Mungal v Old Mutual Life Assurance Co. SA Ltd, Freeman v Mungal v Old Mutual Life Assurance Co. SA Ltd (56/09) [2009] ZASCA 141; [2010] 2 All SA 139 (SCA) ; 2010 (6) SA 98 (SCA) (20 November 2009)

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[2009] ZASCA 141
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Mungal v Old Mutual Life Assurance Co. SA Ltd, Freeman v Mungal v Old Mutual Life Assurance Co. SA Ltd (56/09) [2009] ZASCA 141; [2010] 2 All SA 139 (SCA) ; 2010 (6) SA 98 (SCA) (20 November 2009)

THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
Case No: 56/09
RAJWANTHA SOOKHDEO MUNGAL Appellant
and
OLD MUTUAL LIFE ASSURANCE CO SA LTD Respondent
TREVOR VERNON FREEMAN Appellant
and
OLD MUTUAL LIFE ASSURANCE CO SA LTD Respondent
Neutral citation:
Mungal v Old Mutual
(56/09)
[2009]
ZASCA 141
(20 November 2009)
Coram:
STREICHER, NUGENT, MAYA, SNYDERS JJA and LEACH AJA
Heard:
6 NOVEMBER 2009
Delivered:
20 NOVEMBER 2009
Summary: Determination made by Pension Funds Adjudicator –
whether adjudicator had jurisdiction to consider the complaint –
endowment policy issued by an insurer - value upon early termination.
ORDER
On appeal from: High Court at Durban (Sishi J sitting as
court of first instance)
The appeal in each case is dismissed.
JUDGMENT
NUGENT JA (STREICHER, MAYA, SNYDERS JJA and LEACH AJA
concurring)
[1] Chapter VA of the
Pension Funds Act 24 of 1956
creates the office of the pension funds adjudicator, whose function
is to dispose of complaints relating to pension funds in a

‘procedurally fair, economical and expeditious manner’.
1
After investigating a complaint the adjudicator may ‘make the order
which any court of law may make’, which is ‘deemed to
be a civil
judgment’.
2
Any party who feels aggrieved by a determination of the adjudicator
may apply to an appropriate high court for relief in which
event the
high court ‘may consider the merits of the complaint . . .
and may make any order it deems fit’.
3
It also follows from
s 30P(3)
that in considering the matter the
court may take further evidence.
[2] In this case Mr Mungal, who was a member of the
Protektor Preservation Provident Fund, and Mr Freeman, who was a
member of The
South African Retirement Annuity Fund, both of which
are ‘pension fund organizations’ as contemplated by the Act,
lodged separate
complaints with the adjudicator that were directed at
Old Mutual Life Assurance Company (South Africa) Limited. The
complaints
had much in common and the adjudicator dealt with them
together. After considering the complaints the adjudicator made
certain
orders against Old Mutual and in particular he ordered Old
Mutual to pay to Mungal the sum of R29 592 and to Freeman the
sum
of R46 635.
[3] Old Mutual was aggrieved by the determinations.
Invoking the provisions of
s 30P
it applied in each case to the
high court at Durban for orders setting aside the respective
determinations and for further declaratory
relief. The two
applications were heard together by Sishi J and both succeeded.
Mungal and Freeman now appeal with the leave of
the court below.
[4] The funds are designed to accommodate employees to
whom a benefit has become payable in consequence of terminating their
membership
of another provident fund. They are ‘underwritten funds’
by which is meant that their only assets are claims under long-term

