background pension fund dispute employers’ surplus members’ reserves the dispute is not about...

BackgroundBackground

Pension Fund DisputePension Fund Dispute

Employers’ surplus

Employers’ surplus

Members’ reserves

Members’ reserves

The dispute is not about who owns the surplus,

But rather about whether or not it is a surplus



BackgroundBackground

COSATU’sordinary surplus

versusextraordinary surplus

COSATU’sordinary surplus

versusextraordinary surplus





Let bygones ...

... be bygones!

Let bygones ...

... be bygones!

- R80 to R200 billion -- R80 to R200 billion -

Let bygones be bygones!Let bygones be bygones!


FSB estimate excludes impact of company contribution

holidays over the past decade.

FSB estimate excludes impact of company contribution

holidays over the past decade.

Let bygones …

… be bygones!

Let bygones …

… be bygones!


“Future pensions under-funded”

“Future pensions under-funded”

* Future pensions under-funded* Future pensions under-funded

Like planting crops …. If the seeds go missing, there’ll be no

crop to harvest ….

Current pension contributions will impact on the economy of our country over the next few

decades ……..

Like planting crops …. If the seeds go missing, there’ll be no

crop to harvest ….

Current pension contributions will impact on the economy of our country over the next few

decades ……..

Let bygones …

… be bygones!

Let bygones …

… be bygones!- R80 to R200 billion -- R80 to R200 billion -

Overseas-owned companies are dis-investing us of our

pension investments

Overseas-owned companies are dis-investing us of our

pension investments

Let bygones be bygones!Let bygones be bygones!


Converting pension reserves into company profits is stripping our country of its savings

Converting pension reserves into company profits is stripping our country of its savings

Examples of what has happened over the past 20 years

….

Examples of what has happened over the past 20 years

….

Sentrachem Pension FundSentrachem Pension Fund

February 1992

Surplus

R5 million

R650 million

Pension Fund

February 1992

Surplus

R5 million

R650 million

Pension Fund

March 1998

Surplus

R408 million

6 000 Members

transferred

& retrenched

March 1998

Surplus

R408 million

6 000 Members

transferred

& retrenched

Sentrachem Pension FundSentrachem Pension FundFebruary 1995

Shortfall

on budgeted

investment

returns of

R57 million

R650 million Fund

February 1995

Shortfall

on budgeted

investment

returns of

R57 million

R650 million Fund

March 1998

Members

transferred

& retrenched

* Surplus

of

R408 million

March 1998

Members

transferred

& retrenched

* Surplus

of

R408 millionThe Bill will

not fix th

is Fund’s practice

The Bill will

not fix th


Revlon Pension FundRevlon Pension Fund

Negotiated mass-transfer

---

At the time of the transfer

the Pension Fund

was under-funded by

30%

Negotiated mass-transfer

---

At the time of the transfer

the Pension Fund

was under-funded by

30%

Revlon Pension FundRevlon Pension FundAfter the conclusion of the negotiation

but immediately prior to the transfer,

the actuary was instructed to

re-value the Fund using a

9% post-retirement interest rate.

This had the effect of changing

the funding level from being 70%

funded to being 94% funded

Revlon Pension FundRevlon Pension FundAfter the conclusion of the negotiation

but immediately prior to the transfer,

the actuary was instructed to

re-value the Fund using a

9% post-retirement interest rate.

This had the effect of changing

the funding level from being 70%

funded to being 94% funded

The Bill will

not fix th


The Bill will

not fix th



“What effectively has been achieved

by amending this basis has been that

every member in the pension fund at

the time of transfer was given a fair

share of the assets which existed at

that time”


“What effectively has been achieved

by amending this basis has been that

every member in the pension fund at

the time of transfer was given a fair

share of the assets which existed at

that time”The Bill will

not fix th


The Bill will

not fix th


IBM Pension FundIBM Pension Fund

……………………………….

