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SA’s twisted history of pension fund plunder

Two recent cases should be cause for worry.

South Africa has a grimy history of companies raiding their pension funds, and the fear is that two recent court cases, which found in favour of the pension fund trustees, will do little to curb the practice.

The first case, involving two pensioners against the Tongaat Hulett Pension Fund, wound its way through the lower courts to the Supreme Court of Appeal (SCA), only to be defeated on what the vanquished pensioners regard as a poor understanding of the law by the judges. They were denied an opportunity for review at Constitutional Court (ConCourt).

The second case involved Rosemary Hunter, former deputy pension fund registrar at the Financial Services Board (now called the Financial Services Conduct Authority), against the FSB over its attempts to deregister funds that still had assets owing to former employees. She too lost her case in the ConCourt, principally on the basis that the court assumed the FSB had competent and responsible people running it, and had investigated a few funds (less than 20%) that had been deregistered as part of the FSB’s cancellations project.

Read: What was the real issue in Hunter’s pension funds case?

Both cases ended up in defeat at the ConCourt, with no further avenues of legal redress available to the applicants. But the findings of the judges in favour of the pension fund trustees and regulator should be a cause for concern for employees, past and current, with claims to a share of actuarial surpluses or other assets sitting in pension funds of which they are members.

The Tongaat Hulett pensioners, in a recent missive to the 54 fellow pensioners that supported their legal fight, spell out several false or erroneous findings they believe were made by the judges who heard their case.

They claimed in their court papers that the trustees were able to deceive the courts by mislabelling R1.43 billion in contingency reserves as “excess assets”, a term not found in the Pension Funds Act. “Assets in contingency reserve accounts” – a term that is defined in the act – should be shared among the members when they are no longer needed to provide for contingent liabilities. It is at this point they become an actuarial surplus. The pensioners argued that by renaming these assets as something else, the trustees, who by law must balance the interests of employees and the company, were able to divert funds away from the members to the company.

The “excess assets” in the Tongaat case referred to the actuarial surplus plus reserves. The SCA was satisfied this was clear enough and “in order to ensure the continuing solvency of the fund, the employer had to carry the balance of the cost”. The decision to apportion these assets as it did was therefore reasonable, found the court. It was legal, said the court.

Letter of the law

But was it moral? Bruce Moor, one of the applicants in the case against the Tongaat Hulett Pension Fund, outlines what the loss of the case means in financial terms: of the R800 million “future actuarial surplus” in the fund at 2012 valuations, R107 million will go to the members and R693 million to the company. The pensioners had argued that a proper application of the intent of the law would probably have given them a 50:50 split, or R400 million. The actual fund rules allow for 80% of actuarial surpluses to go to members and 20% to the company, but by applying this to “excess assets”, the employer managed to grab three quarters of the actuarial surplus, says Moor.

The losers in this case must also pay legal costs of some R680 000 to the winners. The costs would have been about R500 000 higher had the pensioners’ lawyers not taken the last leg of the case on risk. In Rosemary Hunter’s case, she at least got off with no costs awarded against her, largely because she waged her fight in the public interest. However, she had to carry her own litigation costs, even though she did not stand to benefit financially from the court’s decision.

The prohibitive cost of fighting these cases against deep-pocketed adversaries will not be lost on others contemplating a similar legal challenge.

Before 2001, there was robust debate as to who owned surpluses accumulated in pension funds – the company or the beneficiaries. Many employers claimed these surpluses as their own, particularly in defined benefit or so-called balance of cost funds, since they could with some moral authority claim that they had carried all the risks. If the market went down, they still had to cover the fund’s liabilities. The law was sufficiently vague to encourage several employers to plunder their pension fund surplus assets without any legal sanction. Several billion rands worth of surpluses were snatched away from pensioners through this self-serving interpretation of the law.

Looting

In 2001 the law was changed to curb this looting by companies. The Pension Funds Act was amended to set rules for the allocation of surpluses. Where no fund rules on apportionment existed, it was up to the board to determine the split “taking into account the interests of all stakeholders in the funds”, with neither the employer nor the members having any right of veto on such decisions.

