The Supreme Court of Appeal (SCA) has set aside an agreement that, among other things, aimed to establish a uniform approach to the provision of retirement fund benefits to local government employees.
The majority decision by the SCA upholds the February 2023 judgment by the Full Bench in Pretoria, which found the Retirement Fund Collective Agreement (CA) to be unlawful, save for one clause.
Read: Bargaining councils can’t intrude on retirement funds’ statutory protections
The appeal court not only found that the CA is illegal but also set aside the agreement in its entirety. Costs were awarded against the appellants.
The case highlights the boundaries between labour legislation, primarily the Labour Relations Act (LRA), and the Pension Funds Act (PFA).
The SCA judges diverged – three-to-two – on the extent to which collective bargaining under the LRA can influence the operations of retirement funds regulated by the PFA. The majority finding was that the CA was invalid because it went beyond LRA-permissible collective bargaining and interfered with PFA-regulated fund governance, whereas the minority held that the CA constituted legitimate collective bargaining under the LRA.
The CA was concluded in September 2021 within the South African Local Government Bargaining Council (SALGBC) by the South African Local Government Association (SALGA), representing about 257 municipalities, and two majority trade unions: the Independent Municipal and Allied Trade Union (IMATU) and the South African Municipal Workers’ Union (SAMWU).
About 250 000 employees in the local government sector and an unknown number of retirees stood to be affected by the CA.
A central feature of the CA was an accreditation regime. This required funds operating in the local government sector to obtain accreditation from an accreditation committee (established by the SALGBC’s executive committee). Funds that were not accredited would not receive contributions from employers.
For and against the agreement
The CA triggered legal challenges from other funds in the sector, including the Municipal Workers Retirement Fund (MWRF), the Municipal Employees Pension Fund (MEPF), and the Municipal Retirement Organisation. The aggrieved funds said SALGA, IMATU, and SAMWU acted ultra vires by seeking to regulate retirement fund governance in the sector.
SALGA and the unions said the CA would fix longstanding problems in the local government retirement system. They argued that employers and employees had been frustrated for years by issues such as duplicated administration, lack of transparency in how funds were run, high costs, poor governance, and a lack of uniformity across the many funds. They saw the CA as a way to create a more efficient, fair, and standardised system through an accreditation process, which would ensure better oversight, lower fees, improved trustee conduct, and easier movement for employees between funds. In their view, this was a legitimate part of collective bargaining under labour laws.
The opposing funds said the CA overstepped what labour laws allow and interfered with how retirement funds are supposed to operate independently under the PFA. They argued the CA was not really about terms of employment but was trying to force funds to change their rules – changes that could make funds financially unstable. This undermined the independence of trustees, who have a legal duty to act in the best interests of members (including retirees), and created a parallel regulatory system that clashed with the PFA. They also contended that the CA affected non-parties such as pensioners without proper legal extension.
In June 2022, the High Court granted an interim interdict in favour of the MWRF that restrained the SALGBC from implementing the CA on 1 July 2022, pending the outcome of the court’s review of the agreement.
The interdict exempted one clause in the CA (clause 8), which required municipalities to contribute at least 18% of pensionable salary to an employee’s retirement fund. It also required that any employee appointed after the CA took effect would have to join a defined-contribution fund.
Issues before the SCA
The appeal against the High Court’s judgment was brought by the SALGBC, SALGA, IMATU, and SAMWU.
The MWRF brought a cross-appeal against clause 8 (the only clause upheld in the High Court’s review).
The SCA had to determine four issues:
- Whether the CA constituted a valid collective agreement under sections 23 and 213 of the LRA, which define collective agreements as regulating terms and conditions of employment or matters of mutual interest.
- Whether the main agreement mandated the CA’s conclusion, and whether IMATU had the authority to be a party to the agreement.
- Whether the CA was reviewable under the Promotion of Administrative Justice Act (PAJA) as administrative action or under the constitutional principle of legality.
- Whether the CA unlawfully fettered trustee independence, interfered with retirement fund governance, or rendered funds financially unviable.
The majority judgment was written by the President of the SCA, Judge Mahube Molemela, with Judge Connie Mocumie and Judge John Smith concurring. The minority judgment was authored by Judge Raylene Keightley, with Acting Judge of Appeal Phillip Coppin concurring.
Validity under the LRA
The majority held that although labour laws permit collective bargaining on retirement-related matters such as terms and conditions of employment or matters of mutual interest under sections 23 and 213 of the LRA, such bargaining cannot encroach on the PFA’s regulatory domain.
The CA exceeded these boundaries by attempting to regulate retirement fund governance, a sphere reserved for the PFA. Central to this finding was the recognition that retirement benefits, although linked to employment remuneration, are subject to distinct protections under the PFA.
