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Pension Funds
Friday, February 1, 2002
Balancing act

Millions of people could stand to benefit from the redistribution of the estimated R80 billion of surplus assets in the pensions industry. What is not clear is who will ultimately enjoy a welcome boost to their retirement provision, and by how much. There are currently approximately 10 million members of pension schemes.

Without making any promises, and assuming all the guesswork cancels each other out, it is not unrealistic for the average individual to expect a R10 000 or even a R20 000 boost to his or her retirement provision. It will depend on many factors, however; for example, length of service and, most importantly, whether there is a surplus available in the fund concerned. And they will have to wait a long time. In theory the last report for surplus redistribution won’t be submitted until 31st May 2006. This is because Defined Benefit Funds are only required to produce a statutory valuation every three years, and then they have 18 months in which to submit a surplus apportionment scheme.
Lorraine Dias, senior retirement fund consultant at NMG-LEVY says anyway, it’s dangerous to talk about figures at this stage. “The estimate of the surplus was achieved in a roundabout way,” and did not take into account any misuse of surplus assets in the past. “The figure also relates only to defined benefit funds, and excludes defined contribution funds administered by insurers, for example.”
Nor was there a common date for valuations submitted to the Financial Services Board, she points out, because these all took place at different times in line with each fund’s three-year statutory valuation date.

Administration costs

There are going to be huge administrative costs involved. “Indeed, there is some concern,” she adds, “that the whole cost of this exercise is going to offset any of the benefits derived.”
All fund records going back to 1st January 1980 will have to be researched and recreated and this will involve copious actuarial work, and this will have to be paid for. The administrators will also charge additional fees since an exercise of this nature is not encompassed in their normal remuneration structure.
The procedure is to be controlled in terms of the Pension Funds Second Amendment Act 2001, which was signed by the President on December 7th 2001 and came into immediate effect. This date is termed ‘The Commencement Date’.
In terms of this law the whole exercise will hinge on three specific criteria, and each fund will have to carry out a comprehensive actuarial analysis and valuation to establish:
• Whether there are any ‘surplus assets’;
• Whether the employer concerned misused any surplus assets; while,
• The calculation will have to take into account the new provisions for ‘minimum benefits’.

In respect of each fund the first statutory valuation after the commencement date will also be termed ‘the surplus apportionment date’. The fund will then have a period of 18 months from that date in which to submit to the Registrar for approval a scheme for the distribution of any surplus assets.
Obviously, for pension schemes that are 100% funded (that is, their assets match their liabilities) or if there is a deficit as at the apportionment date, and there was no misuse of funds, then there will be no surplus available, and the matter will end there.


The Act says that if any surplus has been misused in the past it must be refunded by the employer. The consulting actuary will be required to certify the true position. The circumstances of misuse might include:
• Benefit improvements for executives in excess of benefits to other members;
• Additional pensions granted to selected members in lieu of post-retirement medical costs;
• Recognition of prior service for selected members; and,
• Contribution holidays taken after the commencement date.

“In respect of any misuse of the surplus in the past, the relevant amount will be rolled forward to the apportionment date together with interest. This is then added to the assessed surplus,” notes Dias. She also explains that pension increases will need to be reviewed to make sure they met the minimum requirements. This must include all former members who left the fund between January 1st 1980 and the surplus apportionment date. Indeed, all ‘stakeholders’ must be considered (members, deferred members, pensioners, former members, and employers).
For a defined benefit fund the minimum benefit to which an individual is entitled is the actuarial reserve. This is defined in current legislation and would not have applied at the time the individual left the fund. Providing there is a surplus in the fund then this person can expect to receive his allocated surplus.


It would be in the employer’s interest to try and understate the surplus; in the existing members’ interests to enjoy the benefits of any surplus to the detriment of ex-employees; and in the Trustees’ interests to seek preference for existing members, as well, or maybe to hide a surplus to cover any future mistakes in investment strategy.
There will therefore need to be safeguards to ensure vested interests do not distort the calculations, so that all stakeholders are equitably represented. Thus:
• Any apportionment scheme has to be communicated to existing members and agreed by them. They can lodge objections;
• At least 75% of the Trustees have to agree to the distribution of the surplus;
• A watchdog will be appointed to look after the interests of former members;
• The scheme needs to be approved by the actuary;
• Finally, approval is required of the Financial Services Board; which, if there is a problem with the application it can,
• Refer the matter to an independent specialist tribunal.

There are two types of minimum benefit: the Minimum Pension Increase for existing pensioners, retrospective to the date of retirement; and, the Minimum Individual Reserve for existing and former members.
Comments KPMG, “The idea of minimum benefits is to prevent the build-up of future surpluses at the members’ expense,” and to redress past imbalances. Once the minimum benefits have been certified and allocated, the balance of the surplus, if any, must be distributed in terms of the apportionment scheme in an equitable manner between:
• Active members;
• Pensioners;
• Former members; and,
• Employers.

Note that where former members have now moved into retirement, it is likely the relevant amount will be capitalised into their existing fund and their monthly pension increased accordingly. Since this will affect their entire pension, they are likely to receive a lump sum for the completed period of retirement. The allocated surplus for a former member, who is currently contributing to a fund, will be paid into his individual account in the case of a defined contribution fund, or passed as a transfer value into a defined benefit fund. To apportion a surplus due to an existing member there will be an internal reallocation within the fund.
It will be very difficult to get records in respect of the early 80s, and indeed there will be former members who cannot be traced. Further complications may arise in respect of pension fund members who are deceased by the time the allocation is made. This will affect many members, of course, since the effective period for review runs from January 1st 1980. Beneficiaries will have to be traced, and how they receive any payments will be a minefield of wills, estates, estate duty and current income tax status of the relevant parties. Even if there are no disputes amongst claimed dependants it will take years to sort out.
Kobus Hanekom, senior manager Consulting Services at Sanlam Employee Benefits, says that defined benefit funds are likely to experience an increase in their funding costs as a result of the imposition of minimum benefits. “The decision trustees and employers will have to make will be either to increase contributions or to restructure existing benefits. This may be an appropriate time to consider whether a given fund should be converted to a defined contribution fund.”
He says the position of the defined contribution funds is less of a problem. Even if the legislation is amended to require them to carry out valuations prior to proposing a reallocation scheme, it is unlikely to affect their bottom line. “Changes would, however, have to be made to introduce principles of full vesting to ensure that members suffer no penalty should they terminate their membership of the fund.”
Mr Hanekom believes the surplus legislation constitutes a “significant blow to the future of most defined benefit schemes.” Funds now have even more reason to consider the outsourcing of their pensioner liability. “And we would encourage all trustees and employers to investigate the position of their funds as soon as possible so that a strategy can be developed and implemented.” By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:15.1 1st February, 2002
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