insurance contracts. When a person joins the fund the moneys that he
or she received from the earlier fund will be used to pay
the premium
on an insurance policy taken out by the fund. The parties to the
policy will be the fund and the insurer and the member
will be the
‘life assured’. Benefits that accrue under the policy are paid by
the insurer to the fund and the moneys are then
available to pay to
the member the benefits to which he or she is entitled under the
Rules. The policies that were taken out when
Mungal and Freeman
joined their respective funds were both issued by Old Mutual.
[5] Old Mutual is also the administrator of each of the
funds. While the funds are under the overall control of boards of
trustees
the responsibility for their administration was assigned by
the trustees to Old Mutual under what was called a Fund
Administration
and Trustee Services Contract. The agreement requires,
and authorises, Old Mutual to perform all the functions that
generally attach
to the administration of such a fund, which are
specified in some detail in an annexure to the agreement.
[6] In these proceedings Old Mutual says at the outset
that the adjudicator was not entitled to make any orders against it
because
the complaints by Mungal and Freeman do not fall within the
definition of a ‘complaint’ in the Act. If there was to be a
complaint
at all, it was submitted on behalf of Old Mutual, it ought
properly to have been directed to the Ombudsman for Long-term
Insurance.
4
That objection was not raised when the matter came before the
adjudicator but that is not material. If the adjudicator had no
jurisdiction in the matter then that is a sufficient and proper basis
upon which to set aside his determination.
[7] A ‘complaint’ is defined in the Act to mean,
amongst other things
‘a complaint … relating to the administration of a fund … and
alleging-
(a) that a decision of the fund or any person purportedly taken in
terms of the rules was … an improper exercise of its powers;
(b) that
the complainant has sustained or may sustain prejudice in consequence
of the maladministration of the fund by the fund
or any person,
whether by act or omission;
(c) that
a dispute of fact or law has arisen in relation to a fund between the
fund or any person and the complainant; or
(d) …
but
shall not include a complaint which does not relate to a specific
complainant;’
[8] The complaints in this case were conveyed to the
adjudicator in letters written by Mungal and Freeman. Needless to say
they
were not framed in the language of the definition but I do not
think the form in which a complaint is made is critical. Chapter
VA
clearly contemplates complaints being made by lay persons who are not
expected to have studied the definition with legal expertise
and to
have framed their complaints accordingly. More important than the
form in which the complaint is expressed is the substance
of the
complaint. If the various elements of the definition are inherent in
the complaint that seems to me to sufficiently bring
it within the
terms of the definition notwithstanding that they have not been
expressed in those terms.
[9] The complaints were that Old Mutual refuses to pay
moneys that are said to be due to the respective funds under the
policies.
But they might just as well have been couched as complaints
that Old Mutual refuses to claim the moneys on behalf of the funds.

Because the corollary of its refusal, as insurer, to acknowledge the
validity of the claims, is a refusal, as administrator, to
perform
its duty to take steps to recover the claims. And for so long as
moneys that are due to the funds are not claimed the right
of its
members under the Rules to be paid pension benefits will be thwarted
because the members have no independent legal rights
against the
insurer under the policies. If moneys are payable under the policies
I do not see why the members should be told to
forego the pension
benefits that will accrue to them if the moneys are paid and to
confine themselves to complaints against the
insurer to the Ombudsman
for Long-term Life Assurance.
5
[10] Seen in that context the complaints against Old
Mutual are quite capable of being construed as complaints ‘relating
to the
administration of the funds’. Clearly the complainants will
be prejudiced if the moneys are due but are not recovered. It also

seems to me that the refusal of the administrator to acknowledge the
validity of the claims and to take the necessary steps to
pursue them
is capable of constituting ‘
maladministration
of the fund’. The disputes in these cases are certainly ‘in
relation to the fund’ and are between the complainants
and the
administrator of the funds as much as between them and the insurer.
Those allegations were not made in terms in the letters
that were
written to the adjudicator but they are all inherent in the nature of
the complaint.
6
[11] On that approach it might be
that the order made by the adjudicator ought to have been directed at
compelling Old Mutual, as
administrator of the funds, to acknowledge
that the claims are valid and to press for their recovery, but that
relates to the nature
of the orders that were made rather than to the
nature of the complaints. Where the insurer is not also the
administrator there
might be no purpose served by considering a
complaint of this nature if the insurer is not willing to submit to
the conclusions
reached by the adjudicator. But where the insurer is
also the administrator those conclusions could hardly be altogether
ignored,
particularly if they were to be confirmed by a court in
proceedings under
s 30P.
Those are matters, however, that relate
to whether an order is capable of being made that will be effective
in resolving the complaint,
and not to whether the adjudicator has
jurisdiction to consider the complaint. In my view there is no merit
in the objection and
I turn to the merits of the complaint.
[
12]
There
is no need to visit the Rules of the respective funds. The complaint
is directed at the collection of moneys that are alleged
to be due to
the funds. Whether those moneys are indeed payable depends upon the
construction of the relevant policies.
[13] The policies that were issued to the respective
funds were both endowment policies with Mungal and Freeman
respectively being
the ‘life assured’. The nature of an endowment
policy is that in return for a premium the insurer undertakes to pay
to the
policyholder a sum of money on a fixed date in the future or a
sum of money (not necessarily the same amount) upon death of the
life
assured. In effect it is a fixed investment.
[14] Affidavits were deposed to by two actuaries
explaining the actuarial and investment principles upon which
policies of that
nature are modelled. Needless to say the rights and
obligations of the parties to a policy are determined by the terms of
the particular
policy and not upon the model on which it purports to
be founded. But that evidence is nonetheless helpful to understanding
the
various provisions of the policies. On matters of actuarial and
investment principle there is no material difference between the

