Landmark legal victory

A watershed ruling by the Supreme Court of Appeal (SCA) in Bloemfontein on November 2 represents a positive upshot for pension funds in South Africa and could see members benefitting from billions of rand in unclaimed funds.

Pension funds have been legally challenging the prescriptive Regulation 35(4) addition to the Pension Funds Act (PFA) around actuarial surpluses and contingency reserve accounts for years.

Now a trio – Hortors Pension Fund, Southern Sun Group Retirement Fund and the Vrystaatse Munisipale Pensioenfonds – have won their respective cases on the matter, which were heard jointly at the SCA in August.

The court ruling allows them to use this money in other ways if they can’t find the member.

This followed the funds initially losing in the Gauteng High Court, with applications to secure an order declaring Regulation 35(4) invalid being dismissed.

The Hortors application was against the Financial Sector Conduct Authority (FSCA) as the first respondent and the minister of finance as the second respondent.

The Southern Sun Group Retirement Fund’s case was against ‘the Registrar of Pension Funds and Others’ while Vrystaatse Munisipale Pensioenfonds’s case was against ‘the Minister of Finance and another’.

Johan Esterhuizen, a partner in the pension funds department at law firm Shepstone & Wylie, represented Hortors.

He tells Moneyweb that the SCA decision is of “great significance” for the pension funds industry as the regulation in question has been a bugbear for over a decade.

“The [regulation] change came as far back as 2001, but only became an issue in later years,” he says.

“When older pension funds could not find certain members, this regulation called for their portion to go into contingency reserve accounts.

“However, pension funds have been questioning what happens to the money if there have been exhaustive steps to find such members over several years.

“Regulation 35(4) essentially meant this money [actuarial surpluses] stays in contingency reserve accounts in perpetuity,” he adds.

“The consequence of the SCA’s recent judgment is that this regulation has now been found to be invalid [as it is beyond the finance minister’s power and not in accordance with the Pension Funds Act 24 of 1956] and thus is unenforceable,” notes Esterhuizen.

He says this means pension fund boards are now empowered to decide how such funds can be used, including using a portion to pay top-up benefits to other members or even offering a ‘contribution holiday’ to current members.

“This can run into billions of rand [between the various pension funds] but different funds can opt to do different things … The critical thing is that pension funds will still be liable if members that previously could not be traced do come forward. The liability never goes away,” he adds.

“Pension funds will need to keep a reasonable amount in contingency reserves, but the SCA ruling means that pension fund boards are not disallowed from taking money out of contingency reserve accounts.

“Such a move will still need to be approved by relevant authorities, like the FSCA,” he points out.

This article first appeared on Moneyweb and was republished with permission.

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