Why FSCA’s liquidation exemption stands despite conflicting with Board Notice

The Financial Services Tribunal (FST) has dismissed an application by an umbrella fund member who was aggrieved by the FSCA’s decision to exempt the fund from the full liquidation requirements in the Pension Funds Act (PFA).

The tribunal’s decision addressed the legal position of administrative decisions that are made irregularly. It was trite law that such decisions are not void but remain in effect until they are set aside, the FST said.

It also dealt with the intersection of the registrar’s ability to exempt a retirement fund from the requirements for voluntary dissolution (liquidation) with the exemption criteria set out by the erstwhile Financial Services Board (FSB) in Board Notice 75 of 2009.

The background to the application is the decision by a banqueting and conferencing company, Cobin Investments (Pty) Ltd, to liquidate its sub-fund of the Keystone Umbrella Provident Fund in October 2020.

Like many businesses in the hospitality sector, Cobin found itself in a precarious financial position because of the lockdown. It decided to liquidate the sub-fund so that its employees, who were earning a reduce salary or receiving no salary, could access their retirement benefits.

Cobin went into voluntary liquidation in 2021.

The requirements for the voluntary liquidation of a retirement fund are set out in section 28 of the PFA. However, sub-section 28(17) authorises the registrar to prescribe the circumstances under which funds may be exempted from these provisions, and it “must prescribe the requirements” for such an exemption to be granted.

The tribunal said, to its knowledge, the registrar did not issue any prescriptions.

Exemptions from the liquidation provisions

In June 2009, the FSB published Board Notice 75, which provided guidance in respect of the information that the registrar will require from a fund and/or liquidator in exercising his or her powers and functions under section 28 of the PFA.

Paragraph 9 deals with applications for exemptions under sub-section 28(17), and paragraph 9.2 states:

The registrar will only consider an application for exemption from the provisions of section 28 of the Act where, on the date that the fund takes a resolution to liquidate or partially liquidate the fund due to the withdrawal of a participating employer, the following conditions apply:

  1. The average benefit per member is less than R50 000;
  2. The fund or the relevant participating employer withdrawing does not have more than 50 members;
  3. The fund or the relevant participating employer has assets of less than R50 million; and
  4. The surplus apportionment scheme or nil return has been approved or noted by the registrar.

In its exemption application, the fund’s administrator, Lifesense Financial Services Administration, disclosed that the sub-fund had 54 members and the average benefit per member was R104 191.23, which meant the application did not conform to the requirements of the Board Notice.

The FSCA nevertheless granted the exemption from all the provisions of section 28.

This resulted in the applicant, “TS”, complaining to the FSCA in February 2021. She wanted the FSCA to withdraw the exemption and recover the funds that had been paid out to the members. Thereafter, TS wanted the administrator to follow a transparent liquidation process that observed all the provisions of section 28.

The FSCA accepted that the exemption was granted in conflict with the Board Notice but refused to comply with TS’s demand to withdraw the exemption. As a result, TS approached the tribunal.

Adverse effect on the members’ rights

The tribunal referred to section 95 of the Financial Sector Regulation Act, which provides for the revoking of decisions, quoting from it as follows:

(1) A financial sector regulator may, by notice to a person in relation to whom the regulator made a decision in terms of a financial sector law (or, if more than one such person, all of them), revoke the decision if—

(c) the decision is, for any reason, invalid.

(2) A revocation of a decision in terms of sub-section (1) has effect from the date on which the revoked decision was made.

(3) A financial sector regulator may not take action in terms of sub-section (1)

(a) if the action would adversely affect the existing or accrued rights of any person (except the person in relation to whom the regulator made the decision) [emphasis added].

The FST commented on these provisions as follows:

      • Sub-section (1) creates the exception, allowing the FSCA to “review” its decision;
      • Sub-section (2) restates the common law; and
      • Sub-section (3) sets the jurisdictional requirement for the FSCA to exercise its power, which is nevertheless discretionary.

The tribunal said the FSCA did not exercise its discretion but found that the jurisdiction requirement had not been satisfied, namely that revoking the exemption would adversely affect the members’ existing or accrued rights.

In this regard, it pointed out that the fund’s members would bear the costs of the liquidation because they were the only creditors, and the fund was a defined contribution fund. These costs decrease the paid-out benefits.

“It is common cause that the costs of a full liquidation are more than the costs of a winding-up under an exemption. All but seven of the 54 members have withdrawn their pension benefits. It is the case on the papers that 47 will be obliged to repay what they received, and all 54 will be obliged to contribute to the costs of liquidation, which means that their benefit will be reduced,” the tribunal said.

TS contended that the members did not have a right to their benefits excluding the costs of a full liquidation, because they were obliged to share in the liquidation costs, and the invalid exemption could not have created any rights.

But the tribunal said this argument was faulty for two reasons:

      • An invalid administrative act remains valid until it is set aside; and
      • Revocation is not retrospective – as stated in sub-section 95(2) of the FSRA.

Members have not waived their rights

Counsel for TS then used sub-section 95(2) to argue that the seven members who had not withdrawn their benefits would bear the costs of the full liquidation.

But the tribunal said the FSCA’s exemption also gave these members a vested right to benefit payments without the deduction of the costs for a full liquidation. Except for TS, there was no evidence that any of them had waived their rights or were prepared to pay the costs, “which might escalate if regard is had to where a full liquidation driven by the applicant could lead”.

It appears that TS believed a full liquidation was necessary so that members could inspect the preliminary liquidation and distribution accounts, to determine whether their benefits had been calculated correctly.

The FST accepted Lifesense’s response that this objective could be achieved by “the format of the benefit statements provided by the fund”, and the fund would provide a benefit statement to any member on request.

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