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[2010] ZASCA 63
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Registrar of Pension Funds v ICS Pension Funds (288/09) [2010] ZASCA 63; 2010 (4) SA 488 (SCA) ; [2010] 4 All SA 63 (SCA) (4 May 2010)
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
Case No: 288/09
In the matter between:
REGISTRAR OF PENSION
FUNDS
Appellant
and
ICS PENSION FUND
Respondent
Neutral citation
:
Registrar
of Pension Funds v ICS Pension Fund
(288/09)
[2010] ZASCA 63
(4 May 2010)
Coram:
HARMS DP,
NUGENT, MLAMBO and MALAN JJA and THERON AJA
Heard:
12
MARCH 2010
Delivered:
4
MAY 2010
Summary:
Pension
Funds Act 24 of 1956
– actuarial surplus –
section 15F
–
approval by registrar for transfer of credit in reserve account to
employer surplus account – considerations to be
taken into
account.
________________________________________________________________
ORDER
___________________________________________
______________________
On appeal from:
North
Gauteng
High
Court, Pretoria (Rabie J sitting as court of first instance).
The appeal is dismissed with costs.
_________________________________________________________________
JUDGMENT
___________________________________________________________
______
NUGENT JA and THERON AJA (HARMS DP,
MLAMBO and MALAN JJA concurring)
[1] This appeal concerns the
application of
s 15F
of the Pension Fund
s
Act 24 of 1956. We think it is helpful at the outset to trace the
background against which that section was introduced into the
Act.
[2] Depending upon their structure
some pension funds are capable of accumulating an actuarial surplus,
which, in broad terms, is
the excess of its actuarially valued assets
over the actuarial value of its accrued liability towards members and
former members.
1
In recent years there have been disputes as to whether such surpluses
accrue to the benefit of members or whether they accrue to
the
benefit of contributing employers.
2
With effect from 7 December 2001
ss 15A
to
15K
were introduced
into the Act to deal with such surpluses. Together those sections are
commonly referred to as the ‘surplus
legislation’.
[3] In broad terms
s 15B
requires the
board of every pension fund that commenced prior to 7 March 2002 to
submit to the Registrar of Pension Funds, within
a specified time, a
scheme for the apportionment of any actuarial surplus that it might
have. The board is required to determine
who may participate in the
apportionment, which must include existing members and former
members, and must then apportion the surplus
as between all the
participants, in accordance with various principles that are
reflected in the section.
[4] The surplus that is apportioned
to members and former members must be credited to a ‘members’
surplus account’
and the surplus that is apportioned to the
participating employer must be credited to an ‘employer surplus
account’.
The use to which the credits in those accounts may be
put is circumscribed by
s 15D
and
s 15E
respectively.
Section 15C
deals with the allocation of surpluses that arise after
the legislation took effect.
3
[5] In this appeal we are concerned
only secondarily with
s 15B
but primarily with
s 15F.
Section 15F
deals with actuarial surpluses that were apportioned
before the surplus legislation took effect and in particular to an
actuarial
surplus that had been allocated to a ‘reserve
account’ of the fund. A ‘reserve account’ is
defined in the
Act to mean a ‘contingency or investment reserve
account’ and will ordinarily have been under the control of the
contributing
employer.
[6]
Section 15F
allows the board of a
fund to apply to the registrar to approve the transfer of all or some
of the credit balance in an existing
reserve account to the employer
surplus account. Once so transferred it is available to be used by
the employer within the limits
circumscribed by
s 15E.
If the
application is refused, whether in whole or in part, the portion of
the credit that is not transferred will be subject to
distribution,
under
s 15F(3)
, as if it were actuarial surplus that is
distributable under a
s 15B
scheme.
[7] Under
s 15F(2)
the registrar
may approve such a transfer from the reserve account to an employer
surplus account if he or she
‘is satisfied that the allocation of actuarial surplus to [the
reserve account] was negotiated between the stakeholders in
a manner
consistent with the principles underlying
sections 15B
and
15C
.’
