Pension Funds Second Amendment Bill: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE MEETING
21 AUGUST 2001
PENSION FUNDS SECOND AMENDMENT BILL: BRIEFING

Chairperson: Ms Hogan

Relevant Documents
Pensions Fund Act 24 of 1956
Proposed Amendment of Pension Fund Regulations Government Gazette No 22575 (17/08/01)
National Treasury: Presentation to the Portfolio Committee of Finance on the Pension Funds Second Amendment Bill

SUMMARY
The briefing ran through the objectives of the draft Bill, the process and negotiations so far in formulating it, the controversial aspects from the point of view of labour and business. Also covered were issues of retrospectivity, minimum benefits, topping-up a deficit fund by the employer, scheme approval and the roles of the Board of the Fund and the tribunal.

MINUTES
The briefing was presented by Mr Masilela from the National Treasury and Mr Andrews from the Financial Services Board (FSB). Mr Masilela dealt with the broad principles of the Bill and Mr Andrews dealt with technical issues. The meeting was primarily a run through of the presentation document with few explanations of the technical issues or the actuarial jargon. It will become clearer, however, when deliberations on the Bill begin.

Mr Masilela pointed out that the three key objectives of the Bill are:
- to achieve minimum benefits in the future,
- top-up pass transfers, conversions and retrenchments and
- apportion residual surplus.
The government realised that this was a contentious issue and first tried to seek consensus between the trade unions and business. The government’s negotiation process was scheduled to last six weeks. This could not be achieved because of the gap between the parties and also the complexity of the issues at hand.

The formal Nedlac process took one year. Because the process took so long it had a negative impact on the market. The FSB had a legal obligation to attend to applications for surplus funds that meant that the longer the process took the more funds were being used.

The negotiations surrounding the surplus pension funds issue has a long history. In 1998 already a draft bill was brought to Parliament. Organised labour, however, said the bill was inadequate and it was subsequently withdrawn.

At the end of 1998 the actuarial surplus amounted to R80 billion. Today the amount is probably higher. The legal position as enunciated by the Supreme Court of Appeal is that no party has a right to the surplus funds and advised that the stakeholders should negotiate and legislation be enacted. Also, the FSB Appeals Board has ruled that upon liquidation residual surplus be paid to the employer. This would mean that the members of the fund would have no access to the surplus.

Mr Masilela explained that the surplus is concentrated in funds with few members as a result of the migration from defined benefit (DB) funds to defined contribution (DC) funds. Mr Andrews (FSB) explained that the members and the employers consciously chose this migration because the DB funds gave the members share in the management, was easier to understand and was a lump-sum payment as opposed to monthly payments when the member leaves the fund. The employers preferred the move because the DC funds were more transparent and was clearer as to what their obligations were in the future.

Mr Andrew (DP) asked under what circumstances could a fund be liquidated. Mr Andrews (FSB) replied that the rules of the fund would say when the fund must be liquidated and when the fund may be liquidated. When the employer is liquidated, the fund must be liquidated as well.

In trying to find solutions government looked at how the surplus was caused. Two main causes are (a) high returns on investment while giving the member a comparatively low pay back and (b) the employers’ cautious approach to funding to safeguard their future obligations. It is government’s view that the above two causes should form the core of the argument when making decisions.

Mr Masilela expressed the government’s view that members, former members and employers must benefit from the surplus because they all contributed to the generation of the surplus. When dealing with the surplus it needs to be acknowledged that inequities took place in the past. At the moment there is no obligation on the employer to top-up an under-funded fund. In this regard risk-sharing is an important principle.

Another principle is that of savings in the economy. The surplus needs to be looked at from a macro-economic perspective to ensure that squandering is prevented. Mr Andrew (DP) wanted to know if the government foresees that the members, non-members and employers share in the deficit if the fund is in deficit. Mr Masilela answered that the Bill addresses only surplus funds. Mr Andrew (DP) was worried about having an Act that did not deal with deficit funds because then the Act would be inadequate as potential problems were ignored.

VIEWS OF LABOUR – Mr Masilela said that organised labour recognised the need for legislative change. They want the following: inequitable transfers of the past to be addressed, inflation-proof pensions, top-ups for former members and the employer getting no cash benefit. These are their current views that have remained unchanged from 1999. Organised Labour’s views are based on the rationale that the fund was set up for the employees so the employers should not benefit.

