EMPLOYEE BENEFITS STUDIO

9 March 2007

Dear Sir

RE: DRAFT PENSION FUNDS AMENDMENT BILL 2007

1. Reform of the 51 year Pension Funds Act is to be welcomed. There has however been a plethora of other legislation passed by Parliament over this period of time that also impacts on the Pension Funds Act. Examination of such legislation in relation to the Bill should in my humble opinion be drawn to your attention as there is risk of conflict with clearly adverse consequences for the very people the Bill seeks to provide enhanced protection for.

2. As I expect that many people and organisations will be submitting comment about the Bill and drawing your attention to these, I am limiting my comment to two matters that might not receive wide attention.

Financial Services Board Act, No 97 of 1990

3. The increased powers granted to the Registrar of Pension Funds are in my view long overdue and are to be welcomed. In fact, in some areas I do believe that they do not go far enough. Having said that, not only does the use of power need to have checks and balances, but there also needs to be proper recourse for those affected by wrong decisions and errors which do occur.

4. While the Financial Services Board has a very efficient and in my view effective Board of Appeal, the Board may only correct an incorrect decision by the Registrar. At the heart of my concern are the provisions of the Financial Services Board Act which at section 23 provide;

Limitation of liability

The Minister, the board, a member or alternate member of the board or the board of appeal or any officer or employee in the employment of the board shall not be liable for any loss sustained by, or damage caused to, any person as a result of anything done or omitted by any such functionary, body or person in the bona fide, but not grossly negligent, exercise of any power or the carrying out of any duty or the performance of any function under or in terms of this Act or any other law.

5. But for gross negligence, the Registrar of Pension Funds cannot be held responsible for the consequences of his actions. It is submitted that given the high level of competence and professionalism at the Registrar's Office, gross negligence, which has been defined as; a degree of negligence which indicates a complete obtuseness of mind and conduct' and

"Dicta in modern judgments, although sometimes more appropriate in respect of dolus eventualis, similarly reflect the extreme nature of the negligence required to constitute gross negligence. Some examples are: 'no consideration whatever to the consequences of his acts' (Central South African Railways v Adlington & Co 1906 TS 964 at 973); 'a total disregard of duty' (Rosenthal v Marks 1944 TPD 172 at 180); 'nalatigheid van 'n baie ernstige aard' or un besondere hoe graad van nalatigheid' (S v Smith en Andere 1973 (3) SA 217 (T) at 219 A - B); 'ordinary negligence of an aggravated form which falls short of wilfulness' (Bickle v Joint Ministers of Law and Order 1980 (2) SA 764 (R) at 770 C); 'an entire failure to give consideration to the consequences of one's actions' (S v Dhlamini 1988 (2) SA 302 (A) at 3080). It follows, I think, that to qualify as gross negligence the conduct in question, although falling short of dolus eventualis, must involve a departure from the standard of the reasonable person to such an extent that it may properly be categorized as extreme; it must demonstrate, where there is found to be conscious risk-taking, a complete obtuseness of mind or, where there is no conscious risk-taking, a total failure to take care. If something less were required, the distinction between ordinary and gross negligence would lose its validity.

is highly unlikely - if not impossible. Where there is no gross negligence by the Registrar or his Office, parties who suffer financial loss as a result of decisions made or not made, from the additional powers now granted, have no recourse. However, due to errors for which the Registrar should be responsible for, loss suffered by pension funds and their members as a result of errors made with the additional powers being granted should be capable of being rectified. Errors made should not be for the expense of members - the very people the Bill is seeking to provide enhanced protection to.

6. I would therefore propose that in line with the intent of the Bill to afford members and pension funds better protection, that section 23 of the Financial Services Board Act 1990 also be amended to afford pension funds and their members a proper recourse where errors are made by the FSB that result in financial loss.

Pension Funds Amendment Bill 2007

New wording for section 2 of the Pension Funds Act

7. From the explanatory memorandum we see that section 2 of the Pension Funds Act is being amended to provide;

To make it clear that all bargaining council funds registered in terms of the Act are indeed subject to the Act and to oblige bargaining council funds not yet registered under the Act to register before or on 1 January 2008 in the interest of consistency in fund governance and dispute resolution across bargaining council funds and other occupational funds.

