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“SURPLUS AND MINIMUM BENEFITS IN RETIREMENT FUNDS”

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					“SURPLUS AND MINIMUM BENEFITS IN RETIREMENT FUNDS”

General Information sheet on the surplus legislation for general use only

Publication of this information sheet does not imply that any or all of the Funds within the Anglo Platinum Group have a surplus and that there is automatically a claim against the various Funds within the Anglo Platinum Group.

Each Fund with in the Anglo Platinum Group will be going through the required procedures and where applicable, a surplus apportionment scheme will be done.

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“SURPLUS AND MINIMUM BENEFITS IN RETIREMENT FUNDS”
A WORKBOOK PRESENTED BY ALEXANDER FORBES FINANCIAL SERVICES

NOTE: The issues surrounding trustee duties are complex and depend entirely on the particular circumstances facing each fund. Trustees must in all cases take their own decision on issues based on their particular fund’s circumstances at the time. It is for this reason that trustees cannot rely simply on what we have discussed here today, neither should they regard our discussions as legal advice. Trustees should get specific assistance where they are uncertain of the consequences or reasonableness of any contemplated action.

Copyright in this material is expressly reserved. This workbook may not be
copied, stored, retrieved or in any way reproduced without the express written permission of Alexander Forbes Financial Services. Breach of copyright is a serious offence and can lead to litigation. This is not a work of final reference. While every attempt is made to ensure that the information published is accurate the editors, publishers and printers take no responsibility for any loss or damage that may arise out of the reliance by any person upon any of the information contained herein.

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INDEX SURPLUS AND MINIMUM BENEFITS IN RETIREMENT FUNDS

QUESTIONS (1) When are minimum benefits payable by retirement funds, in respect of active members? (2) How will the minimum benefits be calculated in a: (2.1) defined contribution fund (2.2) defined benefit fund (3) From which date will minimum benefits apply and must the fund rules be amended prior to such date in order for minimum benefits to apply? (4) Will minimum benefits apply to funds, which do not have an actuarial surplus on the commencement date? (5) What happens if liquidation or conversion the fund assets are insufficient to meet the cost of paying minimum benefits to members? PENSION INCREASES (6) The Board is required to set a pension increase policy. What must the policy provide for? (7) What is the Minimum Pension Increase?

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12

13

14

15

15

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(8) What pensioner is entitled to receive the minimum pension increase? (9) What are the are the implications of the minimum pension increase for defined contribution fund pensioners and spouse/child pensioners receiving pensions from the fund from insured risk benefits? (10) When must the fist minimum pension increase be granted? (11) Funds will be required to set up a notional pensioner account to determine the minimum pension increase> What does this entail? SURPLUS (12) Do all funds have to submit a scheme to apportion surplus, or only funds which have an actuarial surplus on the commencement date of the legislation? (13) What will be regarded as actuarial surplus in: (13.1) .in a defined benefit fund? (13.2) in a defined contribution fund (14) How is a defined contribution category of a fund defined? (15) What is a contribution holiday defined as in a : (a) defined benefit category of a fund? (b) Defined contribution of a fund? (16) Can an employer continue with a contribution holiday after the commencement of the Act and what are the implications of doing so?

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17

18 18

19

20

21 22

22

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(17) Who are the stakeholders who could potentially benefit from surplus? (18) Who determines the appointment of surplus? (19) How may surplus be apportioned ? (20) What is the Ranking Order for the Appointment of Surplus? (21) In what circumstances may “Former Members” be excluded from participation in the scheme due to insufficient information? (22) Who would represent former members in the surplus apportionment process and what will his/her responsibility be? (23) What is required of the Board in order to apportion existing surplus? (24) What will be regarded as an improper use of surplus by the employer? (25) What happened if a fund has already entered into an agreement with various parties as to the distribution of surplus on the commencement date, but the distribution has not yet been effected? (26) What is the Specialist ad hoc Tribunal and what does it do? (27) May the Board refer the surplus apportionment to the Specialist and hoc Tribunal without first attempting to apportion surplus itself? (28) May decisions of the Specialist ad hoc Tribunal be taken on appeal?

23 24 24 25 26

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28 29 31

31 32

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(29) What happens if the fund goes into liquidation: (1) before commencement date (2) after commencement date of the Act but before surplus apportionment date (3) after 12 months surplus apportionment date? SURPLUS ACCOUNTS (30) What can the employer surplus account be used for? (31) What can the member surplus account be used for? – Section 15D (32) Member trustees cannot vote with regard to the use of surplus in employer account (and vice versa in certain circumstances) – how does this impact on trustees’ fiduciary duties? (33) What happens to surplus already allocated to an employer reserve prior to commencement of legislation? – Section 15F PAYMENT SURPLUS (34) Can surplus be paid in cash to the employer or active members, after the commencement date of the legislation? (35) Can surplus be transferred to a preservation fund in respect of members and former members? (36) If surplus is apportioned to a former member and/or pensioner who has died?

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38 40

42

43

45

46

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INTRODUCTION
This hot topics seminar is based on the version of the Pension Funds Second Amendment Bill (the Bill) which was presented to the portfolio committee on finance. The Bill is complicated and contains many uncertainties. Some of the answers in the booklet are not conclusive, but are based on our interpretation of the Bill, taking into account, where possible the legislature’s intention. While the answers are not conclusive they do give an indication of what trustees, fund members, employers and other stakeholders can expect once the legislation comes into force. The questions, answers and other matters discussed at this Hot Topics Seminar may have limited currency, as the Bill in its current format may change substantially prior to being enacted. The issues surrounding minimum benefits and the apportionment of surplus are complex and depend on the particular circumstances facing each fund. It is for the above reasons that trustees, members and other stakeholders cannot rely simply on what we have discussed here today. Interested parties should get specific assistance where they are uncertain, of the consequences or reasonableness of any contemplated action.

