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[2013] ZAKZDHC 12
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Registrar of Pension Fund and Another v Kwazilu-Natal Retirement Fund and Another (3469/2012) [2013] ZAKZDHC 12 (15 April 2013)
IN THE KWAZULU-NATAL
HIGH COURT, DURBAN
REPUBLIC OF SOUTH
AFRICA
CASE NO.
3469/2012
In the matter between:
REGISTRAR OF PENSION
FUNDS
............................................
FIRST
APPLICANT
FINANCIAL SERVICES
BOARD
.............................................
SECOND
APPLICANT
and
KWAZULU NATAL
RETIREMENT FUND
...............................
FIRST RESPONDENT
MIDLANDS BUJILDING
INDUSTRY
RETIREMENT FUND
..........................................................
SECOND
RESPONDENT
__________________________________________________________________
J U D G M
E N T
(Delivered
on 15 April 2013)
__________________________________________________________________
BALTON J
[1] This is an application by the Registrar of Pension Funds (“the
Registrar) and the Financial Services Board (“FSB”)
in
terms of sections 6(2) and 8(1) of the Promotion of Administrative
Justice Act 3 of 2000 (“PAJA”) to review and
set aside
two decisions by the Registrar taken during October 2011 to approve
and register amendments to the rules of the respondents
in terms of
section 12(4) of the Pensions Fund Act 24 of 1956 (“the Act”).
[2] The respondents are pension funds registered in terms of the Act
with the office of the Registrar and administered by the
Kwazulu-Natal Master Builder and Allied Industries Association.
[3] Both the respondents are defined contribution funds as distinct
from defined benefit funds.
[4] The respondents’ rules in respect of defined contribution
benefits do not guarantee any particular benefit and a member
on
retirement is entitled to the contributions made by him or her and by
the employer in respect of the member and any return on
the amount in
the member’s account that has been invested less his or her
share of the expenses of the Fund.
[5] The following factual background is common cause or not in
dispute:
5.1. Pursuant to the Promulgation of the Pension Funds Second
Amendment Act No 39 of 2001 (the Surplus Legislation) on 7 December
2011, the respondents were required to submit to the Registrar’s
office actuarial valuation reports in terms of section 16(1)
and
surplus apportionment schemes in terms of section 15B(1) of the Act
as at their surplus apportionment dates, being 31 October
2004.
5.2. On 4 January 2007 the respondents submitted to the Registrar’s
office initial surplus apportionment schemes, as well
as initial
valuation reports as at 31 October 2004 which were returned to the
respondents by the Registrar’s office as the
respondents had
not communicated the details of the schemes to their stakeholders to
enable them to lodge objections as contemplated
by section 15B(9)(e)
of the Act.
5.3. On 3 May 2007 the respondents submitted revised surplus
apportionment schemes.
5.4. The initial valuation report and the first revised scheme
submitted by both the respondents reflected a contingency reserve
for
target pensions.
5.5. The respondents were of the view that the establishment of the
contingency reserve accounts for the payment of target pensions
by
the respondents to their members could be viewed as an expectation by
the members.
5.6. During August 2007 the Registrar queried both the initial
valuation reports and the first revised schemes.
5.7. The Registrar was not satisfied with the establishment of the
various contingency reserve accounts in the respondents, including
the contingency reserve accounts for target pensions. The Registrar
required that the credit balances in the contingency reserve
accounts
be released for distribution as actuarial surplus in terms of section
15B of the Act.
5.8. During November 2007 both respondents addressed the Registrar’s
queries, but the respondents’ contingency reserve
accounts for
target pensions remained in issue.
5.9. On 19 February 2008 the Registrar advised the respondents that
he had pended the consideration of their initial valuation
reports
until the issue relating to the contingency reserve accounts for
target pensions had been resolved or satisfactorily explained.
5.10 In the letter
1
the Registrar states:
…
It is the Registrar’s
view that the Rules of the Fund do not create a liability in respect
of the pension target. The Rules
allow for an augmentation of pension
at retirement date in the discretion of the actuary in consultation
with the board of the
Fund.
The basis of a defined
contribution fund is that members are entitled to the contributions
allocated towards retirement benefits
and fund return thereon. Where
additional pension enhancements are given, it can only be funded from
surplus.
In essence, the board of the
Fund is utilising part of the surplus in the Fund to provide target
pensions. By virtue of the surplus
legislation surplus must be
distributed in accordance with the Act. After the commencement date
of the surplus legislation the
board of the Fund cannot deal with
surplus other than in accordance with the Act.