[8] In this case the board of the ICS
Pension Fund, the respondent, applied to the registrar under that
section to transfer to its
employer surplus account part of the
credit balance in a reserve account. The amount that was sought to be
transferred was the
then balance of a portion of an actuarial surplus
that had been allocated to the employer in 1997.
[9] The registrar declined to approve
the application whereupon the fund appealed to the board of appeal
established by s 26
of the Financial Services Board Act 97 of
1990.
4
The board dismissed the appeal and the fund applied to the High Court
at Pretoria to review that decision under the
Promotion of
Administrative Justice Act 3 of 2000
. The high court (Rabie J) found
that the board of appeal had materially misdirected its enquiry and
set aside the decision. It
chose not to remit the matter for
reconsideration by the board of appeal but instead to assume to
itself the role of the board
and to substitute its own decision for
that of the board. Having assumed to itself that function the high
court upheld the appeal
against the registrar’s decision and
directed the registrar to approve the application. The registrar now
appeals against
those orders with the leave of that court.
[10] It was common cause in the court
below and in this court that the decision of the board was reviewable
under the
Promotion of Administrative Justice Act, that
the court
below correctly found that the board of appeal had materially
misdirected its enquiry and correctly set the decision
aside, and
that the court below correctly chose not to remit the matter to the
board of appeal but instead to substitute its own
decision. That
being so
,
the reasons that
were given by the board of appeal for its decision, although
instructive, are not material to this appeal. We are
concerned only
with the substituted decision of the court below and the reasons that
it gave for that decision.
[11] It is not disputed that an
appeal against the decision of the registrar is not an appeal in the
strict sense. The board of
appeal, and hence the court below in this
case, is called upon instead to consider the matter afresh, upon all
relevant material
that is placed before the board of appeal. Indeed,
it was the failure of the board of appeal to recognise that
distinction, which
pervaded all its reasoning, that resulted in its
decision correctly being set aside.
[12] We have pointed out that under
s 15F(2)
the registrar may approve a transfer from an existing
reserve account to an employer surplus account if he or she is
‘satisfied
that the allocation of actuarial surplus to [the
reserve account] was negotiated between the stakeholders in a manner
consistent
with the principles underlying
sections 15B
and
15C
.’
If the allocation of surplus to the reserve account indeed satisfies
those requirements then, notwithstanding the use of
the word ‘may’,
the registrar has no discretion to refuse the application, but is
obliged to approve the transfer.
[13] The manner in which portion of
the actuarial surplus that existed in the fund before the surplus
legislation came into effect
was allocated to the reserve account in
this case needs to be seen in the context in which the allocation was
made.
[14] There are two kinds of
pension funds (at least for present purposes). One is a ‘defined
benefit fund’. In such a fund members become entitled
to fixed
benefits that are circumscribed by the rules, irrespective of the
performance of the investments that are made by the
fund. If the
investments of the fund produce insufficient income to meet those
obligations then the employer underwrites the shortfall.
If the
investments that are made by the fund perform better than expected a
surplus will accrue to the fund. The other is a ‘defined
contribution fund’. In such a fund the benefits that are
payable to members are directly linked to the performance of the
investments that are made by the fund. If the investments perform
well then the benefit will accrue to members directly and they
will
likewise bear the brunt of poor performance. Such a fund thus
relieves the employer of the risk of poor performance of its
investments and likewise promises to members the direct benefit of
sound performance.
[15] Prior to 1 November 1996 the ICS
Pension Fund was a ‘defined benefit’ fund. In about
August 1996 the board of the
fund decided to create a ‘defined
contribution’ section. Members of the fund were invited to
elect whether to remain
in the ‘defined benefit’ section
of the fund or to transfer to the ‘defined contribution’
section that
was to be created.
[16] The decision to create that new
section of the fund is really incidental to this appeal. What is
relevant is that simultaneously
with creating that ‘defined
contribution’ section – and no doubt at least partly as
an inducement to members
to transfer to that section – the
board of the fund distributed part of its accumulated surplus to
members who elected to
transfer.