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Hot Topics Questions
1. When are minimum benefits payable by retirement funds, in respect of active members? Section 14A of the Bill has been inserted to introduce minimum benefits, which will be payable by all funds to their members in certain circumstances. These minimum benefits are payable to members in the following situations : • when a member leaves the fund prior to retirement, other than where the fund is liquidated, e.g. on dismissal, resignation, retrenchment, transfer in terms of Section 14 of the Act; • • when the fund is liquidated in terms of Section 28 or 29 of the Act; and when a fund is converted from a defined benefit to a defined contribution funding basis. Those funds, often referred to as “top-up funds” which do not currently provide benefits on the withdrawal of a member from such fund will have to introduce these minimum benefits. Although not dealt with specifically in the minimum benefits section of the Bill, minimum benefits must also be paid on retirement or death. In terms of section 15(G) of the Bill, notwithstanding anything to the contrary contained in the rules, members whose membership of the fund ceases, should receive as part of their transfer value or benefit payments a share of any credit balances in:

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• • •

the member surplus account; investment reserve account; and such contingency reserve accounts as the Board deems appropriate

in the ratio that the fund’s liability in respect of the past service of members leaving the fund bears to the fund’s liability towards all its members in respect of past service at that date. 2. How will the minimum benefits be calculated in a: 2.1 2.2 defined contribution fund defined benefit fund

The Bill states that the minimum benefits payable shall “not be less than the minimum individual reserve”. The basis for calculating the minimum individual reserve differs depending on whether the fund is a defined benefit or defined contribution fund. Defined Benefit Fund – Section 14B(2)(a) The minimum individual reserve is the greater of (1) and(2) below: (1) the present value of the member’s pension payable from his normal retirement date, provided that • if there is no uniform rate of accrual over the full period of membership, then a uniform rate of accrual shall be assumed as if the member had remained in service until normal retirement date in terms of the rules of the fund; and • the registrar shall prescribe the assumptions to be used by notice in the Government Gazette;

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AND (2) an amount equal to the value of the member’s contributions decreased by reasonable expenses as determined by the Board; plus investment return from the commencement date of the Bill, decreased by expenses determined by the Board; plus such share of the employer contributions which have vested to the member, increased by investment return.

Individual Reserve = Greater of: 1) Present value of benefit payable from member’s normal retirement date using assumptions; OR 2) Member contributions less expenses and vested employer contributions and fund interest.

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Defined Contribution Fund – Section 14B(2)(b) The minimum individual reserve is the sum of the: (1) Member’s individual account, which is determined as follows: member contributions; plus employer contributions; less expenses; plus actuarial surplus apportioned to that member’s account; plus net investment return (This would normally be referred to as full fund credit) PLUS (2) Share of the investment reserve account, the member surplus account and the contingency reserve account as deemed appropriate by the Board taking into account the ratio that the fund’s liability, in the proportion that the member’s individual account in (1) bears to the total of all of the member’s individual account values.

Individual Reserve = members individual account plus share of investment reserve, contingency reserve, and member surplus account, in proportion to all individual accounts.

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Note that the Bill allows for a share of the member surplus account to be allocated to the minimum individual reserve. However the member surplus account will only come into existence once the scheme for surplus apportionment has been approved and it is possible that this will only happen after minimum benefits are payable. We assume that the share of the member surplus account is only payable if and when this account is set up. 3. From which date will minimum benefits apply and must the fund rules be amended prior to such date in order for minimum benefits to apply? For a fund registered prior to a date three months after the commencement date: • minimum benefits in respect of all cessations of membership (except liquidations) prior to retirement shall apply from a date 12 months after “surplus apportionment date”; and • minimum benefits on liquidation, conversion and pension increases shall apply from the commencement date. For funds that are registered three months after the legislation’s commencement date, and thereafter, minimum benefits will apply on registration. The surplus apportionment date is the next statutory actuarial valuation following the commencement date of the legislation. This definition is problematic for many defined contribution funds, which don’t have statutory valuations.

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In terms of the Bill, minimum benefits will apply from the dates mentioned above. The Board must ensure that the fund rules are amended timeously to give effect to the above. In a recent court case it was held that it is acceptable to register a rule retrospectively, but the amended rules cannot be applied until it is registered by the Registrar. In such cases where the fund rule allowing for minimum benefits has not been registered, the Board can only pay the amount allowed in terms of the current rules with the balance of the benefit being payable once the rule is registered. The rules should provide for the minimum benefit to be payable retrospectively. The fund may be guilty of maladministration if it does not timeously amend its rules to provide for the provision of minimum benefits. Funds may, of course introduce the minimum benefits earlier as long as they comply with their existing rules provisions regarding benefit improvements. 4. Will minimum benefits apply to funds which do not have an actuarial surplus on the commencement date? Our view is that it was the intention to include minimum benefits in our funds. However funds that do not have a surplus will not be all funds. However funds that do not have a surplus will not be required to apportion surplus. So it could be argued that such funds will not have a surplus apportionment date, from which date the applicability of minimum benefits can be calculated. Our view is that even though there are discrepancies the intention was for minimum benefits to apply to all funds.

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5.