Unanimous decision

by trustees in favour of

granting an inflation-related

increase to pensioners.


The Fund actuary confirmed

that provision had been made

for an inflation related increase

…………..

Based on investment returns,

sufficient funds were available


“Company overruled

trustees’ decision”


“In truth the employer is seeking to get the best deal for itself in the distribution of surplus and is holding out on

its position by refusing to pay a special increase

beyond the normal practice (Two-thirds of CPI)”

“In truth the employer is seeking to get the best deal for itself in the distribution of surplus and is holding out on


beyond the normal practice (Two-thirds of CPI)”

The Adjudicator:


Actuarialsurplus

Investment

Actuarial

Value

of

Assets

Reserve

“In truth the employer is seeking to get the best deal

for itself in the distribution of surplus and is holding out on


beyond the normal practice (Two-thirds

of CPI)”

“In truth the employer is seeking to get the best deal

for itself in the distribution of surplus and is holding out on


beyond the normal practice (Two-thirds

of CPI)”

Regulation 15

Murphy surplus

Market

Value of

Assets

Murphy’s LawPension Funds Adjudicator,

Professor John Murphy, states:

“Surplus is simply the difference between the assets and the liabilities”

Investment

ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m

ActuarialActuarialValueValue

of of AccruedAccruedLiabilityLiabilityR100 mR100 m

Investment Investment reservereserve Market Market

Value of Value of Assets Assets

required required to fund to fund

liabilitiesliabilities

R120 mR120 m

100%100%

fundingfunding

R20 mR20 m

Murphy surplus

Reflects Reflects Common Common

Practice in Practice in SASA

Murphy’s Law

“The attempt to separate out the investment

reserve from the surplus is sophistry”

Murphy’s Law

“The attempt to separate out the investment

reserve from the surplus is sophistry”

ActuarialActuarialsurplussurplus

InvestmentInvestment

Actuarial

Value

of

Assets

Actuarial

Value

of

Assets

ReserveReserve

Regulation 15Regulation 15

Market

Value

of

Assets

Market

Value

of

Assets

Reflects Reflects Common Common

Practice in Practice in SASA

“Market Value Surplus”

“Market Value Surplus”

Surplus according to Regulation 1515 (2) [d] a comparison of the actuarial value of assets with the accrued liabilities, on the bases contemplated in paragraph (b) (iv) and [c] (ii), showing the resultant surplus or deficiency and, in the case of a deficiency, the percentage ratio of assets to liabilities.

Investment

ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m



Investment Investment reservereserve

Market Market Value of Value of Assets Assets



R120 mR120 m

100%100%

fundingfunding

R20 mR20 m

Regulation 15

Not … section 15 of the Pension Funds Act …

Regulation 15

Not … section 15 of the Pension Funds Act …

Regulation 15Every Pension Fund must report its statutory valuation in terms of this

Regulation… and make good deficiencies in terms of 15 [2] if

they exist.

Regulation 15Every Pension Fund must report its statutory valuation in terms of this

Regulation… and make good deficiencies in terms of 15 [2] if

they exist.

“There is no legal definition of a surplus either in the statute, the rules, or the common law.

After a textual analysis of the language of the rule (reserve value) I held that actuarial reserve value equates

to the applicants actuarial liability”

Murphy’s Law of Surplus

Investment

ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m







R120 mR120 m

R20 mR20 m

100%100%fundingfunding

RegulationRegulation1515

120%120%

funding

funding

R100 billion Overseas R100 billion Overseas

Sentrachem

Revlon

IBM

Anglo

Independent

Procter &

Gamble

Britain

USA

France

Germany

Holland

?

R100 billion Overseas R100 billion Overseas

Sentrachem

Revlon

IBM

Anglo

Independent

Procter &

Gamble

Britain

USA

France

Germany

Holland

?

The Bill will

not fix th

is practice

The Bill will

not fix th

is practice

Nedlac Pension DebateNedlac Pension Debate

*Savings better

in hands of business!