[17] The implications of the election
were explained to members and former members by way of an information
booklet and oral presentations
that were distributed and made
respectively during October 1996. It is not necessary to deal in any
detail with the information
that was conveyed.
[18] Meanwhile, the board of the fund
was reconstituted in November 1996. From that time on the board
comprised three members elected
by members of the fund, and three
members appointed by the employer. At the first meeting of the newly
constituted board on 25
November 1996
,
reports were presented concerning the progress of the creation of the
new section and its implications for the fund.
[19] Ultimately
,
95 per cent of the active members of the fund elected to transfer to
the defined contribution section. At the effective date the
fund had
an actuarial surplus of R107 393 711. The board of the fund
decided to allocate that surplus as follows: 34
per cent was
allocated to active members, 22 per cent was allocated to pensioners,
one per cent was allocated to a ‘contingency
reserve’
5
for those members who remained in the ‘defined benefit’
section, 28 per cent was allocated for use by the employer
(credited
to an employer-controlled reserve account),
6
and a residual surplus of 15 per cent remained.
[20] Amendments to the rules,
allowing for the creation of the defined contribution section with
retrospective effect from 1 November
1996, and for the surplus
distribution, were submitted to the registrar and registered on 30
December 1997.
[21] On 18 January 2005, after the
surplus legislation had come into effect, the board of the fund
applied to the registrar to approve
the transfer of R25 365 605
from the employer-controlled reserve account to the employer surplus
account. Precisely how
that amount is made up is not material for
present purposes. It is sufficient to say that, substantially, it was
the balance that
then remained of the actuarial surplus that had
earlier been allocated to the employer-controlled reserve.
7
The registrar declined to approve the transfer, on the ground that he
was not satisfied that that earlier allocation of actuarial
surplus
to the reserve account ‘was properly negotiated between the
stakeholders in a manner consistent with the principles
underlying
sections 15B and 15C of the Act, as embodied in Circular PF 105
paragraphs 14(a) – (h).’
8
[22] The registrar later expanded upon that when he said
(so far as the reasons that he gave are now relevant) the following:
‘(a) In the exercise where surplus was shared between the
employer and certain members only, no surplus enhancement was
allocated to members preferring to remain in the defined benefit
option.
(b) There is no proof of any negotiation between the fund and
members or members’ representatives.
(c) In the information sent to members, there was no indication of
the amount or percentage that would be allocated to the employer.
(d) The enhancement of members who chose to opt
for defined contribution, indirectly also benefited the employer due
to the transfer
of risk from the employer (in the defined benefit
arrangement) to the members (in the defined contribution
arrangement).’
He also stated that
‘
[t]he decision by an employer-appointed
board to convert from a defined benefit to a defined contribution
arrangement, whereby certain
risks are transferred from the employer
to the individual members, without any disclosure of the amount to be
set aside for exclusive
use by the employer, cannot be viewed as a
decision to negotiate and distribute surplus’.
[23] The registrar’s opposition
to the transfer really reduces itself to two principal objections,
and that is how the matter
was approached before us. First, the
registrar was of the view that the fund had not established that the
allocation had been properly
‘negotiated between the
stakeholders’ as required by s 15F(2) read with ss 15B
and 15C. And secondly, he
considered that the allocation of the
actuarial surplus had not been equitable and was thus not in
conformity with those sections.
[24] With regard to the first
objection it was submitted on behalf of the registrar that there had
been no negotiation at all between
the fund and its members and
others who had an interest in the allocation. It was submitted that
they were simply presented with
the prospect of choosing between
joining the new section of the fund or remaining in the existing
section, to which a proposed
allocation of surplus was linked, and
put to an election between those alternatives. Secondarily to that
submission was the further
submission that the relevant participants
were not properly informed of the implications of that choice, and in
particular were
not informed in advance how the allocation of surplus
would be made.