What happens if on liquidation or conversion the fund assets are insufficient to meet the cost of paying minimum benefits to members? The Bill does provide for the minimum benefits to be proportionately reduced in situations where the fund assets are insufficient to meet the cost of minimum benefits. If the value of the fund’s assets, after the employer has repaid any amounts owing to the fund (which is dealt with below), is less than the total of the minimum individual reserves for all members included in the liquidation or conversion process, after taking into account benefits already paid to former members and the cost of annuities for pensioners, then the minimum individual reserve may be proportionally reduced to the value that the fund assets bear to the sum of all of the minimum individual reserves. When calculating the value of the fund assets for the purposes of paying minimum benefits, the Bill envisages that in the case of non valuation exempt funds which are liquidated after the date on which minimum benefits become payable on withdrawal from service (i.e. 12 months after the commencement date of the Act for fund’s registered on the commencement date) where the fund assets are less than the cost of the minimum benefits, this shortfall shall represent a debt payable by the employer to the fund. If there is more than one employer participating in the fund, this shortfall shall be distributed amongst the employers in a manner which is deemed reasonable by the liquidator.

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Pension Increases 6. The Board is required to set a pension increase policy. What must the policy provide for? Section 14 B(3) of the Bill states that the Board shall establish and implement a policy with regard to pension increases. This policy must: • aim to award a percentage of the consumer price index (“CPI”), or some other reasonable measure of price inflation as a pension increase. For example, the Board may decide to award a pension increase of 90% of CPI. The Board must ensure when choosing the level of increase that the decision has been made in good faith and taking into account all the relevant factors e.g. the funding level of the fund. They must also remember to document their justification for the decision, particularly where the increase is less than a full CPI increase, as pensioners may challenge the policy. • set the frequency with which increases will be considered in line with the policy. Increases must be considered at least annually and at least every three years these increases must be compared with the minimum pension increase specified in section 14B(4). This policy must be communicated to all pensioners and deferred pensioners. Any changes in the policy must also be communicated. 7. What is the Minimum Pension Increase? The minimum pension increase stipulated by the Bill is the lower of: • the pension increase that can be afforded by applying the full notional pensioner assets towards pensioners; and
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full inflation increases since retirement

subject to a minimum of the pension increase in terms of the pension increase policy. These minimum pension increases must be given to both pensioners and deferred pensioners on the first actuarial valuation date following the commencement date of the legislation and at least every three years after that. In the years between such reviews, pension increases must be granted in terms of the pension increase policy. In order to determine the increase that can be afforded by the full notional pensioner assets, the Board will have to track a notional pensioners’ account i.e. the Board will have to ring-fence pensioner assets. Investment growth is then added to these assets and all expenses and payments made are deducted. The Board may use approximations where it is impractical to derive exact increases. 8. Which pensioners are entitled to receive the minimum pension increase? All pensioners and deferred pensioners of the fund are entitled to receive minimum pension increases. This includes, by definition, spouses, children and other beneficiaries in receipt of benefits from the fund as a result of the death of a member. Where the fund has purchased annuities for pensioners in the name of the fund, these minimum pension increases will apply. This means that where the increase granted by the insurer is not sufficient to provide the minimum pension increase, the fund will have to pay these increases to the insurer from fund assets.

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Any pensioners who have purchased an annuity in their own names from a registered insurer (a GN18 annuity) and thereby terminated their membership of the fund, will not be entitled to a minimum pension increase from the fund. It should be noted however that as a share of the member’s surplus account, investment reserve account and contingency reserve, need to be paid to pensioners on retirements, the benefits of pensioners who did not receive these minimum amounts including GN18 annuitants, may need to be increased when surplus is apportioned. The bill will need to be amended to clarify this. 9. What are the implications of the minimum pension increase for defined contribution fund pensioners and spouse/child pensioners receiving pensions from the fund from insured risk benefits? In terms of the Bill minimum pension increases must be granted to all pensioners, which would include defined contribution fund pensioners and child/spouse pensioners. Where a defined contribution fund provides spouse/child pensions, which are insured, but which do not provide for increases, the fund will still be required to provide minimum pension increases to such child/spouse pensioners. The Bill does not specify how the minimum pension increases for defined contribution fund pensioners will be funded. The pension increase must be provided by the fund and presumably the rules can specify how the increases will be provided where there is no surplus to fund the increases.

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10. When must the first minimum pension increase be granted? Minimum pension increases will apply to all funds from the date of commencement of the surplus legislation. The first minimum pension increase must be granted on the first actuarial valuation following the commencement date of the legislation. The Bill does not specify by which date the fund’s pension increase policy must be implemented. It does however state that in terms of the policy increases should be considered at least each year. The section in the Bill which deals with the pension increase policy, will come into effect on the commencement date of the legislation. Within a reasonable period of the commencement date, the fund should implement the pension increase policy bearing in mind that increases must be granted at least annually. 11. Funds will be required to set up a notional pensioner account to determine the minimum pension increase. What does this entail? In order to determine the minimum pension increase a fund has to determine the pension increase that can be afforded, by applying notional pensioner assets towards the pensions. To determine the notional pensioner assets a notional pensioner account must be established. The notional pensioner account will be made up as follows: • The retiring member’s actuarial reserve, including the investment reserve at the date of retirement must be transferred to the account.

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Growth must be added to the account, which would be the overall fund return, unless a separate pensioner portfolio is operated in which case it would be overall return of the separate portfolio.

• •

Any pension payments made including lump sums commuted must be deducted from the account. All expenses associated with the payment of pensions must be deducted.

Surplus 12. Do all funds have to submit a scheme to apportion surplus, or only funds which have an actuarial surplus on the commencement date of the legislation? A fund must submit a scheme for the apportionment of any actuarial surplus effective as at the surplus apportionment date. Surplus apportionment date will be the statutory actuarial valuation of the fund coincident with or next following the commencement date. If a fund has no actuarial surplus on the commencement date and no actuarial surplus on the surplus apportionment date, it is our view that the fund will not be required to submit a scheme for the apportionment of surplus. It is not clear whether for a fund with no surplus “improper use” by the employer must be determined (see question 24), and allocated to the fund, to determine whether there is surplus. If the fund has no actuarial surplus on the commencement date but does have actuarial surplus on the surplus apportionment date, then it will have to submit a scheme to apportion the surplus.
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13.