Really?

Nedlac Pension DebateNedlac Pension Debate

Savings Members … stays in the Fund

Companies … share dividends

Surplus means:Surplus means:



Actuarial

Value

of

Assets

Actuarial

Value

of

Assets

ReserveReserveMarket

Value

of

Assets

Market

Value

of

Assets



Actuarial

Value

of

Assets

Actuarial

Value

of

Assets

ReserveReserve

?Market

Value

Surplus

?Market

Value

Surplus

Regulation15

Surplus

Regulation15

Surplus

In the case oftransfer valuesIn the case of

transfer valuesIn the case of

valuation reportsIn the case of

valuation reports

“It is correct that many transfers have taken place with members receiving, as a transfer value, the accrued

liability……..”

Liabilities means Assets!

Investment

Regulation 15 [2] [c] [I] [cc]Regulation 15 [2] [c] [I] [cc]




required to required to fund fund

liabilitiesliabilitiesRegulation 15 [2] Regulation 15 [2]

[b] [ii][b] [ii]

R120 mR120 m

R20 mR20 mInvestment

Regulation 15 [2] [b] [iii]Regulation 15 [2] [b] [iii]

ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m


R20 mR20 m

The Debt The money backing the debt










[b] [ii][b] [ii]

R120 mR120 m

Investment


ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m


R20 mR20 m











[b] [ii][b] [ii]

R120 mR120 m


ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m








Market Market Value of Value of AssetsAssets

Regulation 15 [2] Regulation 15 [2] [b] [ii][b] [ii]

R120 mR120 m

R100 mR100 m


ActuarialActuarial

ValueValue

of of

AssetsAssets

R100 mR100 m


Implicitly revalued the assetsImplicitly revalued the assetsImplicitly revalued the assetsImplicitly revalued the assets

“With the benefit of hindsight it was

not fair to have given transferring

or retrenched members no share of

this provision against a fall in the

stock market. Having decided this,

it is necessary to legislate in order

to give them any share, because

…..

“With the benefit of hindsight it was

not fair to have given transferring

or retrenched members no share of

this provision against a fall in the

stock market. Having decided this,

it is necessary to legislate in order

to give them any share, because

…..

Memorandum versus The Bill

30%Investment

Reserve

30%Investment

Reserve

Actuarial

Value

of

Assets

R100 million

Actuarial

Value

of

Assets

R100 million

Portionleft

behind

Portionleft

behind

But, the proposed legislation does not fix the past, rather it legitimizes the past

But, the proposed legislation does not fix the past, rather it legitimizes the past

“ … secondly, most of the transfers

had occurred more than three years

ago, and, even though members may

now feel that they did not get what

was promised in whatever agreement

was signed between the union and the

employer, they would be unsuccessful

in claiming anything through the

courts because their claim would have

become prescribed….”

“ … secondly, most of the transfers

had occurred more than three years

ago, and, even though members may

now feel that they did not get what

was promised in whatever agreement

was signed between the union and the

employer, they would be unsuccessful

in claiming anything through the

courts because their claim would have

become prescribed….”

Memorandum versus The Bill

30%Investment

Reserve

30%Investment

Reserve

Actuarial

Value

of

Assets

R100 million

Actuarial

Value

of

Assets

R100 million

Portionleft

behind

Portionleft

behind

Draft Draft Minimum Minimum

ValueValue




100%100%

fundingfunding

R100 mR100 m R130 mR130 m R70 mR70 m


of of AccruedAccruedLiabilityLiability

Regulation 15 [2] [a]

15 [2] [c] [I] & [ii]


15 [2] [c] [I] & [ii] Regulation 15 [2] [b] [Iii]Regulation 15 [2] [b] [Iii]

