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Retirement Planning
Monday, March 1, 1999
Torpedoed by case

A recent ruling by Pension Funds Adjudicator, Professor John Murphy, could have significant implications for defined benefit retirement funds, as a number of typical benefits could be declared unfair in terms of the Bill of Rights.
According to Kobus Hanekom, legal practice partner for Old Mutual Actuaries and Consultants, “Al- though the Adjudicator has always expressed support and understanding for the valuable role played by defined benefit funds, there is concern he may have unintentionally torpedoed these schemes in South Africa.
“The ruling could subject defined benefit funds to in-depth scrutiny in terms of operating in an equity environment and could lead to a major restructuring of current schemes as we know them.”
The case involved a complaint of unfair discrimination based on marital status. The complainant received R33 000 less than expected from his withdrawal from the retirement fund because he was recently divorced and no longer qualified, in terms of the fund rules, as a married member.
When calculating the complainant’s pension, the actuary considered whether or not a pension must he paid to the member’s spouse. In line with the fund rules, no allowance was made for a spouse’s pension, as the member was divorced.
Commenting on the ruling, Mr Hanekom said that in terms of the Bill of Rights, retirement fund members might not be discriminated against unfairly. Professor Murphy had to determine whether it was fair for the fund to differentiate between divorced and married members when granting withdrawal benefits.”
With this particular case, Professor Murphy noted that family responsibilities of unmarried members, whether never married, divorced or widowed, were not taken into account. Professor Murphy determined that the fund failed to show any rational basis for discriminating between married and divorced members when calculating benefits, and that the calculation of benefits was unlawful and unfairly discriminatory on the grounds of marital status.
The fund’s rationale for distinguishing between married and unmarried members in their rules stems from the nature of defined benefit schemes that cater for member need.
This recent ruling implies defined benefit schemes have no choice but to change to become more equitable. When classifying benefits, dependant status and not marital status, should be part of the distinguishing criteria.
“Unless Professor Murphy introduces clear qualifications indicating to what extent it is reasonable to pro- vide a greater benefit to a member with dependants than to a member without dependants, defined benefit schemes will require significant restructuring. “This case could even result in the end of defined benefit schemes as we know them,” added Mr Hanekom.
Professor Murphy ruled that the complainant’s transfer value be recalculated using the same methods and assumptions applicable to married members. This could affect the fund’s resources, which in turn could detrimentally affect other fund members’ benefits. However, he has indicated that unless he protects this fund, and others, all unmarried members who received discriminatory withdrawal benefits in the past could claim compensation, which may cause a large fund deficit.
“As a result, the ruling was made with prospective effect so that corn- plaints from unmarried members regarding benefits received prior to the determination on 22nd January 1999, will only be investigated if they were submitted by the original date of this particular complaint — 17th March 1998.

Copyright © Insurance Times and Investments® Vol:12.2 1st March, 1999
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