actuaries. Such differences as there are between them are
attributable to the construction that each places upon the policies.
[15] Endowment policies are linked directly or
indirectly to a particular portfolio of investment assets. The
premium is invested
in the portfolio and the returns on the
investment accrue to the benefit of the policyholder.
[16] Some policies are linked directly to the portfolio
in that the value of the portfolio is attributed directly to the
value of
the policy. The benefits that accrue to the policyholder are
thus determined by the value of the portfolio at that time. The
drawback
of such a policy is that the value of the portfolio will
fluctuate from day to day according to the state of the market and it
is uncertain what its value will be at the date the benefit accrues.
The policyholder is in much the same position as an owner of
shares
who sets a date upon which the shares must be sold irrespective of
their market value on that date.
[17] Insurers counter that drawback by offering
‘smoothed bonus’ policies. Policies of that kind are only
indirectly linked
to the value of the investment portfolio. The
policies are managed in such a way that fluctuations in the value of
the investment
portfolio are smoothed out when that value is
attributed to the value of the policies. In that way the value of a
policy on the
date that the benefits accrue can be predicted with
some degree of certainty. The aim of such a policy is to ensure that
there
is a positive return on the policy even if the value of the
portfolio is depressed at the time the benefit accrues.
[18] Smoothing the effects of fluctuations in the value
of the portfolio is achieved by allocating to the policies during
periods
of growth in the value of the portfolio only a portion of
that growth and allocating the balance to a reserve account
(sometimes
called a ‘stabilisation reserve account’). The reserve
may then be drawn upon to allocate past growth to the policies at
times
when there is little or negative growth in the value of the
portfolio. In that way the value of the policies will follow the
trend
of the portfolio rather than its fluctuations.
[19] The manner in which growth in the value of the
investment portfolio is allocated to the policies is by periodically
declaring
‘bonuses’. It is usual for such declarations to be made
annually in arrear, though provisional interim bonuses might be
declared
periodically through the course of the year.
[20] The allocation of growth to the policies is an
exercise in accounting and does not involve the realisation of
assets. A bonus
that has been declared and credited to the policies
is thus capable of being revoked merely by reversing the relevant
accounting
entries. To assure policyholders that that will not occur
before the benefits under the policies accrue to the policyholders
insurers
usually undertake that at least a portion of a bonus that
has been declared will not be revoked. The portion that may not be
revoked
is commonly called a ‘vesting bonus’ and the portion that
may be revoked is called a ‘claim bonus’. An insurer might offer

