Ekurhuleni Metropolitan Municipality v Germiston Municipality Retirement Fund (457/08) [2009] ZASCA 154; 2010 (2) SA 498 (SCA) ; [2010] 2 All SA 195 (SCA) (27 November 2009)

About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2009
>>
[2009] ZASCA 154
|

|

Ekurhuleni Metropolitan Municipality v Germiston Municipality Retirement Fund (457/08) [2009] ZASCA 154; 2010 (2) SA 498 (SCA) ; [2010] 2 All SA 195 (SCA) (27 November 2009)

Links to summary

THE SUPREME COURT OF
APPEAL
OF SOUTH AFRICA
CASE
NO: 457/08
EKURHULENI
METROPOLITAN MUNICIPALITY
a
ppellant
and
GERMISTON
MUNICIPAL RETIREMENT FUND Respondent
Neutral
citation: Ekurhuleni Metropolitan Municipality v Germiston Municipal
Pension Fund (457/2008)
ZASCA
154 [2009] (27 November 2009)
Coram
: NAVSA,
LEWIS, HEHER AND MLAMBO JJA AND GRIESEL AJA
Heard
:
2
November 2009
Delivered:
27
November 2009
Summary:
Interpretation
of pension fund rule: interpretation to be done having regard to
context – nature of fund, purpose of rule, general
practice and
effect – in order to give commercially sensible meaning to rule.
_____
ORDER
On appeal from:
High Court,
Johannesburg
(C J
Claassen J sitting as court of first instance).
The appeal is dismissed with costs including those of
two counsel.
JUDGMENT
LEWIS JA (NAVSA, HEHER AND MLAMBO JJA AND GRIESEL AJA concurring)
[1] This appeal turns on the interpretation of a pension
fund rule. The respondent is the Germiston Municipal Retirement Fund
(the
Fund). It was established as the Germiston Municipal Pension
Fund on 1 July 1924. The appellant, the Ekurhuleni Metropolitan
Municipality
(the Municipality), the successor to the Germiston
Municipality, is the principal employer participating in the Fund.
When the
Fund was established it was primarily a defined benefit fund
(the nature of which I shall discuss later). The Fund was converted

in 1994 to a fund with a primarily defined contribution nature. Both
parties are bound by the rules in terms of
s 13
of the
Pensions Fund
Act 24 of 1956
.
1
The rule in issue was carried over from the old rules (where it was
rule 43.1)
to the new, where it is
rule 10.8(1)
(which I will refer
to generally as the Rule).
[2] The Rule states:
'If the rate of interest earned on the total moneys (including any
uninvested moneys ) of the Fund during any financial year should
be
lower than five and one-half per cent (5.5%) the Council
[Municipality] shall contribute to the Fund such a sum as would
increase,
on being added to the interest actually earned, the rate of
interest to five and one-half per cent (5.5%) during such financial

year.'
[3] The Fund and the Municipality agree that ‘moneys'
means more than cash, and that 'interest' means more than interest
earned
on cash. It is not contested that interest on moneys includes
the return on investments. This common understanding is based upon
an
interpretation of all the rules and the context in which they are
used. They differ, however, as to the meaning of the phrase
‘actually
earned’: the Municipality contends that it excludes gains on all
unrealized assets, while the Fund asserts that
in effect the
Municipality has guaranteed growth, at least to the level of a 5.5
per cent increase in the value of the assets in
every financial year.
[4] According to the Fund, in the financial year 1 July
2002 to 30 June 2003 its assets diminished in value by -4.3 per cent.
This
was the first time in the Fund's history that it had not
achieved at least 5.5 per cent growth in its investments. The Fund
accordingly
instituted action against the Municipality, claiming that
it was liable to contribute to the Fund the difference between -4.3
per
cent loss and 5.5 per cent return in that financial year. The
amount claimed was R61 173 822. The calculation of this figure was

not disputed by the Municipality. What was, and remains, in dispute
is the meaning of the phrase ‘interest actually earned’.
The Fund
asserts that it includes a return on all its investments, taking into
account all realized and unrealized capital gains
and losses based on
the market value of the assets. The Municipality contends that it
means a return only on the gains actually
achieved, which would
exclude unrealized capital gains or losses. The Municipality raised
the issue of interpretation shortly before
the trial commenced. It
had relied previously on a number of defences which it no longer
pursues on appeal. The meaning of the
Rule is the only issue before
us.
[5] The high court accepted the Fund’s interpretation
of the Rule and ordered the Municipality to pay to the Fund the sum
of R61
173 822 plus interest. It is against this order that the
Municipality appeals with the leave of the high court.
Conversion from a defined benefit to a defined
contribution retirement fund
[6] Before turning to the different interpretations
placed by the parties on the Rule I shall deal briefly with the
differences
between the nature of the Fund when it was established in
1924 and the nature after it was converted in 1994. It had previously