What will be regarded as actuarial surplus in: 13.1 in a defined benefit fund? The difference between A and B will be actuarial surplus in a defined benefit fund. A. The value that the valuator has placed on fund assets less any credit balances in the member surplus account and employer surplus account. B. The value the valuator has placed on the fund’s liabilities in respect of pensionable service accrued prior to the valuation date plus The value of contingency reserve accounts which are established. Fund Assets – credit balance in employer and member surplus accounts =A

Fund liabilities (in respect of accrued service) + value of contingency reserve accounts =B

A – B = actuarial surplus in a defined benefit fund.

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13.2 In a defined contribution fund The difference between A and B will be actuarial surplus in a defined contribution fund. A. The fair value of the fund assets less any credit balances in the member surplus account and the employer surplus account. B. Sum of individual member accounts, plus any other liabilities plus value of any investment reserve account plus value of any contingency reserve accounts, as the board deems prudent. Fair value of fund assets – credit balances in employer and member surplus accounts = A

All individual member accounts and other liabilities + investment reserve and contingency reserve = B

A – B = actuarial surplus in a defined contribution fund. 14. How is a defined contribution category of a fund defined? Defined contribution category is defined as a category of fund members whose retirement benefit is equal to the value of: • • the fixed rate contributions paid by the member and the employer, where the fixed rates are defined in the rules less the expenses deducted from contributions paid

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increased by investment returns and any share of actuarial surplus or transfer from a contingency reserve account as determined by the board.

15. What is a contribution holiday defined as in a: (a) defined benefit category of a fund? The payment by the employer of less than the difference between the rate recommended by the actuary (ignoring any surplus/deficit) and the contribution payable by members. (b) defined contribution category of a fund? Payment by the employer of less than the contribution rate in the rules, before taking into account any amounts paid from an employer reserve account/employer surplus account. Note that a contribution holiday is defined per category of a fund and not per fund. That is, one fund may have both a defined benefit and a defined contribution section within it and there is a different meaning of “contribution holiday” for each section. 16. Can an employer continue with a contribution holiday after the commencement of the Act and what are the implications of doing so? Yes. The implication of doing so is that any contribution holiday taken after commencement date of the Act will be an improper use of surplus by the employer.

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The only proviso to this is is if the contribution holiday is approved by members or by trade union representatives representing the members, after a “clear and comprehensive communication exercise as part of a negotiated utilisation of surplus by stakeholders”. (See question 24). The value of improper uses of surplus is notionally “added back” to the surplus to create a reconstructed surplus, which must then be apportioned as provided for in the Act. If, on completing the surplus apportionment scheme, the trustees have allocated an amount to the employer surplus account, then the value of the contribution holiday will be deducted from this amount. If there is not enough in, or nothing allocated to, the employer surplus account then this amount will become a debt by the employer to the fund. 17. Who are the stakeholders who could potentially benefit from surplus? The Act defines stakeholder to mean: Active members; Pensioners; Deferred pensioners; Former members, and The employer participating in the fund. “Pensioner” is defined in the Bill to include any person that the fund pays a pension to, and thus would include spouses and children’s pensions which the fund is paying, but not someone for whom an annuity has been purchased by the fund in the annuitant’s name.

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“Former member” is not specifically defined and the current definition of member in the Pension Funds Act (which would automatically be incorporated into the meaning of former “member”) confuses the issue. We believe that the Act should define the term. As a result of “former member” not being defined, persons who

“contributed” to the build up of surplus (for example persons who were never members of the current fund but members of a previous fund, from which surplus was transferred) will be excluded from participation in the surplus apportioned 18. Who determines the apportionment of surplus? The Board determines who will participate in the apportionment of surplus. Such persons must include existing members and former members who left the fund in the period from 1 January 1980 to the surplus apportionment date. 19. How may surplus be apportioned? The Board has to submit a scheme to apportion surplus to the Registrar within 18 months of the Surplus Apportionment Date. The Registrar is given the power to prescribe the conditions with which the scheme must comply. The scheme may involve the following: • • • • improvement of benefits to existing members; increases to benefits or transfer values for former members; crediting an amount to the member surplus account; crediting an amount to the employer surplus account;

or any two or more of the above.

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20. What Is the Ranking Order for the Apportionment of Surplus? The Board must make the decision (from the pool of stakeholders) as to who is to benefit from surplus. In our view, the Bill envisages the apportionment process to be as follows as regards the priority of use of surplus: • before apportioning surplus, the surplus must be increased by the amount of surplus “utilised improperly” by the employer (see question 24 below); • then former members must have benefits previously paid to them (or transferred in respect of them) increased to their minimum individual reserve as at the date they left the fund, adjusted to surplus apportionment date by net investment earnings over the period; • at the same time, pensioners must also have their pensions increased to the minimum pension. Both these increases in respect of former members and pensioners are a prior charge on surplus. If there is not enough surplus to increase the benefits of former members and pensioners as described above then the amounts payable to them can be proportioned down until the total equals the surplus to be apportioned; • then the Board must deduct what is payable to former members and pensioners from the surplus and the remainder can then be equitably split between existing members, former members and the employer taking into account the financial history of the fund. The Registrar may prescribe certain methods for apportioning surplus which, if used by the Board, would be deemed to be equitable.

