1.              INTRODUCTION

1.1                  The explanatory memorandum to the Pension Funds Amendment Bill (“BILL”) explains rather blandly that its primary objective is to enhance the protection of the pension interest of the members of pension funds.  In truth, the main reason for the BILL is to plug holes in legislation (particularly the surplus legislation) that were exposed to have no effect prior to the Pension Funds Second Amendment Act passing through Parliament in 2002.

1.2                  Over the intervening period since 2002, other defects in the Pension Funds Act (“ACT”) have become apparent in not only the sections dealing with surpluses but in other areas as well.

1.3                  The BILL also seeks to amend references to out of date legislation.

1.4                  The Financial Planning Institute (“FPI”) regrets the unnecessary delays in the retirement fund reform process: the formal publication of the BILL was expected to have happened during the third term of 2006.

1.5                  The purpose of this document is to:

1.5.1              Briefly describe the main changes that are proposed to the ACT, and

1.5.2              To comment and express an opinion on such changes.

1.6                  The explanatory memorandum to the BILL has been quoted in certain passages in this commentary.


2.              SUMMARY

2.1                  The main topics that are covered in the BILL are:

2.1.1              Clarification surrounding surpluses utilised improperly in terms of section 15B of the ACT, as well as other provisions relating to surplus apportionment;

2.1.2              Extension of the application of the ACT to retirement funds established through bargaining council agreements and to bring these funds under the regulatory auspices of the Registrar of Pension Funds (“REGISTRAR”).  Bargaining council funds not yet registered under the ACT must register on or before 1 January 2008;

2.1.3              Increasing the powers of the REGISTRAR to intervene in the affairs of a fund without first having to obtain a court order; this is intended to increase regulatory effectiveness;

2.1.4              Providing for specific duties of pension fund administrators;

2.1.5              Clarifying the jurisdiction of the Pension Funds Adjudicator (“PFA”) and the appointment of a deputy and acting adjudicator as well as alignment with the Prescription Act;

2.1.6              Clarification on the treatment of divorce and maintenance orders in respect of pension benefits;

2.1.7              Updating provisions in the ACT which are no longer aligned to existing legislation.



The FPI have noted the consequential and technical changes that are reflected in sections 1, 3, 4, 5, 29, 28(a) and 30 of the BILL.

4.              SECTION 1 – Definition Clause

4.1                  This section, containing 23 sub-sections, envisages approximately 26 amendments to the ACT.  Many of the proposed amendments are purely of a technical nature or are incidental to other changes in legislation.  The following amendments deserve comment:

4.1.1              Section 1(a)-(b):  The definition of an actuarial surplus has been expanded.

4.1.2              Section 1(c):  Various new definitions have been introduced that are used in the BILL.  A beneficiary now includes the nominee of a member or a dependant.  

4.1.3              Section 1(l):  The definition of a “fund return” is introduced into the ACT.  A wide definition is given to the term, to include “income (received or accrued) and capital gains and losses (realised or unrealised) earned on the assets of the fund, net of expenses and tax charges, associated with the acquisition, holding or disposal of an asset.”

4.1.4              Section 1(m):  This section states that in the calculation of the member surplus account,  the board may elect to smooth the fund return.

4.1.5              Section 1(u):  This section aligns the act with the definition of a “spouse” as contained in various other acts.  Although opposite-sex co-habitants will also be covered under the ACT as dependants (as defined in sub-section (i)(b)(i) of the BILL), “common law spouses” will not be deemed to be spouses for purposes of the ACT. Opposite-sex domestic partners may find themselves still “out in the cold” should a board of trustees resolve that a person who lived together with a member as a “common law spouse”, does not qualify as a dependant.  The position of opposite-sex domestic partners remains a grey area in South African law, and perhaps even more so in pension law.

5.              SECTION 2 – Application of the Act

5.1                  This section makes it clear that all bargaining council funds must be registered in terms of the ACT and will be subject to the ACT. Some commentators are of the opinion that despite registration, bargaining council funds will remain subject only to the provisions of the Labour Relations Act (“LRA”), where regulation and supervision is practically non-existent.