DraftRegulation 33

DraftRegulation 33

Draft Bill & Supporting RegulationDraft Bill & Supporting Regulation

ExampleExampleNovemberNovember

20002000


ValueValue




100%100%

fundingfunding

R100 mR100 m R130 mR130 m R130 mR130 m




15 [2] [c] [I] & [ii]



DraftRegulation 33

DraftRegulation 33


COSATU’sCOSATU’s


ValueValue




R100 mR100 m R130 mR130 m R130 mR130 m




15 [2] [c] [I] & [ii]



DraftRegulation 33

DraftRegulation 33


COSATU’sCOSATU’sThe problem with this proposal

is that if it is considered to be new legislation and isapplied retrospectively, then Business South Africa will

oppose it in court - they have little option but to do so, and the delays will give companies an additional few years to strip out the

so- called surpluses …...


ValueValue




R100 mR100 m R130 mR130 m R130 mR130 m




15 [2] [c] [I] & [ii]



DraftRegulation 33

DraftRegulation 33


NACTUNACTU

If the transfer of full value of the assets reservedto fund a benefit was negotiated and agreed, then that is

what must be paid…. if not then, then now …..

If the actuary signed a Section 14 transfer certificate statingthat all the same assumptions were used as were used

in the last statutory valuation, and then changed theassumptions relating to the assets, then it’s time to

put it right ….

Transfer CertificateTransfer Certificate

In reality, the actuary changed the assumptions relating to the valuation of the assets, changing the valuation bases to some 40%less than what it was, and did not report this in his statement to the FSB.

Now the Bill proposes that if this 40% was used for a company contribution holiday, it should not be paid to members ….

In addition, the Bill will now prevent any member from claiming this lost 40% …..

“The transfer amount in respect of each member …..

…. using the same valuation bases as was used for the most recent actuarial valuation ….”

The Bill & Supporting RegulationThe Bill & Supporting Regulation

Bill protects Funds from correcting past inequities …..Bill protects Funds from correcting past inequities …..

“…. If there is not sufficient surplus in the fund to allow the top-up, then the top-up must be proportioned down ……”

“…. If there is not sufficient surplus in the fund to allow the top-up, then the top-up must be proportioned down ……”

British Definition“Cash equivalent”

should be read as reference to “transfer value”.

“It is a fundamental requirement, stemming from the legislation, that a cash equivalent should represent the actuarial value of the benefits which would otherwise have been preserved.

Such actuarial value should represent the expected cost within the scheme of providing such benefits and should be assessed having regard to market rates of return on equities, gilts or other assets as appropriate.”


set aside set aside to fund to fund





100%100%

fundingfunding

100%100%

fundingfunding

R100 mR100 mR100 mR100 m R130 mR130 mR130 mR130 m R130 mR130 mR130 mR130 m






15 [2] [c] [I] & [ii]



BritishBritishTransferTransfer

ValueValue

Cash Cash equivalentequivalent

BritishBritishTransferTransfer

ValueValue

Cash Cash equivalentequivalent

British Transfer Value British Transfer Value

R120 mR120 m

Tra

nsf

er A

sset

sT

ran

sfer

Ass

ets

Tra

nsf

er l

iab

ilit

yT

ran

sfer

lia

bil

ity

R100 mR100 m

Transfer of Defined Benefit to Defined Benefit

Market Market Value of Value of

Assets set Assets set aside to aside to

fund fund liabilitiesliabilities

R100R100R100R100

Investment Investment Reserve Reserve R20 mR20 m

Actuarial Actuarial Value of Value of AssetsAssets

R100 mR100 m

Accrued Accrued Value of Value of Actuarial Actuarial LiabilityLiability

Regulation 15 [2] [b] [Iii]Regulation 15 [2] [b] [Iii]

