Pensions & Employee Benefits

A defined benefit pension fund is one where a member’s retirement benefit is determined by a formula, typically based on salary and years of service. The employer usually bears the investment and longevity risk, because the benefit is guaranteed according to the rules of the fund. A defined contribution pension fund, by contrast, provides benefits based on the contributions made by the employer and/or employee plus investment returns. The member bears the investment risk, and the final retirement benefit depends on the accumulated fund value.

To convert a defined benefit fund to a defined contribution fund or vice versa, the fund rules must first be formally amended to change the benefit structure. An actuarial assessment must be conducted to ensure that accrued benefits are protected. Members must be properly informed and consulted about the change, as it affects their risk and retirement outcomes. The amended rules must be submitted to the Financial Sector Conduct Authority for approval.

Under South African law, pension fund trustees have a fiduciary duty to act in the best interests of members and beneficiaries. Their key responsibilities include ensuring the fund is properly governed and administered in accordance with the rules and the Pension Funds Act (or any other relevant statute) protecting members’ benefits, exercising due care, diligence and good faith, avoiding conflicts of interest, ensuring proper investment of fund assets, monitoring service providers, maintaining proper records, and ensuring compliance with regulatory requirements set by the Financial Sector Conduct Authority.

In South Africa, disputes over death benefit allocations are primarily resolved in terms of section 37C of the Pension Funds Act 24 of 1956 ("PFA") (provided that the fund is established under the PFA) The board of trustees has the discretion to identify dependants and nominees, investigate their financial circumstances, and allocate the benefit in a fair and equitable manner — the benefit does not automatically follow the deceased’s will.

If beneficiaries disagree with the allocation, they may lodge a formal complaint with the Pension Funds Adjudicator, who has the authority to investigate and make a binding determination. A party dissatisfied with the Adjudicator’s decision may apply to the High Court for relief.

In a defined benefit (DB) fund, a surplus arises when the fund’s assets exceed its actuarially calculated liabilities. The surplus must be dealt with in terms of the specific fund rules, usually following a formal surplus apportionment process, and any allocation requires approval by the Financial Sector Conduct Authority. A deficit occurs when assets are insufficient to meet promised benefits. In that case, the trustees must implement a funding plan to restore solvency, typically requiring additional employer contributions, as the employer bears the funding risk.

In a defined contribution (DC) fund, members’ benefits equal their individual account balances, so there is generally no traditional surplus or deficit in respect of member benefits. Investment risk is borne by members. Trustees must however ensure the fund remains financially sound and compliant with regulatory requirements.

CDH can assist in ensuring the company’s retirement fund is fully compliant with pension fund legislation and regulations by conducting compliance audits against the Pension Funds Act and/or other related legislation; reviewing and updating fund rules to align with regulatory changes; advising trustees on their fiduciary duties and governance best practices, and ensuring proper documentation and reporting to the Financial Sector Conduct Authority. We can also provide training to trustees and ensure that communication to members meets statutory disclosure requirements, thereby reducing regulatory risk and enhancing overall fund governance.