5.2                  In its comment on the draft bill given in 2006, the FPI highlighted certain issues that required attention in the opinion of the FPI.  None of the issues drawn to attention of the Financial Services Board have been addressed in the BILL, with the consequence that this area remains fraught with difficulty, as two conflicting Acts (the ACT and LRA) will apply to bargaining council funds.

5.3                  While the inclusion of funds established through bargaining councils is welcomed in principle, the FPI suggests that more preparation and research must be done before the full inclusion of bargaining council funds under the provisions of the ACT.  Some of the more immediate conflicts and problems that come to mind are discussed below.

5.4                  With regard to the election of a pension fund’s board of management, not all members of a bargaining council fund have a say in the collective agreement, due to the LRA principle of “majoritarianism”.  Minority unions whose membership does not meet the agreed threshold for membership of the bargaining council, and members in a closed shop collective agreement situation, will not be able to participate in the election of the fund’s board of management.

5.5                  The preceding is due to the fact that sec. 33A of the LRA provides:

“(1) Despite any other provision in this Act, a bargaining council may monitor and enforce compliance with its collective agreements in terms of this section or a collective agreement concluded by the parties to the council.

(2) For the purposes of this section, a collective agreement is deemed to include:

(a) any basic condition of employment which in terms of section 49(1) of the Basic Conditions of Employment Act constitutes a term of employment of any employee covered by the collective agreement ; and

(b) the rules of any fund or scheme established by the bargaining council.

(3) A collective agreement in terms of this section may authorise a designated agent appointed in terms of section 33 to issue a compliance order requiring any person bound by that collective agreement to comply with the collective agreement within a specified period.”

5.6                  In other words, in terms of the LRA, pension fund rules registered with the REGISTRAR will become part of the collective agreement as established by the majority trade union and majority employer representative.  The collective agreement, and thereby the fund rules, are extended by the Minister to non parties/minority unions in terms of section 32 of the LRA. Many such extended agreements relating to pension funds exist.  The LRA principle of ‘majoritarianism’ is therefore being undermined by the proposed change.

5.7                  Section 28 (1) (g) of the LRA provides that the powers and functions of a bargaining council includes the power to establish and administer pension schemes, provident schemes or funds for the benefit of one or more of the parties to the bargaining council, or their members.  In practice this has the effect that contributions are paid to the bargaining council and benefits are paid by the bargaining council.  This is in conflict with the ACT. 

5.8                  In order to ensure compliance with the provisions of a collective agreement, the LRA sets out detailed compliance procedures and mechanisms to address non compliance.  These procedures are is distinctly different to the procedure contained in the ACT.

5.9                  Benefits negotiated at bargaining councils also frequently provide for accident benefits, disability income benefits and funeral benefits.  These are not permitted by the REGISTRAR to be included in pension fund rules. 

5.10             To change the agreement and get all the participating employers in bargaining council funds to effect their own assurance arrangements for all members at the same time is not practical.  Some bargaining council funds have as many as 250 or more participating employers, in addition to which not all employees of an employer will always participate in the bargaining council fund, but only those covered by the bargaining sector (for example, unionised employees).  Non-unionised employees are treated differently because of the bargaining council agreement.  Taking only certain aspects out of the bargaining council realm is most likely to be very disruptive to collective bargaining for members, unions, the bargaining council and employers.

5.11             A further aspect is that of dispute resolution.  Bargaining council collective agreements are required to have their own dispute resolution mechanisms.  These provisions usually relate to binding arbitration.  The rules relating to dispute resolution are different in the LRA and the ACT.  There is likely to be much uncertainty how dispute resolution mechanisms in fund rules should be drafted and complied with.

5.12             Similarly, the trustees’ right in terms of the ACT to amend rules of the pension fund is likely be in conflict with the right of the parties to a collective agreement to change the collective agreement.  This is important, as the collective agreement can vary terms and conditions of employment, yet when trustees amend the rules of a fund, they are not parties to the main agreement.  At law, a non party to an agreement cannot vary an agreement entered into between other parties.  The effect of the BILL is an unavoidable conflict of law.   

