participation in the fund.

Further, it contended that the fourth respondent took over all the rights and duties of the former Vista University in accordance with the Higher Education Act. These included the payments of pensions, death and disability fund contributions to the first respondent. At no time did the deceased’s employer terminate its participation in the fund. The first respondent’s rules do not place any obligation on the fourth respondent to advise the second respondent upon amalgamation of any options.

It submitted that the fault lay with the first and second respondents for failing to continue payment of the risk premiums to the third respondent.

The second respondent, as the administrator, was responsible for ensuring that it made the correct allocation of contributions, to issue regular statements to members, to effect correct payment of benefits, and to exercise care and diligence in the performance of its duties. The first and second respondents failed to comply with their fiduciary duties as set out above.

In conclusion, it asserted that the fourth respondent was not responsible for the payment of any risk benefits to the complainant.

 

In her determination, Dr De la Rey said that in view of the first respondent’s rules, a lump

sum death benefit and a spouse’s pension became payable to the complainant as a

dependant and a qualifying spouse of the deceased following his death.

The deceased was at all material times a member of the first respondent until he passed

away. The merger of Vista University and the Rand Afrikaans University did not affect his

membership of the fund or his employment.

Dr De la Rey submitted that the benefits are payable by the first respondent in terms

of its rules. However, if any portion of the risk death in-service benefit is insured with

an insurer, the fund is not liable to pay such portion of the benefit unless the claim is

admitted by the insurer.

The risk death in-service benefit was reinsured with the third respondent. The third

respondent declined the claim on the basis that the deceased was not on its member

data and the risk premiums were not paid timeously.

 

It is not in dispute that the fourth respondent duly paid the deceased’s contributions

to the first respondent, including premiums for risk benefits. It was the responsibility

of the second respondent to transmit the risk premiums to the third respondent as

the reinsurer of risk benefits.

“There is a dispute between the first and second respondents about who was

responsible for the delay or failure to transmit the deceased’s risk premiums to the

third respondent or to inform it of his eligibility.

“The third respondent would have admitted the claim had the deceased been

properly recorded in its membership data and risk premiums paid accordingly.

“A registered fund is entrusted with the control of property with which it is bound to

deal for the benefit of others. This manifestly gives rise to fiduciary obligations.”


In terms of the Pension Funds Act, the object of a board shall be to direct, control and oversee the operations of a fund in accordance with the applicable laws and rules of the fund.

The Act provides that in pursuing its object the board shall:

· act with due care, diligence and good faith;

· ensure that proper registers, books and records of the operations of the fund are kept, inclusive of proper minutes of all resolutions passed by the board;

· ensure that proper control systems are employed by or on behalf of the board.

“The ultimate responsibility of keeping proper records and control systems rests with the fund. This includes the proper allocation of contributions and payment of benefits. The board may, if the rules permit, delegate some of its functions to a service provider.”

However, the primary function of the board in relation to the business of a fund is to ensure that it exercises a rigorous oversight function over its service provider.

“The duty to keep proper records in respect of a member’s contributions and to ensure that contributions are allocated to risk benefits is of critical importance. Any failure to keep proper systems in place and to keep proper books and records may prejudice members.

“Although it appears that the second respondent also failed to perform its administrative function properly, the primary responsibility was on the fund to exercise a rigorous oversight function over its service provider.

“The first respondent failed to act in the best interests of the deceased’s dependants and did not comply with its duty of care and diligence.

“Put differently, the board of the first respondent failed to comply with its fiduciary duties, as a result of which the complainant was prejudiced as a beneficiary of the deceased.”

Dr De la Rey ordered the first respondent to pay the complainant the lump sum insured death benefit and a spouse’s pension, less any deductions authorised, plus interest at the rate of 15.5% per annum from June 2006, within 35 days of the date of the determination.

 

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