The CA’s accreditation regime mandated rule amendments, such as permitting in-service member transfers to accredited funds and restricting membership to specific municipalities, which the majority viewed as coercive. This coercion arose because non-accredited funds would cease receiving employer contributions, putting funds’ financial viability at risk.
The CA affected non-parties, including pensioners, without the necessary ministerial extension in section 32 of the LRA. Without such an extension, the CA’s effects on non-parties violated the LRA’s binding provisions under section 31, which limit agreements to parties unless extended. This boundary protects pensioners, who, as non-employees, fall outside labour bargaining but remain entitled to the protections of the PFA.
Additionally, the majority found that IMATU’s participation in the CA was ultra vires, because its constitution limited bargaining to employment conditions, not retirement fund regulation.
The minority viewed the CA as a legitimate exercise of collective bargaining under sections 23 and 213 of the LRA without unlawfully intruding on the PFA.
They said: “The manner in which pension or retirement funds are administered and regulated under their rules is also a matter of mutual interest. Employers and employees both contribute to retirement funds: it is their money, and hence, their risk that is of prime importance to them.”
This mutual interest justified the CA’s objectives – such as uniformity, equitable access, and improved governance – were directly related to terms of employment, not an attempt to regulate the retirement fund industry.
The minority rejected the notion of overreach, saying the CA bound only parties under section 31 of the LRA and did not extend to non-parties such as funds or pensioners without a section 32 extension.
The minority also found no ultra vires issue with IMATU’s participation, viewing the CA as within the scope of employment-related bargaining.
Interference with PFA governance
The majority found that the CA’s accreditation regime unlawfully interfered with retirement fund governance under the PFA in several ways.
The PFA establishes a regulatory framework prioritising trustee independence and fiduciary duties under section 7C, with rule amendments subject to registrar approval under section 12. The CA, however, empowered non-trustee actors – SALGA, unions, and the accreditation committee – to control accreditation. Non-accredited funds would cease receiving employer contributions, effectively compelling funds to amend their rules or become financially non-viable.
This coercion undermined trustees’ statutory duties to act in the best interests of fund members, including pensioners, as required by section 7C of the PFA.
The majority noted that the CA’s transfer provisions, allowing members to move between accredited funds, posed difficulties for long-term financial stability of retirement funds, which are long-term vehicles where assets and liabilities have to be mapped long into the future. The provisions risked funds’ viability, potentially triggering municipal liability for shortfalls under section 30(3) of the PFA.
The majority further criticised the CA for subverting the PFA’s regulatory scheme by creating a parallel supervisory regime. The accreditation committee’s powers to change fund rules were seen as usurping the registrar’s authority under the PFA. The CA’s usurpation of the powers granted to the trustees by the PFA was a key defect rendering it unlawful.
The minority argued that the CA did not unlawfully interfere with PFA governance, because funds retained the autonomy to decide whether to seek accreditation.
Rule amendments were voluntary and subject to registrar approval under section 12 of the PFA, ensuring compliance with the PFA’s regulatory framework.
Further, the CA did not seek to operate outside the scope of the PFA, or to usurp the authority of the Financial Sector Conduct Authority, or the authority of the registrar of retirement funds, or the Minister of Employment and Labour.
The minority also dismissed concerns about financial viability, noting that funds could apply for exemptions or non-material deviations from the CA’s requirements, preserving trustee discretion under the PFA.
The minority further argued that pensioners’ interests were protected, because their pensions are preserved in insurer-issued annuities, which are protected under the retirement and insurance laws.
Reviewability
The majority held that the CA was reviewable under the constitutional principle of legality, because it constituted an exercise of public power with consequences for non-parties, such as pensioners.
The principle of legality requires that every exercise of public power must be rational. The majority identified multiple defects that rendered the CA irrational. They concluded that because there was no rational connection between the CA and its stated objectives, a legality review had been established. They also found grounds for review under PAJA, citing ultra vires acts and improper motives, such as potential bias towards funds aligned with SALGA or the unions.
The minority argued that the CA was not administrative action under PAJA, because it was a private agreement between bargaining council parties, not a governmental function. Even if the CA were subject to a legality review, it was rational, with a clear connection between its accreditation mechanism and objectives.
The minority also dismissed claims that the CA violated the constitutional rights to freedom of trade and freedom association. If funds refused to seek accreditation, that would be their own election, not coercion by the CA. They argued that employees would not be forced to join particular fund: they could choose between accredited funds. They could leave their pension interest in a non-accredited fund as paid-up.
Clause 8 set aside
In terms of the cross-appeal, the majority found that the interconnectedness between the CA (particularly the accreditation regime) and clause 8 did not permit clause 8 to be carved out from the remainder of an agreement that has been set aside. Therefore, clause 8 was unlawful and must be set aside.