5.11 Rule 6.2 of the rules of both respondents provided that -
at the member’s normal
retirement date, the annual pension payable to the member will be the
benefit in terms of Rule 6.1;
provided that the pension may be
augmented to such an amount and subject to such conditions as may be
determined by the actuary
in consultation with the trustees.
5.12. The respondents replied to the Registrar’s letter and
reiterated their view that the target pension was a benefit
expectation.
5.13. On 23 June 2008 representatives of the Registrar and the
respondents met to discuss the unresolved issues relating to the
respondents’ first revised schemes and initial valuation
reports.
5.14. In a report
2
dated 9 October 2008, Ms Carmen Hollaway, the respondents’
attorney, submitted that the provision of target pensions was
a
benefit entitlement.
5.15 Ms Hollaway contended
inter alia
that:
(i) Members have been historically, consistently and unequivocally
informed that their membership of the respondents entitled them
to,
at a minimum, a target pension on retirement;
(ii) The trustees of the respondents were historically advised by
Fedsure Life (their previous administrator) that the target pension
was a benefit entitlement in terms of the rules of the respondents;
and
(iii) From a funding perspective, the target pensions have
historically been funded from surplus.
5.16. By letter dated 18 December 2009 the Registrar rejected the
respondents’ initial valuation reports as at 31 October
2004.
5.17. On 19 January 2009 the respondents lodged appeals against the
Registrar’s decision.
5.18. Pursuant to discussions between the Registrar’s office
and the respondents’ attorney, the respondents agreed
to submit
revised valuation reports and second revised surplus apportionment
schemes and on 19 March 2009 withdrew the appeals.
5.19. On 11 September 2009 the respondents submitted the revised
valuation reports and the second revised schemes to the Registrar’s
office. The reports no longer made provision for contingency reserve
accounts for target pensions, but contained a target pension
liability for active members.
5.20. In December 2009 the Registrar rejected the revised valuation
reports in terms of section 16(9), read with section 15(3)
of the
Act, as he was of the opinion that the revised valuation reports did
not correctly reflect the financial condition of the
respondents for
the following reasons:
3.1. Section 9 of the revised valuation report reflects the benefit
resulting from following a target pension approach as a liability,
…
As this the target level pension liability is not defined in the
rules, the valuation has not been performed in line with
the rules of
the Fund.
At most the rules allow for an augmentation of pension at retirement
date, at the discretion of the actuary in consultation with
the board
of the Fund, and as such, do not create a liability in respect of the
pension target.
3.2. The target level pension for actives is funded from actuarial
surplus, hence it constitutes an unauthorized distribution of
actuarial surplus.
3
5.21 The respondents then lodged new appeals with the Appeal Board.
4
5.22. On 4 October 2011 the first respondent submitted to the
Registrar’s office amendment No 4 to its rules and the second
respondent submitted to the Registrar’s office amendment No 2
to its rules.
5
5.23. The first respondent’s amendments were considered and
approved on 14 October 2011 and the second respondent’s
amendments considered and approved on 12 October 2011. They were
informed of the approval and registration on 15 and 12 October
respectively.
6
The amended rules read,
inter alia
, as follows:
7
TARGET LEVEL OF PENSION means a
capitalized value determined at the time of the retirement of a
MEMBER based on the ACCRUAL RATE
of FINAL SALARY per year of
CONTRIBUTORY MEMBERSHIP of the SCHEME, as determined by the TRUSTEES
in consultation with the ACTUARY,
following each annual financial
review of the SCHEME.
…
6.2 Unless the TARGET LEVEL OF
PENSION is less than the MEMBER’S SHARE OF FUND, the Member’s
SHARE OF FUND shall, on
the Member’s NORMAL RETIREMENT DATE be
credited with such amount as would be sufficient to reach the TARGET
LEVEL OF PENSION,
provided that such crediting of a Member’s
SHARE OF FUND is determined by the ACTUARY in consultation with the
TRUSTEES as
being affordable by the SCHEME.
5.24. On 30 January 2012 the Secretary of the Appeal Board informed
Ms Hollaway that the Appeal Board would hear the appeals during
February 2012.
5.25. On 1 February 2012 Ms Hollaway requested the Appeal Board to
pend the appeals as there were “recent developments”
which directly impacted on the merits of the appeals and that the
respondents expected to enter into formal discussions with the
Registrar regarding such developments during the course of the
following week.
8
5.26. On 9 February 2012 Ms Hollaway advised the Registrar that the
target pension provisions has not been implemented in terms
of the
amended rules since their approval and registration in October 2011.
The payment of target pensions had been suspended in
May 2010 pending
the resolution of the dispute with the Registrar regarding the 2004
valuation and the determination of the financial
position of the
respondents.
