What should happen to unclaimed benefits in your retirement fund? The recent conference of the Pension Lawyers Association heard that R20 billion in unclaimed benefits owed to some 3.5 million people is sitting in retirement funds, and many funds believe the beneficiaries will never be traced.
Three retirement funds have launched separate High Court challenges to a regulation under the Pension Funds Act that forces funds to keep unclaimed pension surplus benefits in a contingency reserve account indefinitely or pay them to the Guardian’s Fund.
Advocate Alistair Franklin SC, an expert in pension law, told the conference that the effect of the regulation is that money in a contingency reserve account is “sterilised, for no purpose, without a time limit, in a dog-in-the-manger type of impasse which benefits nobody”.
One of the funds that is challenging the validity of the regulation, the Picbel Groepvoorsorgfonds, is represented by its liquidator, Tony Mostert. The fund was one of many from which pension surpluses were plundered by employers between 1993 and 1999 in a fraudulent scheme (known as the Ghavalas option) devised by Peter Ghavalas.
Mostert recovered almost R100 million in pension surpluses that had been stripped from the fund. Some of this money has been distributed to former members (the fund has no active members), but about R55 million cannot be distributed, because the beneficiaries cannot be traced.
Mostert wants the court to declare regulation 35(4) of the Pension Funds Act, which regulates what funds can do with unclaimed pension surplus money, to be ultra vires (the Minister of Finance did not have the lawful authority to create it) and therefore unenforceable.
The hearing is set down for June, and Franklin says the court is likely to pronounce on the matter this year.
The other two cases have been brought by the Free State Municipal Pension Fund and the Southern Sun Group Retirement Fund against the Minister of Finance, the Registrar of Pension Funds and the Chief Master of the High Court. No dates have yet been set for these cases.
Franklin is representing the Free State Municipal Pension fund.
Regulation 35(4) was introduced in 2003, two years after legislation spelling out how pension surpluses should be distributed among members, former members, pensioners and employers.
The regulation states that a contingency reserve account must be set up to hold the unclaimed surplus benefits due to former members who cannot be traced. Payment from the account can be made only to former members of the fund, or to an unclaimed benefits fund set up for the benefit of those members, or to the Guardian’s Fund (which is managed by the Master of the High Court).
Before the legislation on pension surpluses was passed in 2001, the office of the Registrar of Pension Funds had registered rules for many retirement funds that allowed unclaimed benefits to revert to the fund after a certain period of time, usually three years.
When regulation 35(4) became law, unclaimed benefits could no longer revert to the fund.
In 2007, the Financial Services Board (FSB) issued a circular stating that funds may not implement a rule that permits unclaimed benefits, whether or not they arose from a pension surplus, to revert to the fund and instructed funds to remove any such rule.
Franklin says that, where funds have moved unclaimed benefits back into the fund, in line with their rules, the Registrar of Pension Funds is refusing to approve the actuarial valuations that funds are required by law to submit to the FSB.
He says that, when the courts hear the three cases attacking the legal standing of regulation 35(4), they will not only look at what the registrar’s office has ordered funds to do, but will also “clinically examine” whether the Minister of Finance had the power to make the regulation. In deciding that, the courts will consider whether the regulation is in conflict with the provisions of the Pension Funds Act, or whether it did not give the minister the power to legislate on a particular topic.
Franklin says the objections to regulation 35(4) raised by the applicants in the court proceedings include the following:
* The minister did not have the legal authority to deprive boards of trustees of the power to decide, at an appropriate time, to release amounts from a contingency reserve account if it was unlikely that the money in the account could ever be used to benefit former members.
A contingency reserve account is, as its name suggests, set up to cater for future events or circumstances that might occur but which cannot be predicted with certainty. In the case of unclaimed benefits arising from a pension surplus, the contingency is whether the former members will be traced. If they are not traced within a certain (or reasonable) time, the contingency has failed, he says.
The definition of a contingency reserve account in the Act gives a fund the power to credit or debit these accounts, Franklin says. This must include the power to decide when the account is no longer needed.
He says it does not make sense for retirement funds to have to forfeit the money to an unclaimed benefits fund or the Guardian’s Fund, which is less likely than the fund to be able to trace former members.
The Minister of Finance and the FSB have opposed Mostert’s application. Franklin says the minister’s response to the application is that a retirement fund is not compelled to do anything and therefore does have a choice. This choice “is more apparent than real”, Franklin says, because a fund is unlikely to give up its assets to an unclaimed benefits fund or the Guardian’s Fund, particularly because unclaimed money in the Guardian’s Fund is forfeited to the state after 30 years.
* A regulation cannot require assets to be forfeited to the state unless the empowering legislation specifically grants such authority.
* Regulation 35(4) compels a fund to establish a contingency reserve account, whereas the Pension Funds Act expressly gives trustees the discretion to decide whether or not to do so.
* The registrar is incorrect in asserting that former members automatically have a right to money in a contingency reserve account.
Franklin says the Free State Pension Fund is arguing that former members have a claim on money allocated to a contingency reserve account only if certain conditions are satisfied, such as they were alive when the surplus was apportioned. If they were not, they have no claim in law to the surplus.
He says many stakeholders in the retirement fund industry believe the FSB could be doing more to provide guidance to the industry on the treatment of unclaimed benefits, particularly because the Registrar of Pension Funds used to allow money in a contingency reserve account to be returned to the fund, whereas now the registrar will not approve actuarial valuations even where rules approved by the registrar’s office were followed to the letter.
HOW PRE-2001 SURPLUSES SHOULD HAVE BEEN DIVIDED
The debates over who was entitled to pension surpluses that had accumulated in funds until 2001 were put to rest that year, when a new section of the Pension Funds Act, section 15B, became effective.
Advocate Alistair Franklin SC, an expert in pension law, says although millions of current and former members and pensioners have benefited from pension-surplus apportionments, some 3.5 million people have yet to be traced despite considerable efforts by funds and tracing agents.
The legislation on pension surpluses states that:
* Every fund must formulate a surplus-apportionment scheme that sets out how any surplus that built up in the fund before 2001 will be allocated.
* The fund’s board of trustees can, with some provisos, determine who may participate in the allocation.
* The apportionment scheme must include anyone who belonged to the fund from January 1980. A fund has to increase the allocations to former members and pensioners up to the “minimum benefit” specified in the Pension Funds Act before it can apportion any remaining portion of the surplus among current members and the employer.
* Funds have the discretion to exclude from the apportionment scheme former members where funds’ records are insufficient to calculate the benefit due to them. In the court applications, these members are referred to as “poor data members”.
* Funds have the discretion to include “poor data members” in the apportionment by setting aside a portion of the surplus in a contingency reserve account. The funds in these accounts are for former members who can be identified but not traced, or who did not substantiate their claim to a share of the surplus within nine months of the trustees advertising for members to come forward and do so.