[25] What is meant by ‘negotiation’
in s 15F(2) was considered by a differently constituted board of
appeal in
Coca-Cola
Southern Africa Pension Fund v Registrar of Pension Funds.
9
After referring
with approval to what was said by Eloff J in
Minister
of Economic Affairs and Technology v Chamber of Mines of South
Africa
10
the board of appeal went on to say the following:
‘
As appears from the above quotation the
extent of the need to enter into debate in an endeavour to reach
agreement, depends upon
the extent of the disagreement between the
contending parties.
It is obvious that if
there is no disagreement it is not possible to conduct a negotiation
in the sense in which that word is used
in section 15F. Consequently
what is contemplated by section 15F is that there must not be a
unilateral decision by the board of
a fund to allocate actuarial
surplus to an employer reserve account without taking account of the
views of all interested parties
i.e. the relevant stakeholders. To
the extent that there are differing views, an endeavour should be
made to reach agreement, by
entering into debate on the issues on
which the relevant stakeholders are at variance.’
11
And later:
‘
It must be borne in mind, when considering
what the legislature meant by the words “in a manner consistent
with the principles
underlying sections 15B and 15C
,”
that when the employer reserve account was established, sections 15B
and 15C had not yet been enacted. It could not have
been contemplated
that the process provided in those sections must have been followed
literally. What is required is that the negotiation
conformed to the
broad principles underlying those sections.
The board of appeal went on to say:
‘
Naturally a negotiation envisages an
understanding on the part of the negotiators of the relevant facts in
order for them to reach
an informed conclusion. Accordingly one of
the principles underlying sections 15B and 15C is that the members
and pensioners must
be in possession of sufficient information of
what it is proposed to allocate to the employer reserve account to
enable them to
enter into meaningful debate on such allocation should
they hold a view that differs from that of the board.’
12
[26] We find no fault with those
general observations, which were adopted by the court below, but with
some qualification. So far
as the final passage might suggest that it
was incumbent upon the board of a fund always to have engaged in
discussions with participants
in the allocation directly, we do not
think that is correct. Precisely how the board of a fund was to
‘negotiate’ with
a large body of participants, if they
were not in agreement with the proposal that was made by the fund,
was not touched upon in
that case, nor does it arise in this case.
But we venture to suggest that it would ordinarily be impractical to
expect the board
of a fund to have dealt directly with a large body
of interested parties, who might have had disparate interests, and
that a board
might instead have been justified in insisting that the
participants elect representatives to negotiate on their behalf.
[27] That raises the separate
question what is to be expected of the board of a fund where
participants in the allocation of surplus
had indeed elected
representatives who were able to negotiate on their behalf. In
Coca-Cola
it was submitted to the board of appeal that in those circumstances
direct communication with stakeholders was not required. The
section
is complied with, so it was submitted, if their representatives were
in possession of sufficient information to enable
them to properly
negotiate. In response to that submission the board said the
following:
13
‘While this approach would not necessarily in every case amount
to compliance with section 15F, we agree that in the circumstances
of
the present case it is an acceptable approach’.
[28] In general we agree with that
conclusion, though whether that will have been adequate in a
particular case will necessarily
depend upon the particular
circumstances. It goes without saying that it will have been
incumbent upon the board of the fund to
have ensured that the
representatives were fully informed, and to have had the opportunity
to fully inform those whom they represented.
There might well be
circumstances in which that will have required the board to have made
its resources available to ensure that
that occurred. There might
also be cases in which it would have been clear to the board that the
representatives did not have a
considered mandate from those who they
purported to represent, and in such a case we do not think the board
would have been justified
in simply ignoring that fact. Precisely
what it should be expected to have done will necessarily depend on
the circumstances of
the particular case.
[29] In this case the registrar
appears to have been under the impression that the representative
board of the fund had had no hand
in the decision to allocate surplus
and thus that no ‘negotiation’ at all took place. In that
respect we agree with
the court below that the registrar was
mistaken. We have pointed out that the brochures were distributed and
the presentations
took place in October 1996. A representative board
was appointed the following month, by which time an allocation of
surplus had
not been made. The allocation was made only during the
course of the following year and it took effect in December 1997.