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The Board has to determine how the surplus apportioned to former members and existing members shall be applied for their benefit. There are no prescribed ways of doing this, but the Bill states that it could include: • crediting a portion of it to the members’ surplus account or the members’ individual accounts (which amount then vests and forms part of minimum benefits); • allocating a portion of the surplus to be used for former members to a contingency reserve account to be used for claims by former members who cannot be traced or who substantiate their claims only after the specified nine month period (after advertisement). 21. In what circumstances may “Former Members” be excluded from participation in the scheme due to insufficient information? The Bill contains some “escape” provisions whereby the Board may exclude former members from participating in the apportionment of surplus if the Board can satisfy the Registrar that insufficient records are available to enable former members’ additional benefits to be calculated. The Board is required to first take steps to: • • obtain the records from the fund’s administrators; reconstruct the records from the employer’s records or the records of any fund to which the former member transferred, or a trade union or staff association active in the workplace during the relevant period. If these steps don’t yield the necessary information (i.e. enough information to do the calculations) then the Board must advertise for former members to come forward with evidence to substantiate their claim. The Board has to wait at least six months (but not longer than

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nine months) before excluding any former members from participation in the scheme for reason of insufficient information to calculate benefits. This will be an extensive and costly exercise in some cases. Funds to which former members transferred could include other pension or provident funds as well as a multitude of preservation funds and retirement annuity funds. Rather than excluding former members whose benefits cannot be determined, the Board can set aside a portion of the actuarial surplus to satisfy former member’s claims. 22. Who would represent former members in the surplus

apportionment process and what will his/her responsibility be? The Board must appoint a person to represent the interest of former members in the development of the surplus apportionment scheme. Such person will have to assist the Board in performing duties such as: • • • identifying former members; communicating proposals between the Board, former members and the funds to which they transferred; and collating objections to the scheme from the former members and the funds to which they transferred. The former member representative must submit a report to the Board on: • • the adequacy of the Board’s inclusion of the former members in the scheme; and whether the Board exercised any discretion it had in respect of the former members reasonably in the circumstances.

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This report must accompany the scheme when it is submitted to the Registrar. 23. What Is Required Of The Board In Order To Apportion Existing Surplus? In a standard surplus apportionment process the Board will be responsible for: • • • • • • determining the surplus; identifying all stakeholders; appointing a person to represent former members; obtaining records in respect of former members and advertising; doing an analysis of the financial history of the fund; ascertaining the value of surplus “used improperly” by the employer (and any consequent debt to the fund by the employer as a result thereof); • • • agreeing with the employer and notifying the Registrar of any debt due by the employer to the fund and the details thereof; establishing a minimum pension increase policy; determining the basis of apportionment (i.e. the scheme), including a calculation in respect of minimum benefits for former members and pensioners; • • • • • • determining how the surplus apportioned to existing members and former members shall be applied for their benefit; approving a scheme (75 per cent Board approval is required); sending out the required communication to the necessary persons; dealing with objections to the scheme; obtaining a certificate from the fund’s valuator for submission to the Registrar regarding the scheme; obtaining a report from the person representing former members, for submission to the Registrar;

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• •

submitting a scheme to the Registrar within the required period; dealing with the Registrar’s requests for further information and requests from the special ad-hoc tribunal (if applicable).

Other issues such as: • • • • • referral to the special ad-hoc tribunal; reports by an independent actuary; applications in respect of existing employer reserve accounts; setting up and allocating surplus to contingency reserve accounts; formulating policy on sharing in the surplus accounts, contingency reserve accounts and investment reserve accounts upon members’ exits from the fund; • • • funding deficits; use of surplus to prevent retrenchments; dealing with the liquidation of the fund or conversions from defined benefit to defined contribution (or vice versa); may also arise and complicate the process. 24. What will be regarded as an improper use of surplus by the employer? In terms of the Bill, surplus that has been utilised improperly by the employer, prior to the surplus apportionment date is surplus that has been used to fund: • the cost of benefit improvements for executives in excess of the costs that would have been applied had the executives enjoyed the same benefits provided to other members;

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the cost of 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;

•

the cost of recognising past pensionable service for selected members or for members transferred to another fund in excess of any amount paid into the fund in respect of such past service;

•

the value of any contribution holiday enjoyed by the employer prior to the commencement date.

It is not clear whether this “improper use” relates to the period between the commencement date and the surplus apportionment date only, or whether it is retrospective to commencement of the fund or some other date. If the amount of surplus which is allocated to the employer surplus account is less than the actuarial surplus improperly used by the employer, the difference between these two amounts shall constitute a debt by the employer that must be repaid to the fund on such terms as the Board agrees to. The Registrar must be advised, in writing, of the manner, amount and terms of the repayment of this debt. Surplus used by the employer may be excluded from the calculation of surplus improperly utilised where the “improper use” by the employer has been approved by: • • members; or trade unions representing the members

after clear and comprehensive communication exercise as part of a “negotiated utilisation of surplus by stakeholders”. The reference to “stakeholders” in this provision makes it unclear whether the Board must negotiate with all stakeholders (i.e. former members too), making the negotiation very impractical, or whether the negotiation need only be
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with members, but will consider the interests of all stakeholders on apportionment. 25. What happens if a fund has already entered into an agreement with various effected? The answer to this depends on whether the rules effecting the distribution have been registered or not. Where the rules have been registered, parties have a vested right to the amount allocated to them. This means that these amounts will be liabilities of the fund for purposes of calculating actuarial surplus. They will thus not form part of the surplus to be distributed. If the fund has distributed all of its surplus in this way, this could have the effect of eliminating the surplus altogether. Where the rule effecting the distribution agreement has not yet been registered, it is likely that the parties’ rights to the amounts in terms of such agreement have not yet vested. That being the case, the fund will be bound to reconsider its distribution to give effect to the legislation. Where the initial agreement does not accord with the legislation, it will not be enforceable. 26. What is the Specialist ad hoc Tribunal and what does it do? If: • • the Board fails to submit a scheme; or if the Registrar is not satisfied that the distribution is reasonable and equitable (or in certain circumstances if there are unresolved complaints); or • at the request of the Board; parties as to the distribution of surplus on the commencement date, but the distribution has not yet been

