Two Transnet pensioners, acting on behalf of some 66 000 pensioners, many of whom are in a dire financial situation as a result of receiving shockingly low increases on their pensions, won the first leg of what is likely to be a multi-year legal battle against their former employer last week.
The North Gauteng High Court ruled that Johan Kruger and Johan Pretorius have a right to institute a class action against the parastatal and two of its pension funds for claims amounting to R80 billion that the pensioners allege is owed to the funds.
The pensioners – most of whom are over the age of 70 – have been forced out of retirement and into the courts after receiving pension increases of just two percent a year for the past decade – well below the average inflation rate for the past 10 years of six percent.
The attorney acting for the pensioners, Wynanda Coetzee of Geyser and Coetzee Attorneys, said last year, when the two pensioners launched their application, that 45 percent of the pensioners earn less than the state old-age grant (now R1 350 a month), 62 percent earn less than R2 500 a month and 80 percent of them earn less than R4 000 a month.
Coetzee said many pensioners receiving a net pension of R1 a month after their medical scheme contributions – which are no longer paid in full by their former employer – are deducted. She said some pensioners have committed suicide and others are dependent on their families after being denied a dignified retirement.
After last week’s judgment, Coetzee told Personal Finance that she expects to issue summonses against Transnet and its pension funds by the end of the year.
When the case eventually goes to court, the arguments from the pensioners will centre on a debt the parastatal had to the funds, the Transnet Second Defined Benefit Fund and the Transport Pension Fund, as well as the pensioners’ right to expect a reasonable increase in their pensions.
The pensioners will argue that when the South African Transport Services (SATS) was reinvented as Transnet, Transnet inherited the obligation of SATS to pay a deficit to the funds, which was required to meet the funds’ liabilities to the pensioners. They will also argue that Transnet tried to meet its obligation to the funds by way of some dubious investments.
And they will argue that, before 1999, former employees of the parastatal had received annual pension increases in excess of two percent in order to meet inflation, and that it was reasonable to expect higher increases to continue.
The case raises the question of whether the shameful treatment the fund and the former employer meted out to the pensioners could be repeated and whether other retirement fund members could end up in the shoes of the Transnet pensioners, having to fight a class action or protest in the streets to ensure a decent pension.
Pension lawyers say the Transnet case is fairly unique to because it relates to a funding situation specific to that fund and its complex history and because its is a parastatal fund.
Like most government funds, it is governed by its own statute rather than the Pension Funds Act, which generally applies to private pension funds. Funds that do not fall under the Pension Funds Act do not enjoy the protection of this Act, and, in particular, its provisions aimed at securing minimum pension increases for pensioner members.
Other large pension funds that are governed by their own Acts include the Government Employees Pension Fund, which has 1.2 million active members and 300 000 pensioner members, and the Post Office Pension Fund.
The Pension Funds Act, among other things, provides for 50 percent member representation on retirement funds’ boards of trustees, and requires that funds need to be valued and audited. Since the introduction of the minimum benefit legislation in 2001, funds must also have a pension increase policy that targets a percentage of inflation.
Pensioner members are not represented on the board of the Transnet Second Defined Benefit Fund, despite an amendment to the rules of the fund to allow 50 percent member representation with effect from April this year. The Transport Pension Fund has had such representation only since last year.
Karin MacKenzie, a director at Harold Gie Attorneys, says that private funds and many local authority funds governed by the Pension Funds Act, make provision in their rules for pensioner representatives to be included in their member-elected trustees.
She says that although funds governed by their own Acts are not subject to the provisions of the Pension Funds Act, these funds need to show there is a rational basis for treating members of private and government funds differently.
MacKenzie says the principle of parity between members of private and government funds was established in previous Constitutional Court cases.
Successful challenges against the GEPF and the Post Office Pension Fund were upheld in the constitutional court as their rules did not permit the former spouses of members to access pension benefits on divorce, unlike their counterparts in private pension funds.
When it comes to pension increases, the boards of trustees of private pension funds are required to draw up a pension increase policy.
MacKenzie says there is a common misconception that minimum increases mean members are automatically entitled to an increase based on the Consumer Price Index (CPI).
This is not necessarily the case. What the Act says is that funds must pay the lesser of the increase targeted by the pension increase policy or what the fund can afford, without making it financially unsound.
