Surplus apportionments: confusion and disputes

As is often the case with recently introduced legislation, the provisions of the Pension Funds Act regulating surplus apportionments have caused problems in legal interpretation, which have lead to a number of disputes between industry participants, and confusion amongst stakeholders.

Pension and provident funds are regulated in terms of the Pension Funds Act 24 of 1956 (PFA). In 2001, the PFA was amended to introduce legislation regulating the manner in which pension funds assess and apportion existing surpluses. Since 2001, one of the requirements is that a registered fund must submit a surplus apportionment plan to the Financial Services Board (FSB). This investigation is carried out by an actuary, and the resultant plan to distribute surplus, if any, to stakeholders is submitted to the FSB.

Source of confusion

The primary source of confusion appear to be Sections 15B(5)(a) and 15B(6)(a), introduced in 2001. These sections require that any surplus utilised improperly by the employer, prior to the date on which the fund carries out its surplus investigation, must be taken into account when submitting a surplus apportionment plan. However, neither section 15B(5)(a) nor 15B(6)(a) sets out the time periods in which the investigation of improper utilisation of the surplus must take place.

Possibly in an attempt to remedy this omission the FSB published PF circular 113, dated 24 April 2003 (circular 113), in which the FSB stated that any investigation into improper use of actuarial surplus need only take into account events which occurred on or after 1 January 1980.

High Court dispute

Notwithstanding circular 113, the Sanlam Pensioenfonds in a practical application of section 15B(5)(a) and 15B(6)(a) during its investigations only looked at events which occurred after 7 December 2001, the date on which the Second Amendment Act came into effect. The Sanlam Pensioenfonds argued that since the obligation to investigate improper usage of actuarial surplus only arose on 1 December 2001, such investigation should go back no further than 1 December 2001.

The FSB disagreed, and refused to approve the surplus apportionment plan submitted by the Sanlam Pensioenfonds. The matter was referred to the High Court for consideration. In argument, the FSB withdrew circular 113 and claimed that the Sanlam Pensioenfonds was obliged to go back to the date of its foundation, 1927, to determine improper usage of actuarial surplus.

In favour of Sanlam

In his High Court judgement, Justice Mynhardt found that the wording of section 15B of the PFA did not contain any express intention as to retrospectivity, and that since there is a legal rule of interpretation which requires that statutes must be interpreted with a presumption against retrospectivity, all that could legally be required of the Sanlam Pensioenfonds was an investigation from 1 December 2001, and not prior to that.

The FSB has been given leave to appeal against the judgment of Justice Mynhardt, but has not yet lodged such appeal. The outcome of this appeal may fundamentally alter Justice Mynhardt's decision as to the date from when a fund must conduct its investigations into improper surplus usage.

New retrospective date

As a result of the Sanlam Pensioenfonds judgement, the FSB issued PF circular 128, dated 10 October 2006 (circular 128), which indicates that pension funds need only conduct an investigation into improper surplus usage as from 1 December 2001. However, where a fund has already conducted an investigation which takes into account improper surplus usage prior to 1 December 2001, circular 128 indicates that the Registrar of Pension Funds is of the opinion that such extended investigation is not unlawful or in contravention of either the PFA, or the decision given by Justice Mynhardt.

New rules

However, bearing in mind that the FSB accepted that it cannot require a fund to conduct an investigation into improper usage which goes back further than 1 December 2001, the FSB, in circular 128, announced that –

* where a fund has already had its surplus apportionment plan approved by the FSB which took into account improper usage of surplus prior to 1 December 2001, the fund should consult with the employer (and presumably all other stakeholders) and may request the FSB to set aside the approval of the surplus apportionment plan, presumably so that the fund can re-submit a plan which takes into account improper usage only as from 1 December 2001. The FSB will make a decision on a case-by-case basis.

* where a fund surplus apportionment plan has not yet been approved by the FSB, such a fund may apply for amendment of the surplus apportionment plan. Such applications ought to have been lodged by no later than 10 November 2006. Any such application will only be considered once the outcome of the FSB's appeal against Justice Mynhardt's decision is known.

* where a fund has not yet submitted a surplus apportionment plan to the FSB, it is required to do so within the required time periods and must indicate whether it conducted an investigation into improper surplus usage, and if so, what time periods were taken into account.

Industry-wide impact

Judge Mynhardt's decision impacts not only the FSB and the Sanlam Pensionfonds, but also members of all pension and provident funds. The fund has a fiduciary duty of good faith to its members, and any member who feels that his or her fund has failed to exercise such duty would be entitled to refer a dispute to the Pension Funds Adjudicator. As a further option, a fund may itself decide, on behalf of its members, to review any decision of the FSB not to allow the fund to re-submit its plan. Ultimately members of funds which have submitted plans to the FSB and who are of the view that the apportionment of surplus to stakeholders should be re-calculated should approach their employer or member representatives to take the matter up with the fund.

Amendment

The debate regarding surplus apportionment is complicated further by the recent promulgation of the Pension Funds Amendment Bill (2007) (PFA Bill) which seeks to introduce changes to sections 15B(6) of the PFA. In particular, the newly proposed section 15B(6)(b) makes it clear that any investigation into improper usage of surplus must be undertaken by a fund as from 1 January 1980, or the date of the fund's commencement, or any earlier date agreed to with the employer. If these amendments are passed, it is likely that any fund which has submitted a plan based on an investigation conducted as from 1 December 2001, would have such plan rejected by the FSB and would be directed by the FSB to comply with the requirements of the new section 15B(6)(b).

What is clear from the Mynhardt judgement and subsequent attempts to revise the PFA, is that whether the issue is resolved by the FSB's appeal, or by the passing into law of the PFA Bill, members of pension and provident funds will have to pay close attention to developments in order to protect their interests and to secure their surplus payments.