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then the Registrar can require the Board to refer the apportionment of surplus to a Specialist ad-hoc Tribunal who will exercise the Board’s powers in its place. The Tribunal consists of three members. One of whom must be a lawyer, one must be an actuary and two must have experience in retirement fund financing. The Board selects persons to serve on the Tribunal from a panel approved by the Registrar. If the Board does not select persons within three months of being requested to do so by the Registrar, then the Registrar will select the members. At least two-thirds of the Tribunal members must agree before any action can be taken or decision can be made. The Tribunal can follow any procedures it considers appropriate when doing the investigation. The Tribunal has the power to subpoena persons to give information and produce documents. Witness fees are payable by the fund as are any costs arising from the work of the Tribunal. A record of the proceedings must be kept. This is passed to the Registrar and copies are available to the public for a fee. Any cost incurred by the tribunal including periodical expenses of tribunal members, will be recovered from the fund out of the surplus being apportioned. 27. May the Board refer the surplus apportionment to the Specialist ad hoc Tribunal without first attempting to apportion surplus itself? Yes. It appears that at the request of the Board, the Registrar will require the Board to select the panel for the Tribunal who will then exercise the

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Board’s powers to apportion surplus. There are no pre-conditions or requirements prescribed for this. 28. May decisions of the Specialist ad hoc Tribunal be taken on appeal? The Registrar will accept the Tribunal’s determination of the

apportionment of surplus as satisfying all the requirements of the legislation unless he is of the opinion that the Tribunal failed to exercise its discretion properly and in good faith. The Tribunal’s determination is stated, in the Act, to be binding on the “stakeholders”. This appears to suggest that it is not binding on the fund itself which is not included in the definition of “stakeholder”. We are not sure if this is an oversight or intentional. The wording intentionally used is “binding” and not “final and binding”. This seems to suggest that such decision may be appealed to the ordinary Courts and that the Tribunal’s decision is not final (and only binding on the stakeholders until it is overturned on appeal).

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29. What happens if the fund goes into liquidation: 1. 2. 3. before commencement date of the Act; after commencement date of the Act but before surplus apportionment date; after 12 months after surplus apportionment date?

1 1. commencement of surplus legislation and 2. for existing funds minimum benefits i.r.o: liquidation/conversion/ pension increases Surplus apportionment date 12 months 2

LIQUIDATION ONLY

Proportioned down Cease For non valuation 34

1. min benefits on exit, for existing funds and 2. non-valuation exempt fund on liquidation debt to employer 3

With reference to the above timeline, the following dates are noted: Liquidation date: this is the date that the Registrar approves the liquidator. Commencement date: this is the commencement date of the surplus legislation, which is obviously unknown to us at present. Existing funds (funds registered prior to the commencement date within three months of the commencement date) – minimum benefits: in respect of liquidations, conversions and pension increases become effective at commencement date. Surplus apportionment date: this is the effective date of surplus apportionment, which is basically the fund’s next statutory valuation date, following commencement date. Notes: 1. If the fund liquidates/converts/apportions surplus before its next statutory valuation date then its surplus apportionment date is moved up to the effective date of the liquidation/conversion/apportionment. 2. The effective date of a liquidation is the date that the Registrar approves the liquidator (practically – usually the date of the Registrar’s letter approving the liquidator). 12 months after surplus apportionment date: minimum benefits in respect of all exits from the fund become effective. At the same time section 30(3) becomes effective (see below).

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Notes: 1. If there are insufficient assets on liquidation to meet minimum benefits then minimum benefits can be proportioned down up to this date only for non-valuation exempt funds. 2. Section 30(3): after this date and iro non-valuation exempt funds, where there are insufficient assets to meet minimum benefits this becomes a debt to the employer. Liquidation versus deregistration: It is noted that the surplus bill only deals with liquidations in terms of section 28 and 29 of the Pension Funds Act and that deregistration under section 27 of the Pension Funds Act is not mentioned at all. Liquidation in terms of the Act (section 15I): The Act provides under section 15I that a fund must liquidate in a certain way. Note that this section presupposes that a surplus apportionment scheme has been completed. That is, the fund will first have to do the scheme and then liquidate in accordance with section 15I (and minimum benefits will apply on liquidation). Once the scheme is complete liquidation in accordance with section 15I requires the following: • any amounts in the member and the employer surplus accounts may be drawn on proportionately “to secure the rights and reasonable benefit expectations” of the members participating in the liquidation distribution;

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•

any amounts then remaining in the member surplus account, any contingency reserve accounts and any surplus not allocated to either the employer or the member surplus account must be used for the benefit of members and former members of the fund as the liquidator determines;

•

any amounts then remaining in the employer surplus account must be paid to the employer. This does not apply if the employer has been liquidated prior to the fund going into liquidation, in which case the employer surplus account will be used in the following order of priority: i. to meet contributions deducted from members’ earnings and not paid to the fund; ii. to meet contributions due from the employer but not paid to the fund; iii. to be distributed amongst the members at the date of liquidation [of the fund] and such former members as are eligible in terms of the rules to participate in the distribution.