There
has been no suggestion that the representative board was not
fully informed as the matter progressed. The fact that ‘negotiations’
in the ordinary sense did not take place signifies only that there
was nothing upon which the respective representatives disagreed.
[30] There is some suggestion by the
registrar that the participating parties were not fully informed of
the allocation. Before
us counsel for the registrar confined himself
to a submission that the participants were never informed of the
amount that was
to be allocated to the various participants. At the
time the proposed scheme was first presented to participants it was
not possible
to inform them of the amounts to be allocated because
that was dependent upon the number of members who elected to transfer
to
the new scheme. In July 1997 a newsletter was distributed to all
participants in which they were advised, amongst other things,
of the
amount that would be allocated to the employer controlled reserve
account upon introduction of the new section. As to the
allocation
between other participants their representatives were fully aware of
what was proposed and raised no objection. But
for reasons that we
will come to we think that that is in any event not material.
[31] The court below found that the
first objection raised by the registrar was unfounded and
we
agree. It is quite apparent that none of the interested parties
themselves showed any interest in engaging in discussion with
the
board of the fund once they had been informed of the proposals in
October 1996, and their representatives on the board were
not in
disagreement with the allocation once it was proposed to be made. In
those circumstances nothing remained to ‘negotiate’
in
the ordinary sense of the word.
[32] The second objection by the
registrar was that he was not satisfied that the allocation of the
surplus had been equitable.
His objection was confined to the failure
to allocate any part of the surplus to those members who chose not to
transfer to the
‘defined contribution’ section.
14
[33] On that issue the approach that
was taken by the court below was that the equity or otherwise of the
earlier allocation was
irrelevant to the question whether the
transfer should be approved. It expressed that as follows:
‘
I respectfully disagree with the first part
of the first sentence [in
Coca-Cola
]
where it is stated that “the actuarial surplus must be split
reasonably and equitably between the relevant stakeholders”.
In
my view the legislator could not have intended to include a
requirement of proof that an earlier allocation to the employer
had
been a reasonable and equitable part of a split. Firstly, the
emphasis in section 15F(2) is on the issue that the allocation
“was
negotiated”. The emphasis is therefore on a procedural
requirement rather than on the contents or outcome of such
a
procedure. The last part of subsection (2) refers to the “manner”
of such negotiations, which shall be consistent
with the principles
underlying sections 15B and 15C. By referring to the “manner”
of such negotiations, the emphasis
is again on exactly this, namely
the manner in which the parties negotiated, in other words, the
procedure that they followed,
rather than on the outcome of such
procedure.... [In my view] the legislator intended to only require
that a proper procedure involving
the members as well had preceded
the prior allocation to the employer and that it had not merely been
a unilateral decision by
the employer- appointed board alone.’
15
[34]
We
regret that we cannot agree and, indeed, counsel for the fund offered
only faint support for that part of the reasoning of the
court below.
We think it is clear that the provisions of s 15B as a whole are
directed precisely towards ensuring that an
allocation of actuarial
surplus is reasonable and equitable. Indeed, it provides expressly
that if the registrar is not satisfied
that a scheme under s 15B is
reasonable and equitable he must refer the scheme to a specialist
tribunal appointed under s 15K.
We think the inference is clear
that the tribunal, in making its determination that becomes binding
on all the parties,
16
is required to ensure, amongst other things, that the scheme is
reasonable and equitable. So far as the registrar is called upon
by
s 15F to satisfy himself or herself that the earlier allocation
was negotiated in a ‘manner consistent with the principles
underlying sections
15B and 15C’
it seems to us that the construction adopted by the court below is
too narrow. The provisions of the legislation
as a whole are all
directed towards an equitable distribution of actuarial surplus and
it would be incongruous if the registrar
were required, in effect, to
approve the use by an employer of an inequitable allocation that it
had received.
