3 February 2008

The effects of the Omnibus Pension Funds Amendment Bill

At the time of writing, the Pension Funds Amendment Bill of 2007 had been approved by Parliament but not yet put into operation. This Bill sets out to enhance the protection of the pension interests of members and to undo the legal challenges made successfully against the provisions of the surplus legislation. the memorandum on the objects of the Bill states that the Bill has been introduced "with the intention to circumvent the spirit of the original Legislation passed by Parliament by applying creative legal interpretations".

The Bill is an omnibus Bill: it seeks to correct and block a number of loopholes in the existing Pension Funds Act. It is an important Bill and it has five main areas in which it operates:

  1. clarifying some of the loopholes in the existing Act relating to surplus;
  2. bringing bargaining council retirement funds into the same regulatory net as other funds;
  3. increasing the power of the Registrar of Pension Funds;
  4. defining the duties of pension fund administrators;
  5. expanding on the powers of the Pension Funds Adjudicator and providing for deputy and assistant Adjudicators; and
  6. clarifying the treatment of divorce orders and maintenance claims in respect of retirement funds.

The most contentious of these amendments is the treatment of issues relating to surplus.

Boards of trustees have grappled with the competing claims of the various categories of stakeholders: former members, active members, pensioners and the employer. It has to be said at the outset that Act 39 of 2001, which introduced the surplus legislation, was not a model of clarity and provided bounteous scope for judicial interpretation, let alone the creative interpretation described by the drafters of the legislation.

The most exposed flank was the failure on the part of the drafters of the original legislation to provide for interest and/or investment return to be added to items of improper use of surplus as provided for by the Legislation. One would have thought that with the introduction of such a novel concept as the repayment of past improper use of surplus, that the draftsman would have been aware of the common law position and would accordingly have made clear provision for the imposition of interest or investment return (as they had done in the same legislation strangely enough in respect of contribution holidays). It was not 'creative interpretation' that led to the challenges to this but rather the application of the first principles of interpretation.

The constitutionality of the attempted correction of this failure by means of this legislation remains to be seen. There can be no doubt that the amendment Act can have no retrospective application in respect of funds that have completed and submitted their surplus apportionment schemes before the introduction of the latest amendment.

It is obviously desirable that all retirement funds are brought under the same regulatory authority and it has been anomalous that the bargaining council funds have operated outside the purview of the Registrar of Pension Funds and not been subject to the jurisdiction of the Pension Funds Adjudicator. There are some very large funds that presently fall outside of the jurisdiction of the Registrar and the Adjudicator. The inclusion of these funds under the same umbrella is a necessary precursor to the proposed introduction of the National Savings Fund, which will apply a stricter regime to the regulation of retirement funds.

Following on the recent well-publicised collapse of a large financial institution and that institution's involvement with a retirement fund, the provisions that beef up the Registrar's powers are to be welcomed.

In terms of the Bill, the Registrar now has increased powers to conduct inspections and investigations and he may instruct any person to conduct a compliance inspection of the business and the affairs of a fund or of a pension fund administrator.

The Registrar may furthermore intervene in the management of a fund by directing that the rules of the fund, including the rules relating to the appointment, powers and remuneration and removal of the board, be amended if an inspection or an investigation reveals that the fund is not in a sound financial condition or has failed to act in accordance with the provisions of section 18 or is not managed in accordance with the provisions of the Act or the rules of the fund.

The Registrar may likewise intervene where a fund has no properly constituted board.

The effect of these provisions is that the Registrar will be able to act swiftly in cases where there is perceived mismanagement of the affairs of a fund or where irregularities are being committed. It is well-known that the Registrar is conducting routine inspections of funds and administrators and it is to be hoped that these will be done effectively and quickly bring to light any fact or circumstance which might otherwise lead to the loss of members' investments.

For many years, the Pension Funds Adjudicator has laboured under a legal framework in terms of which only one adjudicator may sign determinations. This position has now been corrected by provisions that contemplate the appointment of a deputy adjudicator or an acting adjudicator.

The provision which provides for a right of appeal or review from a decision of the Adjudicator to the High Court will not, it is submitted, make much difference to the present situation as it applies.

Concern was expressed that the proceedings in the High Court could amount to a rehearing of the whole matter that had been placed before the Adjudicator and that further evidence could be led at that hearing. The provision as it now stands, is that the court may consider the merits of the complaint made to the Adjudicator and in which the Adjudicator's determination was based, and make any order it deems fit. It is specifically provided (even though this presumably was not necessary) that the provision does not affect the court's power to decide that sufficient evidence has been adduced and to order that no further evidence shall be adduced.

The situation is a difficult one and the latest tinkering with the legislation does not take the matter any further. The mischief aimed at was that an appellant could bring in new grounds and new evidence at the hearing before the High Court and thereby drag into the proceedings a complainant who had chosen to bring his or her complaint in a forum where there were no legal costs involved. High Court litigation is often out of the financial reach of the man in the street. A complainant who had been successful before the Adjudicator is therefore effectively precluded from any real opportunity to reply at any additional hearing. It is beyond the scope of this article to go into a debate on the procedure, suffice it to say that perhaps the answer lies in a more rigorous application in the Adjudicator's office of its investigatory function.

The Bill also contains important changes to the Act in order to clarify the treatment of divorce court orders as they relate to pension benefits.

Funds will now be able to deduct from a member's benefit or minimum individual reserve any amount assigned by the court order to the non-member's spouse or any other person. The non-member spouse will have the option of electing to have the amount paid directly to him or her or that it be transferred to an approved pension fund on his or her behalf. The non-member spouse, however, does not acquire the rights of a member in relation to the pension fund.

These provisions, viewed cumulatively, will have a significant impact on the operation of retirement funds in the near future. The Bill is, however, very much a “repair job” to the existing legislation and the real changes necessary will have to wait for the process of retirement fund reform, which is currently underway, to run its course.

Owen Barrow

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