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“Retrospective pension fund rule amendments not registered by FSCA do not bind members” says ConCourt

24 August 2023 Michelle David, Amina Yuda and Ntokozo Ngubane, Norton Rose Fulbright

The Constitutional Court has provided much needed certainty to the retirement fund industry following the surprising April 2022 judgment of the Supreme Court of Appeal in Municipal Employees Pension Fund & Another v Pandelani Midas Mudau and Another.

On 02 August 2023, the Constitutional Court overturned the SCA judgment. The facts of the matter are as follows:

  1. The member was employed by the Municipality from 03 May 2003. By virtue of his employment he became eligible to participate in the Municipal Employees Pension Fund.
  2. He resigned from his position with effect from 31 May 2013 and his membership of the Fund also terminated on that date.
  3. At the time, Rule 37(1)(b)(ii) of the Fund’s rules provided that a member who joined the Fund after June 1998 would upon resignation be entitled to withdrawal benefits of three times the member’s contributions with interest (the original rule). Having been warned by its actuaries that the rule provided for unsustainably high benefits, which could operate to the financial detriment of the Fund, the board of the Fund resolved on 21 June 2013 to amend the original rule, with effect from 1 April 2013, by providing for the withdrawal benefits to be one and half times a member’s contributions with interest (unregistered rule amendment).
  4. On 22 July 2013 the Fund made an application to the Financial Sector Conduct Authority (FSCA) for the registration of the unregistered rule amendment.
  5. On 16 October 2013, whilst the unregistered rule amendment was pending registration by the FSCA, the Fund made payment of the member’s withdrawal benefit, applying the unregistered rule.
  6. Pursuant to the above the member utilised the statutory forums available to him, alleging that he was short-paid and claiming that he was entitled to the withdrawal benefit calculated according to the original rule.
  7. The unregistered rule amendment was registered on 01 April 2014 with a retrospective effect to 01 April 2013.

The issues which were before the Constitutional Court was whether a pension fund may process a member’s claim for withdrawal benefit in terms of a rule amendment that has not been registered and whether a rule amendment that impacts on vested benefits can be amended retrospectively.

The court held that:

  1. While the registration of the unregistered rule amendment was to take effect from 01 April; 2013, it is the registered rules that are binding on the Fund. There was no other registered rule in place at the time of withdrawal of the member even though the registration of a rule amendment was anticipated by the Fund.
  2. In purporting to rely on a rule that was still to be registered, the board of the Fund acted outside the provisions of the PFA and the Rules as well as in breach of the fiduciary duties owed to the member,
  3. The Fund was required finalise the claim on the basis of the original rule. Following that and only upon the rule amendment becoming valid in April 2014, could the Fund then apply the rule as well as attempt to enforce its retroactive effect but not in respect of the vested rights.

An interesting observation from the constitutional court judgment is that, whilst it is unequivocal that an unregistered rule amendment had no binding effect, it did not deal with whether a rule amendment which takes away vested rights can be registered, except to mention that the issue may be considered in future. The court relied on the judgment in National Tertiary Retirement Fund v Registrar of Pension Fund’s (NTRF)as authority for the proposition that a rule amendment that reduces a member’s pension fund benefits may have retrospective effect, provided that it is done in accordance with the rules and the PFA. What the NTRF judgment was concerned with whether the FSCA may refuse to register a rule amendment reducing benefits payable to members upon cessation of membership prior to retirement. This case does not assist with the question of whether rules can be amended retrospectively even where they impact vested rights.

The Constitutional Court noted that the issue of whether a rule amendment which affects vested rights can be approved by the FSCA is a matter that is separate from the issue of the validity of the retrospective operation of an amendment to the rules.

It is clear from the judgment to the extent that there was any grey area, that a pension fund can only seek to enforce a rule amendment after it is registered.  It is going to be interesting for funds in such instances to seek to comply with retrospective amendments where their conduct in the retrospective period is in compliance with the ‘old rules’, will funds then need to claw back for instance where they have paid benefits different to that which are provided by the retrospective rule amendment?

First published by: Financial Institutions Legal Snapshot

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