8. I do agree that the proposed wording in the Bill achieves what has been described. While the inclusion of funds established through bargaining councils in the governance provisions of the Pension Funds Act is to be welcomed in principal, I do suggest that there are some very serious unintended negative consequences of the proposed legislation and this is precisely my concern.

9. Relative to the election of a pension fund's board of management, not all members of a bargaining council fund have a say in the collective agreement due to the Labour Relations Act principle of ' majoritarianism'. Minority unions whose membership does not meet the agreed threshold for membership of the bargaining council, or in a closed shop collective agreement situation, such members will not be able to participate in the election of the fund's board of management if the provisions of the bargaining council collective agreement are to be complied with.

This is so as S 33A of the Labour Relations Act provides;

33A Enforcement of collective agreements by bargaining councils

1. Despite any other provision in this Act, a bargaining council may monitor and enforce compliance with its collective agreements in terms of this section or a collective agreement concluded by the parties to the council.

2. For the purposes of this section, a collective agreement is deemed to include;

(a) any basic condition of employment which in terms of section 49(1) of the Basic Conditions of Employment Act constitutes a term of employment of any employee covered by the collective agreement; and

(b) the rules of any fund or scheme established by the bargaining council.

3. A collective agreement in terms of this section may authorise a designated agent appointed in terms of section 33 to issue a compliance order requiring any person bound by that collective agreement to comply with the collective agreement within a specified period.

10. In other words, in terms of the LRA, pension fund rules to be registered with the Registrar are part of the collective agreement established by the majority trade union and majority employer representative. The collective agreement, and thereby the fund rules are extended by the Minister to non parties I minority unions in terms of s32. Many such extended agreements about pension funds exist. The LRA principle of 'majoritarianism' is therefore being undermined by the proposed change to the Pension Funds Act. There is therefore conflict between the provisions of the Pension Funds Act and the LRA that is going to adversely affect members. This is also likey to lead to much litigation

11. S 28 (1) (g) of the LRA provides;

The powers and functions of a bargaining council in relation to the registered scope include the following - (g) to establish and administer pension, provident schemes or funds ... for the benefit of one or more of the parties to the bargaining councilor their members;

12. In practise this has the effect that in terms of the collective agreement contributions are paid to the bargaining council and benefits are paid by the bargaining council. This is in direct conflict with the Pension Funds Act.

13. An important aspect is that section 5 of the Pension Funds Act clothes pension funds with a corporate identity and a separate legal persona and identity. The effect would be that a pension fund established by a Bargaining Council by way of a collective agreement, the rules of which fund constitute a collective agreement, in terms of the proposed legislation, becomes a legal person, which it cannot be in terms of the LRA. For compliance with the provisions of a collective agreement, the LRA sets out detailed compliance procedures and mechanisms "to address non compliance - which are distinctly different to the Pension Funds Act.

14. Put differently, in terms of the Pension Funds Act a pension fund is a legal persona with its own will, which by law it is required to exercise independently. A collective agreement is a written recording of the agreed will between employers and employees. The clothing of a collective agreement with a legal persona and its own free will is contrary to the provisions of the LRA and the Constitution. Conflict and significant legal expense is sure to follow if Bargaining Council funds are simply included as proposed.

15. Benefits negotiated at bargaining councils also frequently include in the rules of funds the provision of accident benefits, disability income benefits and funeral benefits. The inclusion of these benefits are not permitted by the Registrar in pension fund rules.

To change the arrangement to get all the participating employers in such funds to effect their own assurance arrangements for these members at the same time is not practical, - some Bargaining Council funds have as many as 500 or more participating employers - in addition to which not all employees of an employer will be on the bargaining council fund - only those covered by the bargaining sector - e.g. unionised employees. Non unionised employees are treated differently because of the bargaining council agreement. Taking only certain aspects out of the bargaining council realm is most likely to be very disruptive to collective bargaining for members, unions, the bargaining council and employers.

16. The next aspect is that of dispute resolution. Bargaining council collective agreements are required to have their own dispute resolution mechanisms. These provisions usually relate to binding arbitration. [s33A (4)] So too, the rules of the pension funds established, by virtue of s 33A (2)(b) fall within the ambit of the dispute resolution provisions which are different to the Pension Funds Act. There is therefore likely to be much uncertainty how pension fund rules dispute resolution mechanisms should be drafted and complied with. Compliance with the Pension Funds Act is certain to bring the pension fund rules part of the collective agreement in direct conflict with the main part of the bargaining council collective agreement.