[35] But there is an important
distinction between assessing the equity of a scheme that is proposed
under s 15B, and assessing
the equity of an earlier allocation
that is sought to be made available for use by an employer under
s 15F. The former assessment
relates to an actuarial surplus
that is available for distribution amongst all participants,
including the employer, and that envisages
an allocation that must be
reasonable and equitable as between all the parties concerned. On the
other hand, s 15F is not
concerned with allocating an actuarial
surplus at all. It is concerned with transferring from one account to
another the portion
of a surplus that was formerly allocated to the
employer. The section requires the registrar to be satisfied only
that the allocation
that was made to the reserve account was
consistent with the principles underlying ss 15B and 15C. It
does not require the
registrar to be satisfied that the allocation as
between other participants was consistent with those principles.
[36] The reason for that is clear. It
would be most unfair if an employer who has received no more than its
equitable share of the
actuarial surplus were to be deprived of that
share on account only of the fact that the distribution amongst other
participants
was not equitable. For if the transfer of the credit to
the employer surplus account is not approved (whether wholly or in
part)
then that part of the credit that is not transferred will be
subject to a further allocation amongst all participants under s 15B,
yet the portion of the surplus that was allocated to other
participants would not be open to revision. There can be no good
reason
why an employer should forfeit an equitable allocation that
was made to it only because the allocation of the remainder of the
surplus was inequitable as between the other participants. The
section is concerned with whether the credit in the reserve account
should be made available for use by the employer (by transferring it
to the employer surplus account) and not with that portion
that was
allocated to other participants.
[37] With that in mind it seems to us
that the equity of the apportionment as between other participants in
the scheme is immaterial
to the enquiry under s
15F.
In this case there is no suggestion that the portion of the surplus
that was allocated to the employer (28 per cent of the
actuarial
surplus) was more than its equitable share.
[38] In those circumstances we
think that the
registrar was not entitled to refuse the application on the grounds
of the alleged inequitable allocation as between
the participants
other than the employer. That being so in our view the orders of the
court below were correct, notwithstanding
its misdirection.
[39] The
appeal
is dismissed with costs.
________________
R W NUGENT
JUDGE OF APPEAL
________________
L. V. THERON
ACTING JUDGE OF APPEAL
APPEARANCES:
For appellant:
I
V Maleka SC
K Pillay
Instructed by Rooth Wessels, Motla
Conradie, Pretoria
Naudes Inc
,
Bloemfontein
For respondent: C E Watt-Pringle SC
Instructed by Thyne Hunter
Esterhuizen Inc c/o Friedland Hart, Pretoria
McIntyre & Van der Post, Bloemfontein
1
See the definition of ‘actuarial surplus’
in
s 1
of the
Pension Funds Act 24 of 1956
.
2
Cf
Tek Corporation
Provident Fund v Lorentz
1999 (4) SA
884 (SCA).
3
Sections 15G
–
15K
have no relevance to the
appeal.
4
An appeal under
s 26(2)
lies against a decision
of the ‘executive officer’. Under
s 3
of the
Pension
Funds Act the
‘executive officer’referred to in s 26(2)
of the Financial Services Board Act is also the Registrar of Pension
Funds.
5
Precisely what contingencies the allocation was
intended to cover do not appear from the evidence.
6
That allocation, amounting to R30 million, was
held in the Employer General Account as a ‘ring-fenced
reserve’ for
the use of the employer.
7
The allocation of R30 million that had been made
in 1997.
8
As pointed out in
Coca-Cola
,
referred to later in this judgment, the circular does not deal with
the situation envisaged by s 15F of the Act.
9
A decision of the board of appeal handed down on
28 August 2006.
10
1991 (2) SA 834
(T) at 836G-J.
11
Para 24.
12
Para 26.
13
Paragraph 38.
14
One per cent was allocated to a contingency
account but that did not accrue directly to the members.
15
Paras 76 and 78.
16
Section 15K(4).