One way to get around this is to load the board with docile members, which is precisely what the Tongaat Hulett pensioners claim happened in their case, though this was refuted by the company (the SCA agreed, and found no proof of bias on the part of the pension fund board).

Another way to get around the law is to transfer members out of the fund at the lowest possible cost and then wind up the fund, grabbing whatever surpluses remain. This is also a way to circumvent the Pension Fund Act’s surplus allocation rules. This is what the Tongaat Hulett pensioners argued in their case. In Hunter’s case, the ‘grabbers’ were the fund administrators, who exploited the fact that the funds did not have trustees. The FSB was willing to give the administrators the power to decide what to do with the remaining assets, even if this was not necessarily in the interests of the members or beneficiaries.

The ConCourt’s decision to dismiss the appeal of the pensioners is disquieting in many respects. Cora Hoexter, a law professor at Wits University, writing in the Constitutional Court Review about Mark Shuttleworth’s attempts to challenge the R250 million in ‘fees’ deducted by the National Revenue Fund for transferring R2.5 billion of his wealth abroad, notes that only the wealthy are likely to lose sleep over the ConCourt’s decision to support this outrageous exit charge.

The Shuttleworth case was about the merits of exchange controls. In Shuttleworth’s case, the ConCourt “tolerated constitutional breaches that it had not hesitated to strike down in other contexts”, writes Hoexter. A billionaire emigrant was not the sort of applicant likely to elicit empathy from the court.

Pensioners and fund beneficiaries in these two cases may feel the same lack of love from the courts.

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In SA the wholesale plunder of pension funds is out of control. Not only does the FSB appear to be unable to control the funds but just as worryingly the trustees of the pension funds appear to be conned into investing in companies run by the people who do not put the interests of the shareholders first. in Fidentia, Steinhoff, Tollgate and Pinnacle Point Group in excess of 20 BILLION was lost in pension funds money. Three of these companies had overlaps in directors / major shareholders. The companies are simply placed in liquidation and the pension funds lose their money. Nobody follows the flow of assets after liquidation which all too often leads to ex directors of these companies picking up the assets post liquidation for next to nothing. Pensioners lose out in every instance. With the exception of Fidentia where are the criminal investigations ????

As your average “Joe Soap” I’v become very disillusioned and skeptical of the Constitutional Court. In my mind it was created to be the final arbiter of complex legal issues by stripping away the convoluted legal positioning and posturing used by those with power and money to manipulate the system and to apply some basic fundamental principles to the argument and keep judgments strictly within these fundamental principles. However, of late I seen a number of CC judgments that do exactly the opposite and allow for legal positioning and posturing to continue. There has been a recent case where the CC found that a judgement by a High Court Judge was 100% incorrect and reversed this judgment 180 degrees. Now this begs the question in my mind, if the High Court Judgement was found to be SO incorrect, should said Judge still be allowed to sit on the bench and should all this judges previous judgments not be reviewed ?? However when reading the CC judgement in this case, it becomes very apparent that the CC only applied their minds to a very small and narrow part of the argument which leaves me to believe that once again political influence or expediency MAY be the overriding criteria applied by the CC and not the much vaunted actual constitution itself.

I think, the Concourt decision ”sold” a lot of Pensioners ouT

Question;Who knows – what happened to the ”surpluses” on the pension funds of Volkskas (and Merchant), Trust Bank, United and Allied , when they were closed down and Absa 1 was started ?

Not a single ”retrenched staff member” of any of these banks received a single cent from the ”surplus” !

The Tongaat case is not simply one of plundering “spare” assets in the fund. Staude hired a crooked actuary who vastly over-estimated the return expected on the funds into the future, to a completely unrealistic level, thereby minimizing the actuarial value that needed to be paid out the the employees and pensioners. He and his corrupt unethical henchmen then grabbed the money in order to prop up the results of a failing business and inflate their personal earnings. A business that is failing through gross mismanagement, destruction of the productive assets of the company and emphasizing creative accounting practices ahead of actual profitability.

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