17. Similarly, the 'trustees' right in terms of the Pension Funds Act to amend rules of the pension fund, part of the collective agreement, is in direct conflict with the right of the parties to a collective agreement to change the collective agreement in terms of the LRA. This is important as the collective agreement can vary terms and conditions of employ, yet those conditions are not being varied by the parties to the main agreement - the trustees who are not a party to the agreement are making the changes by virtue of the power vested in them in terms of the Pension Funds -Act. At law, a non party to an agreement cannot vary an agreement between parties thereto. The effect of the proposal is clear conflict of law.

18. All the above provisions are also applicable to Statutory Councils.

19. All the above is also influenced and needs to be considered against the backdrop of section 210 of the LRA which reads;

If any conflict, relating to the matters dealt with in this Act, arises between this Act and the provisions of any other law save the Constitution or any Act expressly amending this Act, the provisions of this Act will prevail.

20. The proposed amendments to the Pension Funds Act do not expressly amend the LRA, consequently, there is likely be much conflict and legal uncertainty which is going to lead to increased costs and many problems for members, who are intended to benefit, trade unions, bargaining councils, statutory councils and employers.

21. These are just some thoughts on a very complex matter of the consequences of proposed simple incorporation of bargaining council funds under the Pension

Funds Act. There are other complex matters, the impact of which need to be addressed, such a~ the impact on work place forums, appeals against a decision of the Registrar of Pension Funds go to the Appeals Board while in terms of the LRA appeals against a decision of the Registrar go to the Labour Court, enforcement of a bargaining council collective agreement in terms of the LRA as opposed to compliance matters dealt with in the Pension Funds Act say the payment of contributions to the fund by an employer, the unfair provision of benefits and many more.

22. To prevent numerous and unforeseen complications and difficulties, some of which have been indicated above, I do suggest that in order to achieve the desired result of all funds enjoying the improved governance of the Pension Funds Act, the LRA should be amended. The amendment of the LRA to incorporate the governance principles of the Pension Funds Act should not be difficult. Such amendment will avoid the conflicts identified and unintended consequences in the proposed legislation.

23. In closing I would obiter that the Committee should be aware that in my humble opinion, many portions of the Bill are in conflict with both the Constitution and centuries of established legal practise. Violations of these pillars of democracy are likely to lead to much litigation and additional expense for both members and pension funds. I seem to recall that similar warnings of the proposed legislation resulting in increased expenses for funds were sounded in 2001 and were ignored. Safe to say that the many recent comments from the Financial Services Board about the high expenses being incurred by pension funds in the surplus apportionment exercises is evidence of materialisation of previous warnings made.

24. In closing, I do need to mention that in my view, the numerous serious flaws in the Bill will only be of benefit the legal fraternity if enacted as proposed, and in many instances, not those "it is designed to benefit and protect.

I wish you and the Committee well with your deliberations.

Yours faithfully

PIERRE REINECK

ANNEXURE

About the writer

I have been an active practitioner in the retirement fund industry for 29 years, the last 13 of which have been as an independent consultant in private practice. I became a pensions fellow of the Financial Planning Institute by examination in 1983 and did serve the Institute for a number of years as chief examiner of the subject "Retirement Fund Constitution and Management". I have a Masters Degree in Labour Law from University of Cape Town.

I arbitrate pension and labour law related disputes and am an associate member of the Association of Arbitrators (Southern Africa). I am a past Vice President of the Pensions Lawyers Association of South Africa, a member of the International Foundation of Employee Benefit Plans in the United States and a former South African representative and past steering committee member of the International Pension and Employee Benefits Lawyers Association.

I was responsible for the launch of the Institute of Pension and Provident Fund Trustees as well as Pensions World SA in 1998, of which I was the managing editor until I resigned in June 2005. J have presented papers at various local and international conferences and seminars, had articles published and have been guest lecturer at UCT on the subject of Pension Law. I was a member of a research group on social security law in South Africa, the results of which have been published in Eds. Oliver et al Social Security Law - General Principles Butterworths. I was involved as benefits consultant to the working group drafting the Employment Equity Act Code of Good Practice: Disability, for the Department of Labour. I am a current contributor to 'The Manual on South African Retirement Funds and other Employee Benefits', published by Butterworths.