The summary ruling

The pension funds adjudicator issued a landmark ruling dealing with the rights of retirement annuity fund members to transfer to other retirement annuity funds prior to retirement age.

In December 1986 at the age of 31, the complainant became a member of the South African Retirement Annuity Fund (SARAF) administered and underwritten by Old Mutual and commenced making contributions to the fund.  In November 1995 the complainant reduced his contributions from R103.49 to R70 per month. On 1 April 1996, the complainant stopped his contributions to the fund.  On both occasions the insurer deducted charges/fees from the members account. 

In 2005, the complainant dissatisfied with the 'very poor returns' requested SARAF to transfer his interest in the fund to another retirement annuity fund. SARAF refused on the basis that the rules of the fund did not contain a transfer rule.  The complainant referred the matter to the adjudicators office.

The adjudicator firstly held that the insurer was not entitled to levy the 2 charges/fees and it was ordered to recalculate the complainants fund value as if the charges had not been levied.

Turning to the issue of transfers, the adjudicator examined the Income Tax Act and held that with effect from 1998, retirement annuity funds were permitted to have a rule allowing for transfers between such funds without the members incurring any income tax liability.  

Hereafter, the adjudicator examined the provisions of the Competition Act and having regard to the submissions of the Competition Commission held that  the absence of a transfer rule substantially prevents and lessens competition in the retirement annuity market in at least 2 respects. 

Firstly, members have no freedom to move their retirement savings to other approved funds.  Secondly, competitors are locked out of the market in respect of members who in any event want to take their business away from poorly performing funds to other competitors.

Hence, the adjudicator concluded that the locking in of members until retirement age has the effect of excluding or impeding competitors or potential competitors from expanding within or entering the retirement annuity market.

The adjudicator then examined the duties of the board of trustees.  He ruled that the rules of SARAF, the Pension Funds Act and the Financial Institutions Act all impose various duties on the trustees inter alia acting in utmost good faith and with due care and diligence. 

Furthermore, the trustees must avoid a conflict of interest.  The trustees even though they are appointed by Old Mutual and may be employees of the underwriter, they nevertheless have a duty to act in the best interests of the members and not the underwriter.  Moreover, the trustees cannot simply be a passive conduit between the members and the underwriter.

Thus, the issue for determination was whether the trustees of the fund were acting in the best interests of the members by not having a transfer rule.  The adjudicator held that there can be no doubt that the absence of a rule allowing transfer prior to retirement, and instead locking in members until age 55 or chosen retirement date is clearly in the interests not of members but of the underwriter of the fund.

The Competition Commission strongly advocates against any artificial restrictions that unnecessarily or unreasonably lock customers into long-term contracts. National Treasury is also of the view that lack of competition may be a result of ineffective transferability among retirement annuity funds. The Income Tax Act allows for transfers prior to retirement. Hence, the adjudicator could find no reasonable cause for locking members into a retirement annuity fund (especially where a member is dissatisfied with investment returns on his retirement investment).

The adjudicator further held that allowing members the right to move between retirement annuity funds must be in the best interests of fund members, especially where they are unhappy with the existing funds costing structures, management of the fund and investment returns. The freedom of movement will also serve as an incentive to the board and the underwriter to perform at a level which is satisfactory to the members.

Owing to the failure of the fund to have an empowering transfer rule, the complainant has sustained prejudice in that he cannot transfer to another approved fund of his own choice.

The adjudicator therefore ordered the fund to submit a rule amendment to the Registrar of Pension Funds allowing for the transfer of members to other retirement annuity funds prior to retirement age. Should the Registrar be satisfied with the amendment and approve the rule amendment, the complainant may move his assets in SARAF to another approved retirement annuity fund.