5.13             The above areas of concern also need to be considered against the backdrop of Section 210 of the LRA which reads:

“If any conflict, relating to the matters dealt with in this Act, arises between this Act and the provisions of any other law save the Constitution or any Act expressly amending this Act, the provisions of this Act will prevail.”


The proposed amendments to the ACT do not expressly amend the LRA, consequently, there is likely be much conflict and legal uncertainty which in turn will lead to increased costs and disputes.  There are other complex matters, the impact of which need to be addressed, such as work place forums, appeals against decisions of the REGISTRAR, enforcement of bargaining council collective agreements in terms of the LRA (as opposed to compliance matters dealt with in the ACT, for example, the payment of contributions to the fund by an employer) the unfair provision of benefits and many more. It is suggested that in order to achieve the desired result of all funds being regulated by the PFA, the LRA should be amended.

6.              SECTION 6 – Calculation of Interest

This section puts a time frame to the payment of interest.  Previously, the ACT only stated that interest was payable but not from which point in time.  It is now clear that interest accrues from the first day following the expiration of the period in respect of which such amount was payable:  in most instances this will be from the 7th day after the end of the month in which contributions became due.

7.              SECTION 7 – The Duties of Administrators

7.1                  A whole raft of measures designed to regulate the duties of pension fund administrators are included for the first time in the ACT.  Steps that the REGISTRAR may take in the event of non-compliance are also listed.

7.2                  In summary, administrators are now legally obliged to:

7.2.1              Avoid conflict between the interests of the administrator and the duties owed to the fund. Specifically, any conflict of interest or potential conflict of interest must be managed and disclosed by the administrator to the board;

7.2.2              Administer the fund in a responsible manner;

7.2.3              Keep proper records;

7.2.4              Employ adequately trained staff and ensure that they are properly supervised;

7.2.5              Have well-defined compliance procedures;

7.2.6              Maintain adequate financial resources to meet its commitments and to manage the risks to which the fund is exposed;

7.2.7              Furnish the REGISTRAR with such information as is requested.

7.3                  In the event of non compliance by an administrator, the REGISTRAR may:

7.3.8              Direct the administrator to stop any practice;

7.3.9              Direct the administrator to withdraw from the administration of a fund. The board must then appoint another administrator;

7.3.10          Suspend or withdraw the administrator’s approval to act as an administrator;

7.3.11          Impose an administrative penalty;

7.4                  The REGISTRAR also has the power to publicise the fact that an administrator is does not comply with the ACT.

7.5                  The FPI propose that administrators be given an avenue to appeal a REGISTRAR ruling, before penalties are applied or publication of transgressions is done.

7.6                  Clarification is needed in respect of the appointment of sponsor (administrator) appointed trustees in the instances of umbrella funds.

8.              SECTION 14 – Amalgamations and Transfers

8.1                  The changes to this section are most welcome as the section 14 process is the most bureaucratic process prescribed in the ACT.  The main changes are:

8.1.1              Provision for a section 14 transfer to be submitted to the REGISTRAR within 180 days of the effective date of the transaction. Currently, there is no time limit and some processes are very protracted.

8.1.2              The most positive aspect is that section 14 transfers are no longer required where affected members were duly informed and at least 75 % of those members agreed to the transaction, provided that any objection they may have had has been resolved to the satisfaction of the board of the fund concerned, and both transferor and transferee funds are valuation exempt. The conditions for this to happen are :                  funds are required to keep proper records of all such transactions;                  any assets transferred must be augmented with fund return from the effective date until the date of final settlement.

8.1.3              In general, all funds involved in a transfer must ensure that assets are transferred within 180 days.

8.1.4              The section also authorises the REGISTRAR to impose conditions on the amendment or withdrawal of a certificate previously issued by the REGISTRAR in respect of compliance with section 14(1).

8.1.5              It also provides for the lapsing of a scheme lodged with the REGISTRAR where a fund failed to provide the REGISTRAR with information requested within a period of 180 days.

