Fair retirement fund ruling; but what about sustainability?

Do the rights of a retirement fund member supersede the long-term sustainability of a retirement fund? This question seems to be at the heart of the matter Mudau v Municipal Employees’ Pension Fund and Others [2023] ZACC 26, decided by South Africa’s Constitutional Court (CC) on 2 August 2023. The matter dealt with section 12 of the Pension Funds Act (PFA), more specifically that a pension fund may not apply retrospective rule amendments prior to registration of these rules with the Registrar of Pension Funds. 

Another decade-long court wrangle

The case took a typical decade-long journey through the South African dispute resolution processes and court system, starting at the Pension Funds Adjudicator before moving to the High Court, the Supreme Court of Appeal (SCA), and all the way to the CC. 

The factual background of the matter is dealt with in paragraphs five through eight of the CC ruling. The applicant in the matter was employed by Vhembe District Municipality from May 2003 until his resignation end-May 2013. He was a member of the Municipal Employees Pension Fund (the Fund and first respondent in the matter) for the duration of his employment. The Fund was administered by the second respondent in the case, Akani Retirement Fund Administrators. As with all retirements funds, the Fund had a set of rules governing its conduct which had to be approved by and registered with the Registrar of Pension Funds. 

Per rule 37 of the Fund, a member’s withdrawal benefit would be three times a member’s contribution, with interest. However, in January 2013 “…the Fund received an actuarial valuation report which warned that it was at risk of failing to meet its future liabilities due to, amongst other things, the calculation of its withdrawal benefits”. The Fund’s board responded to the report by amending rule 37, reducing the withdrawal benefit to 1.5 times a member’s contribution, with interest. This rule change was approved by the board on 21 June 2013, with a retrospective date of 1 April 2013. This unregistered rule change was only lodged with the Registrar on 22 July 2013 and was eventually registered on 1 April 2014. 

An unfortunate retirement

Long-term FAnews readers will already see where this matter is headed. The applicant’s resignation from the Fund overlapped with the rules change, meaning that the Fund calculated and paid his end-May 2013 withdrawal benefits in accordance with the rules amendment, applied retrospectively to 1 April 2013. As such, in October, the applicant was paid a withdrawal benefit of just R646 437.42 per the unregistered amended Fund rule. A bullet point summary of the litigation gives readers an idea of how persistent one has to be to get restitution through SA’s financial services complaints resolution mechanisms and / or the courts. 

• A complaint was taken to the Pension Funds Adjudicator who interpreted it in terms of section 30A of the PFA. In a determination issued on 7 July 2014, the Adjudicator ordered the Fund to pay the balance of the withdrawal benefit which the complainant was entitled to under the old rule, together with interest. They pointed out that “…the unregistered amended rule could not be applied until it had been approved and registered by the Registrar”. Importantly, the Adjudicator also held that “… the retrospective amendment could not be applied to benefits that had already accrued before it was approved by the Registrar”. This sounded fair and reasoned, in the writer’s opinion. 

• The Fund and fund administrator challenged the Adjudicator’s decision in the High Court, bringing an application in terms of section 30P of the PFA. They asked the High Court to review and set aside the Adjudicator’s determination. The High Court, however, dismissed the application with costs, finding that there was no basis upon which the determination of the Adjudicator could be reviewed or set aside. 

High Court supports the Adjudicator

• The Fund and administrators then appealed to the Full Court with the leave of the High Court, on the basis that “the High Court had erred in finding that, amongst other things, the effective date of the rule amendment was the date of approval and registration by the Registrar rather than the effective date”. The Full Court was having not of that, concluding that “the amendment could not be approved retrospectively vis-a-vis Mr Mudau as he was no longer a member of the Fund when it resolved to amend rule 37, and at the time the amended rule was registered”. 

• Not done yet, but getting there, dear reader. In its wisdom, the SCA granted the respondents leave to appeal the Full Court’s judgment and order. “Their argument was that the Adjudicator had erred in finding that the unregistered amended rule could not, despite its express retroactivity, apply to withdrawal benefits which accrued before it was registered”. In this matter, the SCA “found that the Act, read together with the Rules, authorised the Fund to amend its Rules and to determine the effective date of application of the amended rule”. Furthermore, the SCA said that the clear and unambiguous language contained in the amended rule meant that, once registered, the amended rule could apply retroactively to all withdrawal benefits which had accrued to the Fund’s members as of 1 April 2013, the date stipulated in the amended rule approved by the Registrar. The appeal was upheld with costs. 

• And that brings us to the matter before the CC. “Aggrieved by the decision, Mr Mudau approached the CC seeking condonation for his late filing of this application and for leave to appeal the whole judgment and order of the SCA”. An interesting aside is that the Institute for Retirement Funds Africa NPC (IRFA), a non-profit company which represents and promotes the interests of the retirement industry in South Africa, was admitted as amicus curiae and granted leave to make written and oral submissions. 

Going ‘all in’ on retroactive and retrospective

Two issues had to be decided by the CC. First, whether a pension fund may process a member’s claim for a withdrawal benefit in terms of a rule amendment that has yet to be registered by the Registrar. Second, whether a rule amendment may retrospectively or retroactively impact accrued or vested pension fund benefits. It is worth noting that the CC weighed up the social consequences of the case. Per paragraph 3 of the ruling: “A pension is one of the more effective vehicles for future financial planning; [it] is a crucial instrument through which individuals plan and anticipate a period in which they will no longer be working to generate income”. The CC also recognised pensions as “contributing towards fulfilling the right to social security”. 

What did the CC decide? Per point three of the case summary: The order of the SCA is set aside and replaced with the following order: “The appeal is dismissed with costs, including the costs of two counsel; the second respondent is ordered to pay the applicant the sum of R1 493 875.77 (being the balance between R2 140 313.19 and R646 437.42), together with interest at the prescribed legal rate calculated from 16 October 2013 until the date of payment, less any deductions that are permissible in terms of the PFA”. 

PS, there was much written in this ruling on retroactivity and retrospectivity. If that’s something that you enjoy unpacking, feel free to read the full case. A link was shared in the opening paragraph. 

Writer’s thoughts:

The underpin of financial or retirement planning is knowing how much a fund member will receive upon retirement… I would love to hear some financial planning views on the potential for a retirement fund rule change to decimate a fund member’s withdrawal benefit. Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

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