even greater certainty by guaranteeing that the policies will have a
certain minimum value at the time the benefits accrue. Where
that is
done the insurer is effectively guaranteeing that bonuses will be
declared over the life of the policies in amounts that
are sufficient
to maintain a minimum level of growth.
[21] That process of attributing the growth of the
portfolio to the policies is managed through an account for each
policy that
is usually known as an ‘accumulation account’. The
accumulation account will be credited with the premium (or premiums)
and
with bonuses as and when they are declared, and will be debited
with fees and charges that become due to the insurer. The balance
on
the accumulation account at any time (which will always be a credit
when there is a single premium) represents the value of
the policy at
that time.
[22] The two policies that are now in issue, so far as
their provisions are now material, are substantially the same, but
they differ
in some of their detail (though the differences are
mainly confined to terminology). For convenience I will confine
myself first
to the Mungal policy.
[23] The commencement date of the policy was 1 January
1998 and it was to endure until 1 January 2010 (the maturity date). A
single
premium of R193 560.05 was payable on commencement. The
‘glossary of terms’ in
Part 2
of the policy records, under the
heading ‘Accumulation Account’, that
‘[e]ach
policy is administered through its
Accumulation Account which is increased by premiums and investment
returns, and reduced by expenses
and benefit charges’.
The ‘investment returns’ that are referred to are
the bonuses that are declared from time to time, representing that
portion
of the growth in value of the portfolio that has been
attributed to the policy. The ‘expenses and charges’ that may be
debited
to the account are specified elsewhere in the policy.
[24] The general provisions in
Part 3
record that
‘Old Mutual will declare annual vesting and claim bonuses, which
will be added to the balance in the Accumulation Account’.
The
vesting bonuses, once declared, can never be removed in respect of
maturity and death claims. The claim bonus may be reduced
or removed
altogether at any time before it becomes due as part of a benefit
payable under this policy’.
The policy guarantees
‘an average … growth rate of 0.35% per month … up to the date
of any maturity, death or disablement claim’.
The guaranteed value of the policy upon maturity is
expressed in monetary terms to be the sum of R319 076. The
guaranteed value
upon death or disablement (the latter event is not
relevant for present purposes) is naturally not capable of being
calculated
in advance but is calculable once the event has occurred.
[25] The dispute in this case arose because Mungal
elected to terminate the policy before it had run its full course
(which is colloquially
called ‘surrendering’ the policy) after
being informed of the amount he could expect to receive if he
surrendered it (he was
given contradictory figures at various times
but that is not material). At that time the credit balance on the
accumulation account
was R295 730.71. Old Mutual paid
R266 157.64 to the fund – which was 90% of the credit balance
– and the balance
of that amount after deducting tax was paid by
the fund to Mungal.
[26] The reason that the value of the policy as
reflected in the accumulation account was reduced by 10% requires
brief explanation.
By the nature of ‘smoothed bonus’ policies
their value as reflected in the accumulation accounts will seldom
correspond with
the market value of the portfolio. When the market
for the portfolio is buoyant the value of the policies might be lower
than the
value of the portfolio and the converse might occur when the
market is depressed. To pay the full value of a policy when it
exceeds
the related value of the portfolio is necessarily detrimental
to the remaining policyholders because that excess will need to be

recovered ultimately from future growth in the portfolio. Payment of
the full value of a policy when it is lower than the related
value of
the portfolio will have the opposite effect on the body of
policyholders. Maintaining bonuses and the reserve at an appropriate