9
Issues
[6] The Registrar seeks to review the decisions in terms of section
6(2)(e)(iii) and 6(2)(i) of PAJA on the grounds that:
6.1 The amendments are inconsistent with the Act, and
6.2. When the applications for the approval and registration of the
amendments were made the respondents failed to disclose all
relevant
material information, namely that:
(i) The issue whether the respondents were liable to pay target
pensions to their current active members if and when they retired,
was on appeal before the Appeal Board;
(ii) The respondents misstated the nature and effect of the
amendments as being ‘to clarify the provisions relating to the
provision of pension targets’ whereas in fact, the rules were
silent about the provision of target pensions; and
(iii) The FSB officials who took the impugned decisions on behalf of
the registrar made a material mistake of fact, namely, they
thought
that the rules already contained provisions relating to target
pensions when in fact it did not.
[7] Section 6 of PAJA reads
inter alia
as follows:
6. Judicial Review of
Administrative Action –
(2) A court or tribunal has the
power to judicially review an administrative action if –
(e) the action was taken –
…
(iii) because irrelevant
considerations were taken into account or relevant considerations
were not considered.
…
The
action is otherwise unconstitutional or unlawful.
[8] The Registrar relies on
PEPCOR RETIREMENT FUND AND ANOTHER v
FINANCIAL SERVICES BOARD AND ANOTHER
10
to have the rule amendments reviewed and set aside. CLOETE JA held
that
[31] I have pointed out that a
public functionary may be entitled and even obliged to seek the
review by a Court of its own decision;
and I have already held that
the Registrar and the FSB are entitled to do so. The question which
now arises is whether this should
be permitted because of a material
mistake of fact, even a mistake due to the functionary’s own
negligence … and even
if the mistake was not induced by the
person who benefited by the decision.
…
[46] …S 6(2)(
e
)(iii)
provides that a Court has the power to review an administrative
action,
inter alia
, if ‘relevant considerations were not
considered’. It is possible for that section to be interpreted
as restating the
existing common law; it is equally possible for the
section to bear the extended meaning that material mistake of fact
renders
a decision reviewable.
[47] In my view, a material
mistake of fact should be a basis upon which a Court can review an
administrative decision. If legislation
has empowered a functionary
to make a decision, in the public interest, the decision should be
made on the material facts which
should have been available for the
decision properly to be made. And if a decision has been made in
ignorance of facts material
to the decision and which therefore
should have been before the functionary, the decision should (subject
to what is said in para
[10] above) be reviewable at the suit of,
inter alios
, the functionary who made it – even although
the functionary may have been guilty of negligence and even where a
person who
is not guilty of fraudulent conduct has benefited by the
decision. The doctrine of legality which was the basis of the
decisions
in
Fedsure, Sarfu
and
Pharmaceutical
Manufacturers
requires that the power conferred on a functionary
to make decisions in the public interest, should be exercised
properly, i.e.
on the basis of the true facts; it should not be
confined to cases where the common law would categorise the decision
as
ultra vires
.
[9] The Registrar submits that:
9.1 It first became aware of the rule amendments on 1 February 2012.
9.2 The functionaries who approved and registered the rule amendments
were not aware that the appeals were pending before the Appeal
Board
and that the respondents’ past payment of target pensions and
the provision in their valuation reports for future payments
of
target pensions were in dispute between the Registrar and the
respondents.
9.3 Due to an administrative practice in the Registrar’s office
at the time, the functionaries dealing with the proposed
amendments
rules did not have any documentation concerning the disputes/appeals
in question. This was dealt with by the Legal Department
of the FSB.
9.4 The respondents did not disclose the existence of the appeals or
the dispute in their applications for approval of the rule
amendments. If they had done so, the analysts handling the proposed
rule amendments would not have approved and registered the
rule
amendments and would instead have referred the matters to the FSB’s
legal personnel involved with the appeals.
9.5 The rule amendments created a liability with effect from 1
January 1992 towards members upon retirement where those members’
shares of fund are less than the target level of pension.
9.6 The Registrar requested the respondents to withdraw the rule
amendments and abandon their approval and registration and allow
the
Appeal Board to adjudicate the appeals, failing which the Registrar
would bring an application to have the decisions to approve
and
register the rule amendments in October 2011 reviewed and set aside.
9.7 The respondents were afforded the opportunity to consider these
options at special board meetings and advise the Registrar
of their
decision as soon as possible.
9.8 In a letter to the Registrar dated 21 February 2012, Ms Hollaway
responded as follows
11
:
28. The Trustees of the Funds
have always thought to resolve the issues around the payment of
target pensions, amicably with the
FSB and in the best interest of
members. To this end a number of meetings have been held with FSB
representatives since 2008.