been a defined benefit fund – one where every member is promised a
pension benefit that is calculated as a percentage of the
member’s
salary on retirement. The contribution of the Municipality as
employer was thus calculated to meet the promise of a
particular
benefit. Where the Fund’s investments in a particular year were
good, the contribution by the Municipality might thus
have been
reduced: it had only to meet its promise as to the benefit payable.
And conversely, in a bad financial year, the Municipality
may have
had to increase its contributions. (See
Tek
Corporation Provident Fund v Lorentz
2
and
Financial Services
Board v De Wet NO
3
on the nature of a defined benefit fund and
the employer’s liability to make good its promise.) The
Municipality thus carried
the risk of bad investment performance.
[7] A defined contribution fund, on the other hand, is
one where the rules define the contributions to be paid by both
members and
the employer. There is no guarantee of any particular
benefit. And equally where a surplus or a loss is experienced by the
fund
the employer does not get the benefit of a contribution
‘holiday’, nor does it have to pay in where there is a loss.
4
The member, on retirement, is entitled to the contributions made by
him or her and by the employer, and any return on the amount
in the
member’s account that has been invested.
[8] The parties were agreed, however, that the Fund,
prior to 1994, was not purely a defined benefit fund, and that post
1994 it
was not purely a defined contribution fund. It was hybrid in
nature before and after conversion, with a primarily defined
contribution
complexion after the rules were amended.
[9] When conversion to a defined contribution fund was
considered by the parties towards the end of 1993, the Fund started
discussions
with the members. The proposed rule amendments not only
had to be approved by the Municipality and the Registrar of Pension
Funds,
but also by members. The amendments were presented to members
in various circulars and at consultative meetings. There is not much

information available about the entire consultative process. It is
clear, however, that the package of rules was accepted by the

necessary majority of members. Active members were treated
differently from pensioners. The latter were governed by the old
rules
(in terms of Annexure C to the new rules). Pensioners and their
spouses would be treated on the same basis as they had been prior
to
the conversion.
[10] On conversion in March 1994 the Fund changed its
name to the Germiston Municipal Retirement Fund, whereas previously
it had
been called a Pension Fund. Nothing turns on this, and it
remains the same legal entity.
[11] The Fund is now a hybrid that has both defined
benefit and defined contribution features. These include the fact
that the pensioners,
as at the date of conversion, are entitled to
defined benefits whereas the benefits of the active members are
determined on a defined
contribution basis. In addition, provision
is made for safeguards that protect members’ shares, such as the
establishment of
a reserve fund into which investment earnings, inter
alia, are paid. The Rule must be interpreted in this light.
The meaning of the words in the Rule
[12] Interpretation of what is meant by ‘interest
actually earned’ should be approached with ‘common sense and
perspective'
(Bekker NO v Total South Africa
(Pty) Ltd
5
)
argues the Fund. And in determining the meaning of the words used in
the Rule regard must be had to the entire set of rules –
the
contract between the members, the Fund and the Municipality. Both
parties accept this canon of interpretation, invoking
Sassoon
Confirming and Acceptance Co (Pty) Ltd v Barclays National Bank Ltd.
6
Principles of interpretation
[13] The principle that a provision in a contract must
be interpreted not only in the context of the contract as a whole,
but also
to give it a commercially sensible meaning, is now clear. It
is the principle upon which
Bekker NO
was decided,
7
and, more recently,
Masstores (Pty) Ltd v
Murray & Roberts (Pty) Ltd
8
was based on the same logic. The principle requires a court to
construe a contract in context – within the factual matrix in
which
the parties operated. In this regard see
KPMG
Chartered Accountants v
Securefin
.
9
Context and commercial sense
[14] What, then, is a commercially sensible construction
of the Rule? The high court, relying on what it regarded as the
‘grammatical
and ordinary meaning’ of the phrase ‘interest
actually earned’, held that the Rule established a guarantee which
would be
invoked where the growth of the Fund’s investments was
less than 5.5 per cent in the financial year in question. The
Municipality’s
principal attack on this construction is based on
another purely linguistic – grammatical – canon: where different
words are
used in a document they must mean different things.
The significance, if any, of different words
[15] As the Municipality points out, the words
'investment yield’ and 'market value' are used elsewhere in the
rules but not in
the Rule. So, for example, the definition in the
rules of ‘accumulated contributions’ has as a component the
contributions
paid by a member together with interest at a rate to be
decided having regard to the ‘investment yield achieved by the
Fund’.
Members’ shares include ‘investment earnings’
transferred from the reserve account (to which I shall revert): the
earnings
are based on ‘the investment yield achieved by the Fund
during the period for which the investment earnings are credited to
the
member’s account’
(rule 2.2(1)(v)).
And
rule 10.5
requires
the actuary to estimate what portion of the investment earnings is
attributable to various accounts to ensure that any
gain from
investment assets is credited to the correct accounts.
[16] In
rule 2.2(3)(c)(i)
there is a reference to
fluctuations in the ‘market value of the Fund’s investments’.
Why not use the same phrase – rather
than interest actually earned
– if that was what was intended in the Rule, asks the Municipality?
The Fund’s response is that
the rules have been drafted over a long
period by different people, and that accordingly one cannot expect
consistency in language.
That may be so. But I think there is a more
principled objection to the use of this guide to interpretation in
this case: it is
a guide resorted to in order to ascertain the
linguistic meaning of words, not the real intention of the parties.
It must thus
be invoked only where that intention cannot otherwise be
ascertained.
10
If the Rule cannot be given a commercially sensible meaning by
looking at it in context – in its general factual matrix
11
- then the use of different terms in different places may assist in
interpretation. But if the parties’ intention is ascertainable