level serves in the ordinary course to balance those relative gains
and losses. But it is self evident that an insurer is able
to
maintain the appropriate balance only if the time at which benefits
will become payable under the pool of policies is capable
of being
predicted.
[27] Where the value of a policy exceeds the related
value of the portfolio, and the policy is terminated before it has
run its
term, it is common for insurers to pay to the policyholder
only the true value of the policy, so as to ensure that the early
termination
is not detrimental to the general body of policyholders.
7
The tool that they use to evaluate its true value at the time of
termination is a factor that they call a ‘market adjuster’.
A
market adjuster is merely a percentage by which the value of the
policy as reflected in the accumulation account will be reduced
so as
to bring it in line with the value of the portfolio. The percentage
that will be applied is actuarially calculated with reference
to the
current value of the portfolio and will fluctuate from time to time
according to the state of the market. At the time the
Mungal policy
was terminated the market adjuster that was being applied by Old
Mutual stood at 10% and the balance on the accumulation
account was
reduced accordingly.
[28] The reduction of the value of the policy was the
source of Mungal’s complaint. He said that the policy had no
provision specifically
allowing for the application of a market
adjuster and Old Mutual was thus obliged to pay him the full credit
balance on the accumulation
account. The adjudicator approached the
matter in the same way and searched the policy to see if it contained
such a provision.
Having found none he declared that Old Mutual was
‘not entitled to apply the market level [adjuster] to reduce the
complainant’s
benefit’ and on that basis ordered the deducted
portion of the value to be paid.
[29] That approach was also adopted in the opinions
expressed in the affidavit deposed to on behalf of Mungal by his
attorney, in
the opinions expressed by his actuary, and in the
submissions that were made on his behalf before us, but it misdirects
the enquiry.
It assumes a priori that the policyholder is ordinarily
entitled to the benefits of the policy – the credit balance on the
accumulation
account – without interrogating whether that
assumption is correct.
[30] The benefits that are conferred by the policy
appear from the insuring clause in which Old Mutual ‘undertakes to
pay the
benefits, as set out in
Part 1
of this policy document …’.
Only two benefits are provided for in that part of the policy.
8
One is a benefit that is contingent upon the policy enduring to its
maturity date. The other is a benefit that is contingent upon
the
death of the life assured. In both cases the benefit that accrues
when that contingency occurs is an entitlement to the credit
balance
on the accumulation account (which is guaranteed to be not less than
a specified amount upon maturity, and upon death to
be an amount that
returns at least 0.35% on average per month until the date the
benefit is claimed).
9
[31] In its terms the policy exists to provide
policyholders with the benefits that are to be had from fixed-term
investments (the
fixed date being maturity or the death of the life
assured). It would be most surprising if the returns that are
promised on a
fixed-term investment were to be payable to investors
who terminate the policy before the term has expired. Fixing a date
for payment
of the benefit, whether that date be maturity or death,
would be altogether superfluous. It would also be surprising if an
investment
scheme that is actuarially modelled upon the predicable
termination of policies were to have been intended to apply even to
unpredictable
early terminations.
[32] What is overlooked by the argument advanced on
behalf of the appellants (and by the determination that was made by
the adjudicator)
is that the entitlement to be paid on early
termination is not one of the ‘benefits’ of the policy. It is no
more than a separate
entitlement that arises if the undertaking to
pay benefits is terminated before the benefits accrue. That is clear
from the text
of the policy alone, quite apart from the anomalies
that would otherwise arise.
[33] While the policy provides in terms for the payment
of the credit on the accumulation account (the benefit that the
policy
promises) upon the occurrence of one of the specified
contingencies – maturity or death of the life assured – it
provides for
what is payable upon early termination in altogether
different terms. If that event occurs Old Mutual is obliged to pay
the ‘surrender
value’ of the policy. What that means is expressed
in the general provisions of the policy as follows:
‘The amount of the surrender value will be determined by Old Mutual
at the time of surrender and will take into account disinvestment

costs, the recovery of unrecouped expenses, any debts against the
policy and legal limits in force’.
[34] It was submitted on behalf of Mungal that the
proper meaning of that clause is that upon surrender the policyholder
is entitled
to be paid the full value of the policy as reflected in
the balance on the accumulation account, with the deduction only of
such
disinvestment costs, unrecouped expenses and debts as are
determined by Old Mutual (none of those amounts were deducted in this

case). Counsel could direct us to nothing in the text of the policy
to support that construction of the policy and there is none.
The
plain meaning of the language is that Old Mutual will determine the
value of the policy at the time of termination – not
merely the
amount of the costs, unrecouped expenses and debts. Those are stated
in terms to be no more than amounts that may be
taken into account in
determining the value.
[35] It might be that in particular cases Old Mutual
will determine that the amount that is payable is the credit on the
accumulation
account. But then that amount is payable because it is
the amount that Old Mutual has determined to be the surrender value.
And
while the amount payable is usually determined by applying the
market adjuster to the credit balance on the accumulation account

that is only because the credit balance provides a convenient
starting point for making the determination.
[36] In my view the policy means just what it says. Upon
early termination the policyholder is entitled to an amount that is
determined
by Old Mutual at that time (which may or may not equate to
the credit on the accumulation account). I might add that we are not

called upon to decide whether any determination made by Old Mutual
would be open to contestation and judicial scrutiny. It is not

disputed that the amount was determined in this case in accordance
with general insurance and actuarial practice.
[37] Freeman’s appeal can be disposed of rather more
briefly. The policy in that case commenced on 1 November 1994.
Benefits were
payable upon retirement date or death. The selected
retirement date was 1 November 2012. The benefits were described in
the policy
as follows:
‘On survival of the Assured to 1 November 2012 the balance in the
Accumulation Account, with a minimum guaranteed amount of R908 385,