The pension increase policy must be communicated to you, as a pensioner or a deferred pensioner, with a justification for the decision, both when it is drawn up and whenever it is amended. Mackenzie says the trustees need to act reasonably in setting the pension increase policy.
She says it would be prudent for pensioners receiving an increase from their fund to examine the pension increase policy and if they believe it does not meet their rights or is unfair to them, they should ask the trustees for the rationale behind the policy.
Relevant factors that the trustees should have taken into account are the financial position of the fund, its historical and projected investment performance, as well as the previous increases pensioners have enjoyed.
If they are dissatisfied with the policy and its rationale, pensioners can approach the Pension Funds Adjudicator, Mackenzie says.
The Act also says increases must be considered at least annually.
While some government funds have adopted a pension increase policy, it is only obligatory for members of funds under the Pension Funds Act.
MacKenzie says it is more commonly relevant to members of defined benefit funds because most defined contribution funds outsource the payment of pensions to insurers that provide annuities.
A defined benefit fund pays you a pension for the duration of your retirement based on your final salary and your years of service, while a defined contribution fund ensures only that at retirement you are provided with the accumulated contributions you and your employer make to your fund plus the growth on these.
Once a defined contribution fund or its member has purchased an annuity, it no longer falls within pension fund regulation, MacKenzie says.
The pension increase policy is restricted to pensions payable by the fund itself, but not in cases where members have elected to have an annuity purchased from an insurer by the fund on their behalf.
If an annuity has been purchased by the fund on your behalf, the increase will depend on the annuity you have chosen (see “If you have pension choice, use it wisely”).
Pension fund and retirement annuity fund members must, by law, use at least two-thirds of their retirement savings to provide an annuity.
If you have pension choice, use it wisely
Transnet and its pension funds may be responsible for the fate of its former employees, but you can place yourself in a similar impoverished position by failing to save enough for retirement, choosing the wrong annuity or making mistakes with a living annuity.
Guaranteed annuities. If you buy a guaranteed annuity to provide you with a pension for the rest of your life, or for the rest of your life and that of your surviving spouse, the increases in your pension will depend on the policy you choose.
Guaranteed annuities are typically offered with a choice of a level annuity that does not increase, an annuity that escalates by a pre-determined amount, or one that increases in line with inflation.
The increase or increase expectation you choose will influence the monthly pension amount your savings will provide, with a level annuity providing the highest pension initially but likely to lose buying power as result of inflation within a few years. This potentially exposes you to a situation worse than that which the Transnet pensioners find themselves.
Living annuities. If you choose a living, or investment-linked, annuity, you can choose an amount to draw from your savings of between 2.5 percent and 17.5 percent of the value of your investment annually. You can change the withdrawal rate each year on the anniversary of the contract.
However, it is up to you to manage the investment in the living annuity to ensure it provides you with an income for life. The higher the percentage you withdraw, the greater the potential that your investment will become incapable of providing an income. If your withdrawal is higher than the growth in the portfolio, you will begin to deplete your capital, and you then run the risk of the income you withdraw reaching the limit of 17.5 percent of your capital.
Once you reach the limit, your income will be eroded by inflation and will most likely decrease if your capital amount decreases further.
The Association for Savings & Investment SA has issued guidelines that show that even at an initial drawdown rate of five percent, adjusted for inflation of six percent every year thereafter and at an annual return of 7.5 percent a year, the capital in your annuity would start to erode after 19 years. It would start to erode after 33 years if your return was 10 percent a year. It therefore recommends much lower drawdown rates than the maximum allowed.
With-profit annuities. If you choose a with-profit annuity, you income is guaranteed for life but your annual increases are determined by the life assurer in line with investment market returns.
There is no guarantee that the increases will be inflation-linked.
You have to choose a discount or pricing rate and, as a rough guide, you can expect your pension increase to be in line with the extent to which investment returns after fees exceed the discount rate, Michael Prinsloo, the head of best practice in research and development at Alexander Forbes, says.
According to Warren Matthysen, the marketing actuary at Momentum Employee Benefits, a with-profit annuity can cost up to 20 percent less than an inflation-guaranteed annuity, so you will initially enjoy a higher income, but in some years, your increase may not keep pace with inflation.