9.              SECTION 9-10 – Minimum Benefits

9.1                  Changes to this section are mainly technical and designed to clarify wording.  The wording of the section can indeed be described as clear.

9.2                  Important changes are the following:

9.2.1              Section 14A (1):  Previously, it was not clear from a legal perspective that members included pensioners and deferred pensioners.  This has now been rectified.

9.2.2              Section 14A (1)(d): It is clear that minimum pension increases must be granted.

9.2.3              Section 14B (2)(a)(i)(aa):  This change ensures that prospective increases in the rate of accrual are equitable and appropriate.

9.2.4              Section 14B (2)(a)(i)(cc): This section ensures that any lump sum benefit, in addition to a pension payable at retirement, is included when the minimum individual reserve is determined.

9.2.5              Section 14B (2)(a)(ii): Wording is clarified and aligned with the definition of “fund return”.

9.2.6              Section 14B (3)(c): This section deals with funds where the granting of minimum pension increases is inappropriate, namely:                  Retirement annuities that are purchased from an insurer;                  Pensions where the pensioner has agreed to a fixed increase;                  Pensions where the pensioner has accepted a fixed rate pension.

9.2.7              Section 14B (4)(a): This change ensures that funds are not forced into providing pension increases when the fund’s financial soundness would be affected.

9.2.8              Section 14B (6): This change ensures that contingent pensions are included in the calculation of minimum individual reserves where the related beneficiaries are still alive.

10.          SECTION 11-14 – Surplus Apportionment

10.1             The changes to section 15B are, as mentioned earlier, of importance to funds going through a surplus apportionment process.  The changes (where they do have impact) do not apply to surplus apportionment schemes that have been completed and the surplus disbursed.

10.2             The main changes are:

10.2.1          Section 15B (1)(a):  This section clarifies which funds are subject to the submission of surplus apportionment schemes.  Some funds were initiated prior to surplus apportionment legislation in 2001 but only achieved final registration later. Such funds must submit a scheme to the REGISTRAR for approval.

10.2.2          Section 15B (1)(b): This section requires the approval of the REGISTRAR for any change of a fund’s statutory actuarial valuation date.  It is designed to eliminate the manipulation of a surplus apportionment date, to a period when there might be a lower surplus available.

10.2.3          Section 15B (5):  This change finally makes it clear that deferred pensioners are entitled to have their pensions topped up by minimum pension increases to the surplus apportionment date and is in line with the treatment of ordinary pensioners.

10.2.4          Section 15B (5)(d):  Improperly used surplus constitutes a debt payable by the employer in its books.  The REGISTRAR may now set requirements relating to the method for and timing of the repayment of any surplus utilised improperly.

10.2.5          Section 15B (5)(f): The change in this section makes it clear that the fund return is payable to stakeholders from the surplus apportionment date until the date of final settlement.

10.2.6          Section 15B (6): This section makes it clear that investigations into the improper use of surpluses must go back to at least 1 January 1980 and thereby overturns the decision in the Sanlam staff fund case. In this case the court ordered that such investigations need only go back as far as 7 December 2001.

10.2.7          Section 15B (9)(d): The onus rests on a fund to demonstrate that reasonable steps have been taken to inform employers, members and former members of the scheme.

10.2.8          Section 15B (11): A “nil” return must be submitted to the REGISTRAR where a fund does not have surplus to apportion.

10.2.9          Section 15B (12): This section makes it clear that individual surplus apportionment schemes are required for participants in an umbrella fund.

10.2.10       Section 15E & F: These sections allows for transfers from the employer surplus account to the member surplus account, while it is also allowed to transfer a credit balance in an existing reserve account to the employer surplus account.

11.          SECTION 14 – Surplus Tribunals

11.1             This section of the BILL gives the REGISTRAR the power to appoint an ad hoc tribunal to perform the functions of the board as set out in section 15 B of the ACT. 

11.2             According to recent media reports more than 75% of funds have not submitted surplus schemes; clearly, the appointment of a special ad hoc tribunal to perform the functions in section 15 B seems like an unmanageable task.  The question must be asked whether this section can be successfully implemented.  For example, it is not clear whether the errant funds will carry the cost of the tribunal or whether public funds will be used for the tribunal.

