Pension and Provident Funds

Surplus, and Surplus apportionment schemes

By 29/08/2009 No Comments

In one of the first cases involving surplus, and surplus apportionment schemes, the court has ruled on the retrospective aspect of the Pensions Fund, Second Amendment Act, in particular, the question of “improperly used surplus”.

The judgment emanates from the Transvaal Provincial Division, and involves the Sanlam Pensioenfonds (the fund) and the Registrar of Pension Funds. The introduction to the case is quoted verbatim.

“The chairman of the Board of the Sanlam Pensioenfonds (Kantoorpersoneel) (“the Chairman”) has applied on notice of motion for a declaratory order to the effect that subsections (5)(a) and (6) of section 15B of the Pension Funds Act, 1956, no 24 of 1956, (“the Act”) do not have any retrospective effect to a date before 7 December 2001.

“In the alternative he has applied for an order declaring that the Pension Funds Second Amendment Act, 2001, no 39 of 2001, (“the Amendment Act”) which came into force on 7 December 2001, has no bearing on any “utilisation of surplus” prior to that date except for the determination of the participants who may participate in the apportionment of “actuarial surplus” as contemplated in section 15B(4) of the Act.

The FSB opposed the application and also raised a number of points in limine which were in the event, dismissed by the court.

The Fund, is a pension fund, and receives financial contributions from its members who are employed by subsidiaries of Sanlam Ltd (“Sanlam”) as well as from the relevant employers. These monies are invested in order to generate funds for the eventual payment of pension and death benefits in terms of the rules of the Pensioenfonds.

Section 15B of the Act requires of a board of a pension fund to prepare a scheme for the proposed apportionment of any “actuarial surplus” between the members and pensioners of a pension fund and the employer of such members and former members.

The board of the Pensioenfonds had not yet prepared a scheme for the apportionment of any “actuarial surplus”. Its concern was that any “actuarial surplus” which has been “utilised improperly” by the employer who contributed to the Pensioenfonds, will have to be calculated in terms of section 15B(6) of the Act and it will have to be taken into account, in terms of section 15B(5)(a) of the Act, to increase the “actuarial surplus” which may otherwise be found to exist.

The chairman of the fund contended that these two subsections of section 15B of the Act have no retrospective effect and that it is only improper utilisations of actuarial surpluses which have occurred subsequent to 7 December 2001 (the date that the new law came into effect) that will have to be taken into account.

Section 15B(6) defines what a surplus that has been “utilised improperly’ by the employer. This subsection defines such a surplus exhaustively. The subsection reads as follows:
“(6) Surplus utilised improperly by the employer prior to the surplus apportionment date shall consist of-
(a) the cost of benefit improvements for executives in excess of the costs that would have applied had the executives enjoyed the benefits provided to other members;
(b) the cost of any additional pensions or deferred pensions granted to selected members in lieu of the employer’s obligation to subsidise the medical costs after retirement of those members;
(c) the cost to recognise prior pensionable service for selected members or for members transferred into the fund in excess of any amount paid into the fund in respect of such prior service; and
(d) the value of any contribution holiday enjoyed by the employer after the commencement date:
Provided that the board may exclude from surplus utilised improperly by the employer any use of actuarial surplus which the registrar is satisfied was approved by the members, or by trade unions representing the members, after a clear and comprehensive communication exercise as part of a negotiated utilisation of surplus by stakeholders.”

The provisions of subsection (6) is of the utmost importance in the present case. 0ne of the reasons therefor is to be found in section 15B(5)(a) which provides that the actuarial surplus which is to be apportioned “shall be increased by the amount of actuarial surplus utilised improperly by the employer prior to the surplus apportionment date as determined in terms of subsection (6)”. The “surplus apportionment date” is the date of the actuarial valuation of the fund in terms of section 15B(1)(a).

The crucial question is whether or not subsections (5)(a) and (6) of section 15B apply to dispositions which occurred prior to 7 December 2001.

It is not necessary to discuss the actual terms of the judgment, save and except to record that the court made an order declaring that the provisions of subsections (5)(a) and (6) of section 15B of the Pension Funds Act, 1956, 24 of 1956, do not have retrospective effect to a date before 7 December 2001 and accordingly that the subsections did not apply to actuarial surplus utilised before 7 December 2001. The respondent was ordered to pay the applicant’s costs of suit, including the costs of two counsel.

The case is significant because it strikes out the retrospective effect of the Act and in particular, and surplus which had been utilised by the employer prior to the date of the coming into effect of the surplus legislation was to be ignored.

The retrospective effect of the law is analogous to driving along the N1 at 75 kms per hour – well within the speed limit. Two months later, the speed limit on the N1 is reduced to 60 kms per hour, and the police arrive at your house to arrest you for speeding on the day that you were driving legally! That is in its simplest terms the effect of the act. It makes illegal, something that was legal at the time the surpluses were used.

It remains to be seen whether the FSB will take this on appeal, or whether the Registrar will invoke the force of legislature, but the case could have a big effect on the submission of surplus apportionment schemes which need to be submitted to the FSB.

We wait and see.

Ian Mc Laren

Ian Mc Laren

Ian McLaren BA LLB (WITS) General Educated St Johns College, Houghton. BA LLB University of the Witwatersrand 1984 Founded McLarens Attorneys September 1986. Right of Appearance High Court, October 1996. Expertise Litigation, Labour Law, Commercial Law, Family Law, Pension and Provident Funds, Customs and Excise, Wills, Deceased Estates, Trusts, Commercial Agreements, Reviewing and Drafting Government Legislation, Information Technology. Committees/ Trusts Law Society of South Africa Information Technology Committee. Trustee Verney College Educational Trust Other Transvaal Provincial colours for Practical Shooting. Third degree Black Belt JKS Karate. Photographer and motor cyclist Lectured for Continuing Legal Education on Information Technology issues.