Note: if a fund in liquidation is found to have a deficit, the credit balances in the members and the employer surplus accounts will be reduced proportionately. These accounts may be reduced to zero. 1. Liquidation before commencement date: There will be no liability in respect of minimum benefits and the fund will not have to apportion surplus in accordance with the Act. The liquidation must be done in terms of the rules of the fund. Improper uses of surplus are not required to be notionally added to the surplus to be apportioned. The fund will liquidate in accordance with its rules.

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Fund Boards must still make decisions to liquidate funds with member’s best interests foremost in mind. The employer’s issues can be taken into account as it is a stakeholder in the fund but are not of overriding importance. If it is the employer who has the right to terminate the fund (in the rules) then the employer must exercise that right in good faith. 2. Liquidation after commencement date of the Act but before surplus apportionment date: If the fund is liquidated after commencement date, then its surplus apportionment date will become the effective date of the liquidation (see above) i.e. the surplus apportionment date is moved forward. The fund will have to submit a surplus apportionment scheme (i.e. follow the process laid down in the Bill, including taking former members into account). Minimum benefits will also apply to the liquidation. However, if the fund’s assets are insufficient to cover minimum benefits, minimum benefits can be proportioned down. 3. Liquidation 12 months after surplus apportionment date: If the fund is liquidated after the date on which minimum benefits for all exits becomes effective (which is 12 months after surplus apportionment date for existing funds) then where the funds assets are insufficient to meet minimum benefits, this will become a debt of the employer if the fund is a non valuation exempt fund (section 30(30)). Surplus Accounts 30. What can the employer surplus account be used for? The employer may request the Board to use the actuarial surplus, which has been allocated to the employer surplus account for any of the following purposes:

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(a) (b)

funding a contribution holiday; payment of pensions, or an increase in pensions in the course of payment, so as to compensate members for the loss of any subsidy from the employer of their medical costs after retirement; (c) meeting, in full or in part, expenses which the employer is

obliged to pay in terms of the rules of the fund; (d) improving the benefits payable to all members, or a

category of members as defined in the rules, as determined by the employer; (e) transferring part, or all, of the employer surplus account

to the employer surplus account in another fund where the employer is a participating employer; (f) on liquidation of the fund in terms of sections 28 or 29,

payment in cash to the employer; and (g) in order to avoid retrenchment of a significant proportion

of the workforce, payment in cash to the employer. Note that the only two circumstances in which the surplus will be paid in cash to the employer is on liquidation or to avoid retrenchments of the workforce. The Bill also envisages that the rules of the fund may provide for other uses of the employer surplus account. When an employer submits his request to the Board for the use of the surplus, only the employer appointed trustees of the Board shall be able to vote on whether to grant the employer his request.

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One of the uses of the employer surplus account is to transfer amounts from that account to an employer surplus account in another fund (see (e) above). However this use is subject to specific conditions, namely : (a) the employer who has control of the employer surplus

account in terms of the rules of the fund has similar control of the employer surplus account in the transferee fund; (b) employees of the employer are members or former

members of the fund to which the transfer is made; (c) the employer applies to the Registrar for approval of the

transfer, giving such details and supporting reports as the Registrar may require; and (d) the Registrar is satisfied that such transfer is necessary in

order to achieve an equitable distribution of the surplus between the funds. The condition set out in (a) above may not be fulfilled where an employer is bought by another employer, as the previous entity would no longer exist or it cannot be said to exercise any “control” in the transferee fund. 31. What can the member surplus account be used for? – Section 15D The member surplus account may be utilised for the following purposes, notwithstanding any to the contrary in the rules of a fund : (a) (b) improve benefits for existing members; improve the benefits previously paid to former members or the amounts previously transferred in respect of former members;

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(c) (d)

reduce current contributions due from members; and meet, in full or in part, expenses which would otherwise reduce the proportion of the members’ contributions that are invested for retirement.

The use of any amounts standing to the credit of the member surplus account are subject to the following provisos. Firstly, only the member elected trustees on the Board may vote on how the surplus in this account is used unless the proposal before the Board will increase the employer contribution rate. We are of the opinion that in this case the full Board will have to approve such use. Secondly, if the surplus apportionment scheme specifies how this account will be used, then the credit balance must be utilised as provided for in such scheme. The Bill does not specify who may apply to the Board for the use of the member surplus account. Thus it is open for anyone to put a proposal before the Board requesting that the surplus be utilised in a certain manner, which request the appropriate Board members must consider. 32. Member trustees cannot vote with regard to the use of surplus in the employer account (and vice versa in certain circumstances) – how does this impact on trustees’ fiduciary duties? The Board has certain fiduciary duties, including the duty to act with due care, diligence, in good faith and impartially. The Bill has placed the Board in a difficult situation as they have a legal duty to take into account the interests of all members of the fund, as well as the employer, to the extent that the employer is a creditor of the fund. Further when making decisions concerning the fund, the Board has to consider all relevant
41

factors and actively apply their minds when exercising a discretion, especially when dealing with fund assets. However the Bill has circumvented the legal principles set out above by excluding certain trustees of the Board from the decision making process when considering the use of surplus in both the member and employer surplus account. The important question for the Board is whether those members of the Board who are excluded from a vote, could be held liable for any loss resulting from a decision where he was not a party to that decision. This question must be considered in the light of the fact that the trustees are usually seen to be jointly and severally liable for any loss caused by the negligence or misconduct of the Board. This issue has not been addressed adequately and it may be necessary for legislation to clarify this issue. Further the rules of the fund may have to be amended to allow for decisions of this nature to be made by less than the required quorum of trustees and to deal with the issue of Board liability. However this would not override the legal principles regarding fiduciary duties, but may, together with the requirements of the Bill, provide a measure of protection for the Board. 33. What happens to surplus already allocated to an employer reserve prior to commencement of the legislation? – Section 15F On or after the commencement date of the Bill, the Board may apply to the Registrar to transfer part or all of the amounts standing to the credit of an existing employer reserve account to the employer surplus account.

