Secondary

broken-piggy-bank

SCA judgment ‘puts fund retirement members’ accrued benefits at risk’

The Supreme Court of Appeal’s “deeply disturbing” decision in the case of Municipal Employees’ Pension Fund vs Pandelani Midas Mudau puts at risk the accrued retirement benefits of millions of fund members, says pension fund attorney Rosemary Hunter.

Read: Supreme Court of Appeal upholds amended rule affecting withdrawal benefits

The court’s ruling that a retirement fund’s rules may be amended to reduce the benefits that have already accrued by the time the amendment is approved and registered “flies in the face of conventional legal principles”, said Hunter, who has 25 years’ experience in retirement and financial services law and regulation.

She said the judgment should be challenged in the Constitutional Court, given the importance to members and to the country of the social security benefits provided by retirement funds, and the tax incentives provided by the state to promote retirement savings as part of the measures adopted by it to comply with its social security obligations in terms of section 27 of the Constitution.

In Hunter’s view, the Pension Funds Adjudicator was correct when she determined that the MEPF’s amended rules could not be applied to the calculation of a benefit that had accrued before the amendment had been approved and registered, even if the amendment was intended to be retrospective to a date before then.

In what Hunter called a baffling judgment handed down on 8 April, the SCA unanimously held that:

  • Section 12 of the Pension Funds Act (PFA) empowers a fund, subject to the approval of the registrar (now the FSCA) to amend its rules and to determine the date on which the amendment will become effective;
  • If by the amendment of its rules the fund intends to interfere with rights retrospectively, this intention must be given effect to; and
  • As the MEPF had decided that the amendment would have retrospective effect from 1 April 2013, its application to the calculation of Mudau’s benefit had not been invalid.

Potential financial planning implications

Hunter said if the SCA’s ruling is not overturned, the rights of members and beneficiaries of retirement funds subject to regulation and supervision in terms of the PFA will become “wholly uncertain”.

She provided the following example to illustrate her point:

When planning her finances, a fund member may take into account that, if she dies before retirement, then, in terms of the registered rules of her retirement fund, the fund will pay a lump-sum benefit equal to three times pensionable remuneration plus accumulated retirement savings. That lump sum can be shared among the deceased member’s beneficiaries in proportions the board of the fund considers fair and consistent with the social security purposes of section 37C of the PFA.

According to the SCA judgment, however, the trustees would be entitled to amend the rules with retrospective effect from a date before the member died to reduce or even eliminate the amount of the lump-sum benefit payable on death, even if, by the time the rule amendment has been registered, the board has allocated shares in the lump-sum benefit among the deceased member’s beneficiaries.

‘SCA has made an incorrect assumption’

Hunter said the SCA started its analysis at the wrong point: the intention of the fund when it adopted the rule amendment.

“The court should have started with an analysis of what sub-section 12(4) allows and does not allow in regard to the effective date of a rule amendment.”

She said the sub-section states that the fund can determine the date from which an amendment will be effective. It does not explicitly state that the amendment may be made either:

  • Retrospective in that it is prospective in effect, but imposes new consequences in relation to events that occurred before the amendment was approved; or
  • Retroactive in that it changes the rights and obligations of members and the fund from what they were before the amendment was approved, and thus can have adverse impact on rights accrued by members and beneficiaries in terms of the pre-amendment rules.

“The court was not entitled to assume that section 12(4) was intended to authorise retrospective, and even retroactive, amendments. Instead, time-honoured legal principles required it to find that the section does not permit any interference with rights accrued in terms of the pre-existing law or rules.

“By doing the opposite, the SCA implicitly endorsed past conduct by the MEPF that was not authorised by the then registered rules of the fund (that is, calculating and paying a benefit on a basis other than that provided for in its registered rules), which was, as the SCA in Mostert NO v Old Mutual Life Assurance Company reminded us, therefore unlawful and invalid,” Hunter said.

Click here to read Hunter’s full analysis of the SCA’s judgment and the preceding findings by the High Court (single bench and full bench) on the matter.

, , , , , ,

Comments are closed.
SA Corona Virus Online Portal Logo
CLICK HERE FOR MORE INFORMATION