having regard to the context, we should not resort to purely
linguistic, and invariably contrived, constructions.
[17] The Municipality contends further that the high
court did not have sufficient regard to the phrase ‘actually
earned’ in
the Rule. It concedes that ‘actually’ does not add
to the meaning. The word simply means ‘in fact’ and adds
emphasis. But
the Municipality argues that ‘earned’ means gained:
a gain is one which has in fact been made. Thus appreciation in the
value
of an asset that is not in fact realized is not a gain: nothing
has been earned. One does not ‘earn’ simply because assets
appreciate in value. And similarly, depreciation in value does not
mean that a loss has been incurred. Thus fluctuations in the
value of
the Fund’s investments in a particular period have no significance
in themselves. Only where an asset is realized would
there be a gain,
and thus anything earned.
[18] This argument too is based on purely linguistic
grounds: the Municipality seeks to give the words in the Rule their
ordinary
or usual meanings. It does not take account of the context:
the purpose of the Rule, general practices in the pension fund
industry
and the effect of its interpretation. As the Fund contends,
the investment performance of a pension fund is determined by having

regard to the market value of its investments. Its financial
stability is dependent on the value of the assets. If, in determining

investment performance, one disregards all assets that have not been
realized during the course of the financial year, one would
not have
a proper picture of the performance at all. In order to assess the
market value of the Fund one must take into account
the value of all
the assets held by the Fund. Depreciation will mean that there has
been an actual loss. Appreciation will result
in a gain – an
earning.
The context or factual matrix
The purpose of the Rule
[19] Both parties contend that the purpose of the Rule
is to provide a safety net for members. They differ, however, on what
that
is. The Municipality argues that it is to guarantee that the
employer will pay in to the Fund the amount necessary to achieve a

5.5 per cent earning on investments realized, or interest earned. The
Fund argues, on the other hand, that the net is safer than
that. The
Municipality, it contends, is required to make good the difference
between the value of all assets in the Fund, as at
the end of the
financial year, and the total value with at least a 5.5 per cent
appreciation. That difference in July 2003 is the
amount claimed –
R61 989 551. The high court adopted the Fund’s interpretation,
finding that the Municipality’s view would
exclude the biggest
single indicator of the Fund’s performance in the financial year –
the market value of its investments.
[20] The Municipality argues that the high court did not
take into account the anomaly that results from this interpretation:
it
can be called upon to pay in to the Fund simply because the
financial year end coincides with a temporary fall in the stock
market.
If the market improves soon afterwards the Fund will have a
gratuitous windfall, unrelated to earnings generated on the Fund’s