IgnoreIgnore

100%100%

fundingfunding

Example

Example

100%100%

fundingfunding

R120 mR120 mT

ran

sfer

Ass

ets

Tra

nsf

er A

sset

s

Tra

nsf

er l

iab

ilit

yT

ran

sfer

lia

bil

ity

R100 mR100 m





R100R100

R100R100



R100 mR100 m


The DebtThe Debt The money funding The money funding the debtthe debt

R120 mR120 mT

ran

sfer

Ass

ets

Tra

nsf

er A

sset

s

Tra

nsf

er l

iab

ilit

yT

ran

sfer

lia

bil

ity

R100 mR100 m





R100R100R100R100



R100 mR100 m


New SurplusNew Surplus


R20R20

R120 mR120 m

Tra

nsf

er A

sset

sT

ran

sfer

Ass

ets

Tra

nsf

er l

iab

ilit

yT

ran

sfer

lia

bil

ity

R100 mR100 m





R100R100

R100R100



R100 mR100 m


Company Company contribution contribution

holidayholiday

Company Company contribution contribution

holidayholidayR20R20


Tra

nsf

er A

sset

sT

ran

sfer

Ass

ets

Tra

nsf

er l

iab

ilit

yT

ran

sfer

lia

bil

ity

R100 mR100 m


R100R100R100R100



R100 mR100 m


R20R20

The DebtThe DebtThe money funding The money funding

the debtthe debt

Company Company contribution holiday contribution holiday = Company profits= Company profits

Company Company contribution holiday contribution holiday = Company profits= Company profits

R120 mR120 m

Ass

ets

Ass

ets

R100 mR100 m





R83R83



R100 mR100 m


R20R20

The DebtThe Debt

Shareholders Shareholders gaingain

Tra

nsf

erre

d l

iab

ilit

yT

ran

sfer

red

lia

bil

ity

R100R100

R17R17

83%83%

fundingfunding

Ass

ets

Ass

ets

R100 mR100 m


R83R83



R100 mR100 m


Tra

nsf

erre

d l

iab

ilit

yT

ran

sfer

red

lia

bil

ity

R100R100

R17R17

83%83%

fundingfunding

levellevel

Using same Using same assumptions assumptions

-under--under-funded funded pensionpension

Regulation 15 requires this under-Regulation 15 requires this under-funding to be correctedfunding to be corrected

Regulation 15 requires this under-Regulation 15 requires this under-funding to be correctedfunding to be corrected

100% 100% funding funding

levellevel

“With the benefit of hindsight it was not fair

to have given transferring or retrenched

members no share of this provision against

a fall in the stock market.

Having decided this, it is necessary to

legislate in order to give them any share,

because …..

The Second Amendments Bill

But, it doesn’t fix it,

Rather, it legalizes it …

Increases to Pensions

The Bill makes provision for actuaries to use The Bill makes provision for actuaries to use inflation as part of the funding mechanisminflation as part of the funding mechanism

This means that companies can save money by This means that companies can save money by under-funding pensions with the full knowledge under-funding pensions with the full knowledge that these pensions will never keep in line with that these pensions will never keep in line with

inflationinflation

What happens if you approve Bill?What happens if you approve Bill?

You legalize the past inequitable actions.You legalize the past inequitable actions.


*You make in impossible for unions to apply to the courts to get back their lost fortunes.

*You make in impossible for unions to apply to the courts to get back their lost fortunes.


*You ensure that overseas investors remain delighted with their South African investments ……………

*You ensure that overseas investors remain delighted with their South African investments ……………

What happens if you not approve Bill?


The delays continue until all mass-transfers happened more than seven years ago …….

…… and then all records may be destroyed making it impossible to correct the past inequities ……

…….. !!!

The delays continue until all mass-transfers happened more than seven years ago …….

…… and then all records may be destroyed making it impossible to correct the past inequities ……

…….. !!!



In addition, companies continue taking contribution holidays, thus slowly absorbing members’ reserves into company profits ……….

In addition, companies continue taking contribution holidays, thus slowly absorbing members’ reserves into company profits ……….

background pension fund dispute employers’ surplus members’ reserves the dispute is not about...

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