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The Registrar may approve the transfer if he is satisfied that when the surplus was allocated to the employer reserve account, such allocation had been negotiated between the stakeholders in a manner consistent with the principles underlying the Bill. This condition means that the Registrar will only approve a transfer to the employer surplus account, for the benefit of the employer, if negotiations had been held between active members, former members and the employer regarding the original allocation of such surplus to the employer reserve account. It is extremely unlikely that such negotiations had preceded the allocation to the employer reserve account and thus very few funds will be able to obtain the Registrar’s approval in order to transfer amounts to the employer surplus account. Any amounts in the employer reserve account which are not transferred to the employer surplus account will be treated as unallocated surplus as at the commencement date. Payment of surplus 34. Can surplus be paid in cash to the employer or active members, after the commencement date of the legislation? After the commencement date, and as at the effective date of the next statutory actuarial valuation, the Board must submit a scheme to the Registrar for the apportionment of surplus. The Board will determine who will participate in the apportionment of surplus and how surplus of active members shall be applied for their benefit. Surplus can only be credited to members surplus or individual members accounts to improve benefits of active members, reduce current contributions due by members and meet expenses that would otherwise reduce member contributions. members.
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Surplus may therefore not be paid in cash to active

This is in line with the South African Revenue Services practice to not allow payment of benefits to active members. The employer may request the Board to utilize surplus allocated to the employer surplus account to avoid retrenchments. The fund may apply to the Registrar for permission to pay amounts in the employer surplus account to the employer where "negotiations" are taking place in respect of dismissals for operational requirements. The Registrar will only grant an application and issue a certificate allowing amounts from the employer surplus account to be paid in cash to the Employer if he is satisfied that: • members have had full disclosure: • • of the fund’s current financial position and the proposed distribution to the employer; the employer’s need for additional capital to maintain employment, (together if required, with a report from an independent auditor in this regard); • • • • and any other information the members may need to in order to exercise their rights under the Labour Relations Act. the Members have had reasonable opportunity to consider the proposal; at least 75% of the members currently in employment have approved the proposal in writing, and negotiations in terms of the Labour Relations Act have confirmed the need to retrench more than 10 per cent of the fund membership at the previous financial year end. On liquidation of the fund, payment in cash may be made to the employer, if the employer has not been liquidated prior to the fund’s liquidation. The employer will receive any balance in the employer

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surplus account after the rights and reasonable benefit expectations of members participating in the distribution have been secured. in cash. On liquidation of the fund, members will also be able to receive their benefits

35. Can surplus be transferred to a preservation fund in respect of members and former members? Circular RF 1/98 issued by SARS sets out the requirements for preservation funds. It states in particular that benefits may only be transferred from an employer fund to a preservation fund where the member resigns, is retrenched or is dismissed from the services of the employer. Benefits may also be transferred to a preservation fund if the employer fund is wound up either in terms of section 28 or 29 of the Pension Funds Act. In addition to these requirements, the circular also requires the member to be eligible for preservation fund membership and the employer to participate in the preservation fund. Active members will therefore not be eligible to transfer their benefits to a preservation fund. In this regard the Bill suggests surplus be credited to members surplus or individual member accounts to improve benefits of active members, reduce current contributions, and meet expenses that would otherwise reduce active member contributions. Former members will also not be eligible to transfer their benefits to a preservation fund. On a strict interpretation of the circular, surplus The surplus is payable due to the fund benefits should not be seen to be payable on the members resignation, retrenchment or dismissal. the legislation. having to submit a scheme for apportionment of the surplus in terms of

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Should the fund be wound up, and the circular requirements concerning employer participation and member eligibility be met, it would be possible for active members to transfer their fund credits (enhanced by the surplus allocation) to a preservation fund. In this instance former members should also not be eligible to transfer their benefits to a preservation fund as we do not believe they will meet the member eligibility requirements in terms of the circular. At the time of application for preservation fund membership, the potential member (in terms of the circular) must still be an employee of the participating employer and a member of the employer fund. In cases of surplus enhancements granted to former members prior to the legislation, where the fund rules provided for former member’s withdrawal benefits to be enhanced by surplus apportioned if the former member had previously transferred to a preservation fund, SARS has allowed the enhanced withdrawal benefit to be transferred to the same preservation fund. We have approached SARS for clarity, but have not received this yet. SARS may also need to amend the circular to provide clarity on this issue. 36. If surplus is apportioned to a former member and/or pensioner, who has died: • Will the provisions of section 37C apply to the benefit apportioned?

Section 37C refers to a benefit payable "upon the death of the member." If the view is therefore taken that the surplus benefit is an additional benefit payable to the deceased former member or pensioner subsequent to death, it will not be a benefit payable in terms of section 37C. It is however important to take note how the fund's rules are

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worded. The rules may give the trustees the discretion to distribute the benefit in terms of section 37C. • And the surplus is payable to the deceased's estate, but the estate has been wound up, must the estate be re-opened? The Master of the High Court is required to be notified of any additional benefits which become payable to the estate of a deceased person after the estate has been wound up. The Master will therefore not need to be notified in respect of benefits not payable directly to the estate. As the trustees will be aware of the fact that the deceased is eligible for a surplus distribution they will be required to notify the Master that an amount is due and payable to the deceased's estate. The Master will then require the original executor of the person's estate to lodge a supplementary account with the Master. In the event that the original executor cannot or will not act as directed by the Master, the Master may appoint a new executor to deal with the benefit.

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Description: “SURPLUS AND MINIMUM BENEFITS IN RETIREMENT FUNDS”