investments. Moreover, such an anomalous windfall would not be
consonant with a defined contribution Fund. (As indicated, the
Municipality does acknowledge that the Fund is a hybrid one.)
[21] The Fund responds that all deadlines give rise to
anomalies and that there must be a cut-off point when the Fund’s
investment
performance can be analysed. Moreover, it argues, the
Municipality could have protected itself by providing 'claw backs' in
subsequent
periods when performance is better. It would be equally
anomalous if the guarantee would be triggered only upon the
realisation
of losses, through the sale of investment assets, but not
by the performance of investments generally.
[22] The arguments for the Fund’s interpretation are
based also on the need for the safety net provided by the Rule, the
purpose
for which it was agreed being to meet that need. The purpose
is to provide a guarantee by the Municipality to its employees, or

former employees, of investment performance to ensure the financial
well-being of the Fund. The rules of any fund must be based
on sound
financial principles and the board of a fund has the obligation to
ensure that members’ interests are protected (see
ss 7C
and
7D
of
the Act on the objects and duties of pension fund boards). An
administrator of a fund must maintain adequate financial resources
to
meet its commitments and manage the risks to which a fund is exposed
(s 13B(5)(f)).
The guarantee must be seen in the light of these
provisions and makes sense given the duties to protect members’
interests.
Practices in pension funds generally
[23] The Fund contends further that in ascertaining the
meaning of the Rule the court must have regard to general practices
in the
pension fund industry. Usually performance of funds is
determined with reference to changes in the market value of their
assets,
and the ability to meet their obligations to their members.
The Municipality’s interpretation, the Fund argues, is unrelated to

the market value of the fund's assets. It introduces the notion of
realizing profits and losses which, the Fund contends, is foreign
to
the usual operations of a pension fund. Moreover, the assets of the
Fund have readily ascertainable market values. The realization
of the
assets does not change the actual financial position of the Fund. The
only effect that realization would have is to convert
the assets into
cash. Further, on the Municipality's interpretation, the guarantee
would be triggered only where, in addition to
the fall in value of
the assets, the Fund had converted the assets to cash. This is an
arbitrary consequence.
The effect of the Rule according to the different
interpretations
[24] The investment risk that the Rule guards against is
the depreciation of the Fund’s investments. On the Municipality’s
interpretation,
where the value of the Fund’s assets falls, the
members may find their benefits reduced in consequence, and the
Municipality
would not have to contribute to alleviate the situation
for so long as the Fund did not realize those assets that perform
poorly.
Such a result, the Fund contends, could not have been
intended by the members when they agreed to the amendments to the
rules and
the change in nature of the fund.
[25] The Fund argues that the Rule had the same meaning
and effect prior to the amendments. Where a defined benefit was
payable
to a pensioner the Rule would have ensured that the Fund was
able to meet its commitments to pensioners. But the same safety net

is needed for members after 1994 and there is nothing to suggest that
members agreed to give up the protection they had had. If
there is a
depreciation in value of the Fund’s assets then the members will be
prejudiced on the Municipality’s interpretation.
In my view, that
cannot have been intended. It is not a commercially sensible outcome.
[26] It is not one that the Municipality appeared to
accept either. For even in its amended plea,
12
it set out the ‘average annual rate of interest’ for the years
ending June 2000 (14 per cent), June 2001 (14.7 per cent) and
June
2002 (12.5 per cent) based on the market value of the Fund’s
assets. (It states also that for the year ending June 2004,
the
average annual return on the total moneys invested exceeded 5.5 per
cent.) The figures reflect a gain on the value of all assets,
and not
those actually realized.
[27] A further difficulty arising from the
Municipality’s approach is that the obligation to pay would be
triggered only when
assets are realized and losses are incurred. This
consequence runs counter to the general practice that the health of a
pension
fund is measured by the value of its investments and their
performance.
[28] It is important to bear in mind also that people
who were already pensioners in 1994 continue to be governed by the
former
rules of the Fund, including one identical to the Rule (former
rule 43.1).
It would be most odd if the Municipality were obliged to
make good the guarantee in respect of them, but not in respect of
other
pensioners or active members of the Fund. And how would this be
achieved? Would the guarantee be triggered for pensioners when the

overall assets of the Fund are determined at financial-year end, but
not for active members? Again, the interpretation of the municipality

