ASSOCIATION OF RETIRED PERSONS AND PENSIONERS
PENSION FUNDS SECOND AMENDMENT BILL, 2001 AND THE PROPOSED PENSION FUND REGULATIONS
PENSIONERS’ PERSPECTIVE ON THE ISSUES INVOLVED
We would like to record that pensioners as an important stakeholder body were not represented at NEDLAC nor were their views canvassed on what is a vital issue for all pensioners as well, of course, for other stakeholders.
We are therefore pleased to have this opportunity to make our representations on the proposed legislation.
In considering any proposals we submit that certain principles need to be considered as a basis for evaluating changes proposed. They are:
In reviewing the legislation proposed we would like to offer comment on the following aspects of the proposals.
We do not subscribe to the view expressed by some commentators that the surplus arises mainly from excess contributions by the employer. In fact, investment income on assets acquired from the proceeds of years of contributions by pensioners (while they were active members and who never received any reduction in their contribution rates) and other active members who likewise did not receive reductions in their contribution rates would figure largely. Likewise employer contributions (when not on a contribution holiday). Add to this the effect of transfers, conversions and underpayments to members. Lastly, the investment reserves would also account for a large amount of the surplus.
The contribution made by pensioners, some with up to 30 years service, cannot be overlooked.
MINIMUM BENEFITS – SECTION 14A
Section 14A(1)(e), from a pensioner’s point of view, is unreasonable. 1(e) suggests that the minimum pension increase defined need only be made every three years. The Funds fund for annual increases and are able to afford annual increases equal to the excess of actual investment returns over the post retirement provision in the valuation basis. Many if not most funds provide annual increases and to not do so is inequitable relative to all other stakeholders:
· Active members’ minimum individual reserves keep pace with inflation by virtue of their annual salary increases coming into the equation.
· All transfers, retrenchments and conversions benefit at this real level.
· Pensioners’ benefits will fall below real levels for two out of three years and the remaining fund stands to benefit from the low pensions paid in the interim.
What is the worst scenario for pensioners? If pensioner assets are not managed separately and fund returns are low over a three year period, then the board can limit the triennial pension increase to the pensioners’ share of that net return. This may be close to zero.
What is more reasonable? The pensioners’ share of the return should reflect their investment strategy (more cautious, thus more stable over time, although possibly lower on average), their favourable retirement fund tax and possibly lower investment related expenses on average. Their increase should be annual and should target a full CPI index adjustment subject only to available funds. A catch-up exercise should take place as soon as funds are available.
In the light of the provisions of section 14A(3) there should be some bar to avoid amendments of the benefit structure and reduction of benefits prior to the new Act taking effect.
1. Pensioners are topped up to minimum levels at the surplus apportionment date BUT they are not compensated for past poor increases. Former members, active members and deferred pensioners don’t have this problem.
2. Once former members and pensioners’ benefits have been raised to the minimum levels prescribed the playing fields have effectively been levelled (active members get real benefit increases by virtue of their salary increases). What remains can be called the "surplus available after past inequities have been addressed". Why are former members and pensioners not included in the distribution of the remaining surplus given that they contributed to it?
3. It is going to be difficult to determine many of the required figures, e.g. accumulated former member contributions. It is also going to be difficult describing the process followed to members, but this is essential. The Act is quiet on the need to communicate these issues to members.
4. Part (4) of the Regulations describes an equitable way in which smaller non-problematic funds may be dealt with. Why are pensioners not included in the distribution of surplus described in (d)? Former members are.
5. The prescribed basis (assumptions) for determining the minimum benefits have not been included in the Regulations.
6. Pensioners fall into the member category. Thus their share of the surplus will reside in the "member surplus account". However, the investment strategy, expenses and retirement fund tax pertaining to them is very different from that pertaining to active members. How can the pensioners be guaranteed that they are getting an equitable share of the surplus – one which recognises their circumstances?
7. In the definition of "investment reserve account" there is reference to a pensioner reserve account – but this latter account is not defined elsewhere.
8. Section 15K(4)(b) allows the board to provide an average annual pension increase when doing a "CPI catch-up" as part of the minimum pension increase. However, each member’s pension should be lifted to a real level on an individual basis and not on an average basis. Inflation will have been at different levels over the years and depending on when members retired, they will require different, not average, uplifts. Otherwise potential inequities will be introduced between pensioners retiring at different dates.
9. Past transfers are topped up to Q1 as per the Regulations. This effectively compensates former members for the difference between the minimum level of benefit and what was actually paid AND a share of the investment reserve. Does this include the transfer of pensioners to an insurance company? It should. Pensions should be recalculated to a minimum pension as at the date of transfer (in line with the section 15K(4)) and then be further adjusted for the fair value of assets at that date. The same principal should be followed in future.
BOARD DECISION MAKING PROCESS
We would like to suggest an alternative approach to deal with the exercise. It is common knowledge that although there is so called parity of representation between members of the Board representing members and the employer, the reality is somewhat different, and difficult situations arise. Potential conflicts of interest could occur. If, as is proposed, the board decision rests on a 75% vote the question is whether it is 75% of all the trustees or only those present at the meeting with a quorum. Will the Chairman have a casting vote?
Our proposal is that the Trustees be granted a time limit in which to come to a decision on the basis of consensus. In the absence of such an agreement the matter will be referred to an Arbitrator whose decision will be binding on all parties. This will be less expensive than going to a Tribunal. One might say - is this possible? We submit it is possible if there is a time limit and board members realise that the matter will be out of their hands and that they will have to accept the Arbitrator's decision.
Regarding members' participation, we would advocate a method by which the board members make recommendations to the members and hold member meetings to fully explain the implications of the proposals which must be fully documented. The members (all involved) will then be given a reasonable time to vote on the issue. As was proposed by the Financial Services Board in PF circular 105 the required approval will be 75% of pensioners and 75% active members. We do favour the post event reference to members to obtain their objections.