Calculation of pension payouts – Complexities of transfers and switching

Parties that are aggrieved by decisions of the Pension Funds Adjudicator may lodge appeals with the Financial Services Tribunal. The Financial Sector Regulation Act, 9 of 2017 (“FSR Act”) considers the Pension Funds Adjudicator as a “decision-maker” and his/her decisions are “decisions” as respectively defined in paragraphs (e) and (d) of section 218 thereof.

This section came into effect on 1 April 2018 along with the FSR Act. Thus, the tribunal is in a position to entertain appeals of determinations handed down by the Office of the Pension Funds Adjudicator (OPFA).

An example of one of these PFA cases (First Respondent) that reached the Tribunal’s desk is the case between Mr K (The Applicant) and a Retirement fund (The Second Respondent). In general Mr K was not happy with the calculation of his fund credit and seeks reconsideration of the decision of the PFA.

Brief Background

  • The applicant was employed since 1 November 1997 until he retired on 31 December 2017.
  • He was a member of his employer’s Pension Fund.
  • Before 2016 the Pension Fund invested its funds in an investment company and it was managed by an employee benefits group.
  • Mid-year 2016 the Pension Fund’s administrator changed and the funds were invested in an umbrella fund managed by the second respondent.
  • The investment was subject to a transfer in terms of section 14 of the Pensions Fund Act 24 of 1956 (section 14 transfer) which the FSCA had to approve.
  • The applicant had two portions of investments:
    • One portion comprised of funds originally invested in the first investment company which were pending the section 14 transfer to the second respondent.
    • The other portion was made up of contributions accumulated over the last few months of the applicant’s employment leading up to retirement which were invested in the new umbrella fund which the second respondent set up in December 2016.
  • The dispute relates to the part of applicant’s pension benefit that was originally invested (before 2016).
  • This apportions to about 96% of his total benefit that was accumulated over a period of 20 years.

The Applicant’s claim and the PFA’s view

In June 2017, in anticipation of his retirement, he requested a valuation of his pension benefit. The valuation was R2 728 962.35 as at 30 June 2017. On receipt of the valuation he was eager to invest it into a money market portfolio. His employer confirmed that the applicant’s pension could be invested in the money market and requested the member to complete a switch form. The member sent the switch form to the second respondent with a note that stated the following: “as this is a generic form, I wish to clarify that I would like to move my stand alone pension fund from the Ashburton Balanced Fund to a money market fund. Thank you.”

The applicant’s pension fund benefit was therefore invested in the money market on 11 August 2017 in the amount of R2 728 962.35.

During December 2017, due to retire that month, the applicant requested valuation of his pension fund because his intention was to invest the proceeds in a preservation pension fund. On 29 January 2018 the valuation reflected the applicant’s total pension at R3 055 660.22

During February and March 2018 the applicant received fluctuating valuations. On 7 February 2018 the valuation had been reduced. Eventually he transferred the amount of R 2 922 837 to the preservation fund.

After making enquiries he realised that his funds were switched back to equities. Other errors were also pointed out by him. Specifically with regards to the “real growth” vs what was allocated, as well as the fact that no interest was calculated for the period 1 December 2017 to 10 January 2018.

As a result the applicant claims a total loss of R156 714.

The second respondent argued that no mandate existed to invest in the money market portfolio and that the applicant suffered a loss as a result of negative market movements. They further argued that its miscalculation was that its calculation was based on an incorrect investment portfolio.

The PFA concluded that the losses suffered by the applicant, which are attributable to these changes in market conditions, cannot be blamed on the second respondent.

The Tribunal’s Analysis

The applicant’s approach was that there was authority for him to invest in the money market portfolio. He was however not advised that his investment instruction could not be carried out.

The second respondent argued that the applicant should have signed another form that would have then authorised it to invest in the money market. The applicant however denied that he knew that he had to fill in any other form to ensure his instructions could be carried out.

According to the Tribunal, the facts of this matter clearly show that the applicant had asked for advice and that he had been assured that his instruction to invest in the money market was valid. Further, there is no evidence to suggest that the applicant was subsequently advised otherwise.

With regards to the loss, the Tribunal viewed that the PFA did not seem to have considered what would have happened if the valuation had been provided on time as there was a delay when the applicant first requested the evaluation.

The Tribunal’s finding is that “in the circumstance the decision of the PFA should be set aside. The only order this Tribunal then may make in terms of section 234(1)(a) of the FSRA is to remit the matter to the decision-maker for further consideration”.

Click here to download the detailed Financial Services Tribunal’s case.

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