makes no commercial sense.
[29] The Fund argues too that in order to determine what
risk it is that the Rule guards against (what purpose the ‘safety
net’
serves), the court must have regard to the benefits to which
members are entitled.
Rule 4
provides that on retirement the member’s
share will be transferred to an account (a pensions account or an
insurer’s account,
say) to secure the pension. Thus the benefit to
which a member is entitled depends on what is in his or her account –
what the
share is. The sources of the credits in the member’s
account are determined by
rule 2.2(1)(a)
, and in particular (a)(v).
This provides that investment earnings must be transferred from a
Reserve Account: and such investment
earnings ‘shall be based on
the investment yield achieved by the Fund during the period for which
the . . . earnings are credited
to the Member’s Share Account; . .
.’. Thus it is not profits realized that are placed in the member’s
account, but the investment
yield
(rule 2.2(1)(b)(i)).
Equally,
‘valuation losses’ must be debited to the member’s share
(rule
10(5)).
The corresponding provision is to be found in
rule 2.2(3)
which establishes a Reserve Account, which comprises a record of all
moneys of the Fund that have not been allocated to the Share
Account
or the Pensions Account. Valuation losses debited to the Share
Account must be credited to the Reserve Account
(rules 2.2(3)(a)(iii)
and
2.2
(1)(b)(i)). And
rule 10.5(4)
provides that if the financial
position of the Fund requires it, on the recommendation of the
actuary, ‘the Committee may increase
or decrease the contribution
rate and/or the benefits under the Fund in any manner including the
granting of bonuses; provided
that if the valuation reveals a surplus
and the Actuary so agrees, such surplus shall be allocated to the
various accounts . .
. to increase the benefits supported by such
accounts’.
[30] Thus, argues the Fund, it is clear that the
financial position of the Fund has a direct effect on the benefits
received by
members. It matters not that depreciation in value in a
financial year may be made up in following years. In each year the
financial
health of the Fund may impact directly on the benefits or
bonuses payable to members. The better the performance in a year the
more likely it is that a member’s share would be increased. And of
course, the poorer the performance the more likely it is that
the
benefits will be reduced. Thus the Municipality’s guarantee of a
rate of ‘interest’ of 5.5 per cent in a financial year
amounts to
a guarantee that benefits will not be reduced beyond a particular
level when the Fund’s performance is poor. The rules
reflect the
truly hybrid nature of the Fund: the pension of a member is related
not only to contributions that are defined, but
also to good
financial performance that may result in increased benefits and
possibly bonuses too.
[31] The Municipality’s interpretation, on the other
hand, provides no ‘safety net’ for members. It entails the
consequence
that the benefits received on retirement are related only
to realization of assets and not the overall performance of
investments.
It does not protect members against the risk of poor
investment performance.
[32] It is true that the rules provide for other ‘safety
nets’. The creation of the Reserve Account into which, inter alia,
investment earnings are paid ensures some level of risk aversion. So
too does the requirement of actuarial valuations on a regular
basis.
But that is no reason to assume that another measure of protection is
not desirable. Given that both parties regard the
Rule as providing a
risk aversion measure, one must ask what the risk is and how members
are to be adequately protected. In my
view, the Fund’s argument
that the real risk is the fall in the value of investments overall is
compelling. There is no need
to protect against random losses
incurred in the realization of only some assets.
[33] Having regard to the context of the rules – the
nature of the Fund, the general practice of pension funds, and, most
importantly,
the purpose and effect of the Rule – the only sensible
commercial meaning to be given to it is that argued for by the Fund
and
accepted by the high court. The Municipality is accordingly
obliged to pay to the Fund the amount claimed.
[34] The appeal is dismissed with costs including those
of two counsel.
_______________
C H Lewis
Judge of Appeal
Appearances:
For
Appellant: A E Franklin SC
D
L Wood
Instructed by
Wright,
Rose-Innes Inc
Bedfordview
Goodrick
& Franklin
Bloemfontein
For
Respondent: C D A Loxton SC
N
Fourie
Instructed
by
SHB
Attorneys
Germiston
Naudes’s
Attorneys
Bloemfontein
1
‘[T]he rules of a registered fund shall be
binding on the fund and the members, shareholders and officers
thereof, and on any
person who claims under the rules . . .’.
2
1999 (4) SA 884
(SCA) paras 5 and 16.
3
2002 (3) SA 525
(C) para 9.
4
Financial Services Board
para 10.
5
1990 (3) SA 159
(T) at 170G-H.
6
1974 (1) SA 641
(A).
7
The decision was reversed on appeal, but the approach of Kriegler J
in the court a quo was not disapproved.
8
2008 (6) SA 453
(SCA).
9
[2009] ZASCA 7
(13 March
2009); 2009 (4) SA 399
(SCA)
para
39.
10
See R H Christie
The
Law of Contract in South Africa
(5 ed)
2006 p 219.
11
KPMG
Chartered Accountants v Securefin
above para 39.
12
Para 9. The figures were originally set out in a
letter from the principal officer of the Fund to the chief financial
officer
of the Municipality dated 11 December 2003.