becomes available to purchase an annuity. On the death of the Assured
before 1 November 2012 the balance in the Accumulation Account

becomes available to purchase an annuity’.
[38] The general provisions of the policy do not provide
for surrender but provide instead for the policyholder to change the
date
of retirement (thereby terminating the policy by bringing it to
earlier maturity) in the following terms:
‘The Assured also has the option, subject to the Rules of the Fund,
legislation in force at the time and the conditions imposed
by OLD
MUTUAL at the time, to change the date of retirement.’
[39] In August 2003 Freeman advised Old Mutual, after he
had been informed of the amount that would be paid, that he wanted to
change
the date of retirement to the then date (which would
ordinarily then have entitled him to the retirement benefit). Old
Mutual acceded
to his request but was willing to pay only
R886 072.72. Once more that amount was arrived at by applying
the market adjuster
(which was set at 5% at that time) to the credit
balance on the accumulation account, and it led to the same complaint
being made.
Once more the adjudicator made an order declaring that
Old Mutual ‘was not entitled to apply the market adjuster to the
balance
in the Accumulation Account to determine [the] benefit on the
ground of [the advanced] retirement date’.
[40] What occurred in substance is that Old Mutual was
willing to advance the retirement date only on condition that Freeman
would
not then be entitled to the ordinary retirement benefit but
only to the value that Old Mutual attributed to the policy. The
policy
makes it perfectly clear that Freeman was entitled to change
the date of retirement only if he accepted that condition. There is

no basis for construing the policy to mean that he was entitled to
change the date of retirement unilaterally and continue to be

entitled to the retirement benefit that would have accrued had that
been the date of retirement initially.
[41] Permeating all the arguments that were advanced on
behalf of the appellants at various times is the fallacy that the
declaration
of a bonus vests in the policyholder an unconditional
right to receive the bonus. The right that vests in the policyholder
is one
that is conditional upon a defined event occurring. The
accumulation account is not to be likened to an ordinary creditors’
account.
It is an account that records contingent liabilities. And
the contingencies that will give rise to liability – at least in
this
case – do not include early termination of the policy.
[42] For these reasons the court below was correct in
setting aside the adjudicator’s determinations and the appeals must
fail.
Because the case has wider implications Old Mutual has
graciously not sought the costs of the appeal.
[43] The appeal in each case is dismissed.
_________________
R W NUGENT
JUDGE OF APPEAL
APPEARANCES
:
For appellant: M S M Brassey SC
D L Wood
Instructed by:
Legal Resources Centre, Durban
Matsepes Inc, Bloemfontein
For respondent: A Oosthuizen SC
Instructed by:
Cliffe Dekker Hofmeyr Inc, Cape Town
Claude Reid, Bloemfontein
1
Section 30D.
2
">
2
Section 30E
read with
s 30O.
3
">
3
Section 30P.
4
">
4
The office of the Ombudsman for Long-term Insurance has been created
pursuant to the
Financial Services Ombud Schemes Act 37 of 2004
.
5
Although the members are not contracting parties complaints may be
made to the Ombudsman for Long-term Insurance by the life
assured
under the policy.
6
We were referred in argument to the analysis of the definition by
Josman AJ in
Armaments Development and Production Corporation of
SA Ltd v Murphy
1999 (4) SA 755
(C) but I do not think that
analysis is helpful on the facts of this case.
7
Where the situation is reversed the value of the policy as reflected
in the accumulation account will ordinarily be paid and
the
difference between that and the related value of the portfolio will
accrue to the benefit of the remaining policyholders.
8
The benefits are expressed in
Part 1of
the policy in the following
terms: ‘On survival of the Assured to 1 January 2010 the balance
in the Accumulation Account is
payable, with a guaranteed amount of
R319 076. On the death of the Assured before I January 2010 the
balance in the Accumulation
Account is payable.’
9
Although not expressed as such in the definition of the benefit that
is the effect of the guarantee in the general provisions
that there
will be ‘average … growth of 0.35% per month … up to the date
of any … death claim’.