11.3             It is proposed that the enforcement of the apportionment process be reviewed.  It should perhaps be left in the hands of members or even the REGISTRAR to pursue errant funds through the office of the PFA.

12.          SECTION 15-16 – Powers of the Registrar

12.1.1          The REGISTRAR is granted the power to direct that an audit or section 16 investigation may be done if the REGISTRAR considers it necessary in the interest of a fund.

12.1.2          The costs of such an investigation or audit must be borne by the fund.

12.1.3          The REGISTRAR may also instruct a person to conduct a compliance visit to a fund or an administrator.  A person conducting such a visit, has the right to all such documents “as may be reasonably required”.

13.          SECTION 17 – Powers of Intervention

13.1             Prior to the amendment, the REGISTRAR had to approach the court to alter the basis of management of a fund. 

13.2             The BILL gives the REGISTRAR the power to act on three levels, namely:

13.2.1          The amendment of the rules of a fund:

13.2.2          The appointment of an interim board;

13.2.3          The dismissal of errant trustees:

13.3             Not only are the powers that are granted to the REGISTRAR wide in its scope, it is no longer subject to the prior scrutiny of the court.  It remains to be seen how these powers will be used by the REGISTRAR.  The section may lead to litigation and it may even be asked whether the section dealing with the dismissal of a trustee without the sanction of the court will survive constitutional scrutiny.  It is also not clear whether this section will be subject to the Promotion of Administrative Justice Act (“PAJA”).

14.          SECTION 18 – Voluntary Dissolutions

The REGISTRAR may exempt a fund from the requirements of section 28 of the ACT.  This discretion should be welcomed by smaller funds where there are only a few members.  It remains to be seen whether the REGISTRAR will publish a directive on exemption, alternatively whether applications for exemption will be dealt with on an ad hoc basis.

15.          SECTION 19 – Power to Condone

The power to condone non compliance by complainants with procedural time limits is granted to the Pension Fund Adjudicator (“PFA”).  Similar provisions can be found in other acts, for example, acts regulating the CCMA, Magistrates Court and similar tribunals.

16.          SECTION 20 – Appointment of Adjudicator

16.1             According to the Annual Report of the Pension Fund Adjudicator 2005-2006, the office of the PFA received 4901 complaints during the reporting period.  Although this number might seem relatively low, the growth in the number of complaints has been substantial over the past years. 

16.2             The PFA also strives to achieve a turnaround time of 6 months to resolve complaints.  According to the annual report this is only achieved in 53% of complaints.  Given the growth in complaints over the past years and the fact that turnaround times are not met, the power to appointment additional deputy adjudicators is welcomed. 

16.3             The minister’s power to appoint an acting adjudicator is noted.

17.          SECTION 21 – Applicability of the Prescription Act

17.1             The applicability of the Prescription Act 68 of 1969 to complaints is welcomed, as this will help to bring legal certainty in respect of many complaints. 

17.2             Consumerist groups may be opposed to the application of the Prescription Act to complaints before the PFA, as some complaints may expire before they can be pursued before the PFA.

17.3             However, the applicability of the Prescription Act will in many instances help to protect minors with complaints since prescription does not run against minors.

17.4             In the interest of the fund members (many who are quite often uneducated and unaware of their rights) trustees must ensure that members are aware of the applicability of the Prescription Act to any complaints that that they may wish to pursue and that if a complaint is not pursued in time, the compliant may lapse.

18.          SECTION 22-23 – Access to Court and Processes

18.1             In recent months, the role of the High Court in the review of Adjudicator rulings has been a contentious issue.

18.2             It is a moot point that the High Court has inherent powers of review.  The reference to “relief” in this section must therefore be interpreted as a reference to an appeal to the High   Court.  The fact that no new evidence may now be allowed clarifies the recent uncertainty that was so immanent in the Holloway case.  The fact that no new evidence may be presented in an appeal is in line with South African Law and is welcomed.