BUSINESS’ VIEWS – Business also sees the need for legislative change. They see the key source of the surplus as being actuarial conservatism because of over-contribution by the employer. They see the contribution holiday as a right because the rules of the fund allowed for this. Transfers and retrenchments of the past should not be reviewed because this was done at arms length and not forced on members. It would be too burdensome to go far back in time because no records are available. The views of business also remained unchanged since 1999.

Mr Masilela identified the minimum benefits and the redressing of past inequities as two areas that can be compromised on. He said that once a compromise has been reached then one can discuss what will happen to the employer and the members.

Two important principles embodied in the Bill and Regulations in respect of the future is that members will receive fair benefits and it ensures that the beneficiary does not share in the risk of funding any deficit. In respect of the past, the Bill and Regulations call for a thorough audit of the funds to ensure that the decisions that are made are informed ones.

RETROSPECTIVITY – Mr Masilela said that defining this term is difficult. Does it mean that the legislation is retrospective or does the legislation address past inequities? Government sees the Bill as looking at identifiable current surplus and what to do with it. Another view states that if former members are included then the legislation is retrospective. Government argues that former members contributed to the surplus while the new ones might not have.

Mr Masilela says that retrospectivity needs to be realistic and credible because the legislation needs to be implementable. Legally a fund is obliged to keep records for seven years. He explained that most transfers took place more than seven years ago, most taking place in the 1980s. The proposal, therefore, is to go back twenty years and look at the major transfers in this period.

From the surplus accounts members could enjoy benefit improvements or subsidy of expenses and contributions. The employer would get contribution holidays and effect transfers between funds. The only time that the employer could get cash from surplus accounts is on liquidation or to avoid retrenchments.

TECHNICAL ISSUES – Mr Andrews (FSB) dealt with this part of the presentation. Clause 14A deals with minimum benefits. He explained that in the past the benefits did not meet the members’ reasonable expectations. The minimum benefits should at least meet the members’ reasonable expectations.

The Bill envisages the Board of the Fund to present a scheme to the Registrar for approval. The scheme will outline how the surplus funds will be dealt with.

Mr Andrew (DP) wanted to know how the interests of the members in deciding the scheme, will be protected. The presenter said that the Board members will have a fiduciary duty to represent the members as well.

The presenter then spoke about the employer topping-up the fund if the fund is in deficit. This will only arise if the surplus is used improperly. It was obvious that the meaning of deficit needed defining because it was creating confusion. Mr Masilela explained that there are two states of deficit. One is where the fund is already in deficit even before this Act takes effect. The second is if the fund is in surplus, but after going through the process of the Act and it then goes into deficit, then the employer must top it up.

The presenter pointed to Britain that used legislation to do what South Africa is doing. He said that because of the changing economic circumstances the legislation needed to be changed. Because it was not changed in time the whole law had to be scrapped. The lesson is that we need to deal with the problems in a flexible manner and therefore regulations are good because they are more flexible.

The scheme can only be approved if 75% of the Board votes for it. This means that at least half of the Board elected by the members and at least half of the members appointed by the employer have to approve the scheme. The Stakeholders cannot veto the scheme. Also, the valuator of the fund must give his opinion to the FSB. Further, the Board of the Fund is obliged to consider objections by the stakeholders. The objections need to be resolved before the scheme is approved. If the objections are not trivial then the registrar can refer the matter to a specialist tribunal. At this point there is no negotiation. The tribunal merely hears the objection, receives reports and makes a decision that is based on equity.

Mr Andrew (FSB) explained that the tribunal takes the place of the board, i.e. the decision taken by the tribunal gets implemented. If there are still grievances the Appeal Board can be approached. This is an administrative body but operates like a court and is headed by Justice Friedman.

The Bill envisages that upon liquidation if there is a deficit, the employer is obliged to fund the deficit. The rationale behind this is that if the employer gets a right to share in the surplus, then it must fund the deficit.

The briefing never directly referred to the Bill and the technical issues were not adequately explained to give everyone a working knowledge of what the presenters are talking about. For this reason an afternoon session (closed to the public) was scheduled for the FSB to explain all the technical issues.

The meeting was adjourned.