18.3             Notwithstanding what was stated in clause 18.2, the process that is followed by the PFA to reach a ruling is very much an inquisitorial process, as opposed to the accusatorial process that is a distinguishing characteristic of the South African legal landscape.  The consequence of this is that when a ruling by the PFA - a decision that was reached during an inquisitorial process that is geared towards a low cost solution - is appealed, it is met by an accusatorial process that takes no or little cognisance of prohibitive legal costs.

18.4             The National Treasury is therefore faced with the challenge to create the processes and procedures to be applied to the PFA that will ensure that the PFA remains accessible, but that, at the same time, the process that is followed by the PFA is in harmony with the South African legal paradigm. 

18.5             In this regard the, the power to prescribe processes and procedures that is granted in section 23 is welcomed.  It should be a priority of the National Treasury to formulate a law of procedure for the PFA.  Such a process should remain accessible and cheap.      

19.          SECTION 24 – Directives

19.1             The FPI have noted the REGISTRAR’S powers to issue binding directives.  This new section should bring certainty with regards to the status of Circulars that are issued by the REGISTRAR.

19.2             The FPI welcomes the fact that the directives issued by the REGISTRAR will be subject to the Promotion of Administrative Justice Act.

19.3             In the interest of ensuring that directives are adequately publicised, all directives that are issued to “ensure the protection of the members and the public” must be published in the Gazette, in order for the directive to become effective.  

20.          SECTION 25 – Regulations

The deletion of 36 (1) (b) is noted.  It is assumed that the powers to prescribe the form of any document will now formally settle in the REGISTRAR and that forms will now be issued in the form of Directives, as has been the de facto situation for a number of years.


21.          SECTION 26 – Administrative Penalties

The new section 37 is noted.  The publication by the minister of the proposed penalties is awaited. 

22.          SECTION 27 – Death Benefits

This section brings clarity with regard to pensions that are payable to the dependants of a member, on the death of such a member.  According to the section, such pensions will be subject to the rules of the fund, and not to the ACT.  Fund rules will have to provide for these circumstances.

23.          SECTION 28 – Treatment of Divorce Orders       

23.1             The uncertainties that prevail in so many divorce proceedings with regard to the division of a member’s pension interest will hopefully be clarified by the introduction of section 37 D (1).

23.2             However, the fact that “any amount assigned from his pension interest to a non-member spouse or any other person…” may be deducted, creates ambiguity.  It is unclear what is meant by “any other person” and in light of the objects of the BILL, the word “person” should be replaced with the word “dependant” as defined in the ACT.

23.3             The election that is granted to a non-member spouse to elect that the “assigned amount” be paid out to the non-member is also against the objects of the BILL.  It is proposed that the non-member spouse is only allowed to elect for payment in the event that the amount falls within the recently suggested framework for early withdrawal.  In all other instances the non-member spouse must be obliged to transfer the divorce payment to an approved fund.

23.4             The tax dispensation applicable to such withdrawals will have to be clarified by SARS.

24.          SECTION 29 – Delegation and Authorisation

The powers of delegation granted to the Minister should streamline the process of regulation.

25.          CONCLUSION

25.1             It is clear that the delegated power of the REGISTRAR has been extended in many areas.  Although many administrative acts are subject to the rules of administrative justice and PAJA, “over-regulation” must be avoided.  Litigation between funds and the registrar may become more prevalent, due to the REGISTRAR’S comprehensive powers.

25.2             Additional regulation usually brings additional costs.  The costs of regulation will ultimately be carried by the members of funds, thereby reducing their benefits.

25.3             The formal law that applies to the PFA must be expanded to provide for a comprehensive process.  Many of the rulings of the PFA have a far reaching effect, and the time has come to formalise the processes of the PFA.  The challenge will be to ensure that the PFA remains accessible to the blue collar fund member who does not have the educational background to follow the complicated legal processes nor the funds to engage the services of a lawyer.

25.4             The reform of pension legislation does not take place in a legislative vacuum.  As many of the above comments show, related legislation will have to be amended.  The LRA is one example where a holistic approach to reform, and not merely the amendment of one act, is required.



Hannes Esterhuyse


March 2007