29. The Registrar’s
primary objection has always been that “the target pension
liability is not defined in the rules”
of the respective funds.
30. We have always believed that
the members of the Funds have a reasonable benefit expectation of
receiving a target pension and
that the express inclusion of this
liability in defined terms of the rules of the Funds was unnecessary.
31. However, given the
Registrar’s position that in order for the target pensions to
constitute an accrued actuarial liability,
it must be “provided
for (and sufficiently described) in the registered rules of the
Funds” and “certain”.
32. The relevant rule amendments
were drafted to take account of it and provide for the Registrar’s
view as expressed above.
33. It is the considered view of
both funds that the rule amendments are in the best interests of the
members providing as they
do for the payment of target pensions as a
liability, subject to affordability, consistent with the Funds
practice and as consistently
communicated to members since 1 January
1992.
34. Accordingly the Trustees do
not believe that they would be complying with their fiduciary duties
if they were to agree to submit
further rule amendments to restore
the rules to their pre-amended forms.
35. The Trustees are concerned
that the longer the disputes continue the greater the prejudice to
members, both in respect of the
delay of the finalization of the
Funds’ surplus apportionment scheme, as well as the cessation
of the payment of target pension
since affordability cannot be
established. The Trustees therefore appeal to you to address this
issue as a matter of urgency.
36. It is hoped that the
Registrar will now reconsider the Funds respective statutory
valuation in light of the amended rules.
[10] The respondents submit that the amendments were introduced to
encapsulate and formalize the respondents’ historical
practice
of paying target pensions to retiring members which created a
legitimate expectation for retiring members that they would
receive
such a target pension as a benefit of right.
[11] The first aspect to be considered is whether the respondents’
rule amendments No 2 and 4, which introduced target pensions
retrospectively, are inconsistent with the provisions of section 15B
of the Act.
[12] Section 15B deals with the apportionment of existing surplus and
requires the Board of every fund to register a fund for the
proposed
apportionment of any actuarial surplus (“the scheme”).
The respondents submitted their schemes but the issue
of the target
pension liability for active members was referred to the Appeal Board
to determine:
12.1 Whether or not the historical payment of target pensions to
members on their retirement gave rise to a reasonable benefit
expectation on the part of such member; and
12.2 Whether, as a result, that practice gave rise to an accrued
liability in respect of which provision should be made in the
respondent’s revised valuation report as at 31 October 2004;
[13] The Registrar is of the view that the use by the respondents
before May 2010 of actuarial surplus to fund the target pension
was
in conflict with the provisions of section 15B of the Act, which
require that actuarial surplus in a pension fund be distributed
as
set out in the section.
[14] In terms of section 12(4) of the Act a rule amendment may be
approved and registered if the Registrar is satisfied that the
amendment is not inconsistent with the Act and that it is financially
sound.
[15] The Registrar submits that the rule amendments retrospectively
create liabilities in the respondents towards members in respect
of
target pension upon retirement. I agree with the Registrar that the
rule amendments are silent on the aspect of funding for
these
liabilities, save to say the payment of target pension will be
subject to affordability. This is not in accordance with section
15B
of the Act.
[16] In terms of section 6(2)(d) and (i) of PAJA, the Registrar’s
functionaries made a material mistake of law in that the
rule
amendments were inconsistent with section 15B of the Act and their
registration was therefore inconsistent with section 12(4)
of the Act
and unlawful.
[17] Both rule amendments provide that their objective was “to
clarify the provisions relating to the provision of target
pensions
under the SCHEME”. Prior to the approval and registration of
the rule amendments, the rules of the respondents did
not contain any
provision relating to target pensions. The rules of the respondents
merely provided for the discretionary augmentation
of pensions in
terms of Rule 6.2
[18] The respondents acknowledge in the appeals that the rules did
not create any entitlement to target pension, however, their
view is
that the historical application of the discretionary enhancement
provision in the rules had given rise to a reasonable
expectation
amongst members of the respondents that upon retirement, in addition
to the pension to which they were entitled under
the rules, they
would receive an enhancement up to the level of the target pension.
This Court is of the view that the Appeal Board
should adjudicate on
this issue.
[19] It was incorrect and misleading for the respondents to state
that the objective of the amendments was to clarify provisions
in the
rules of the respondents relating to target pension when the rules of
the respondents did not contain such provisions. On
this basis the
functionaries of the Registrar who approved the amendments made a
material mistake of fact. This is borne out by
the respondents’
position in the new appeals, namely that the “liability”
was in terms of the reasonable benefit
expectations of members upon
retirement.
[20] The respondents failed to disclose relevant material information
being that the subject matter of the new appeals pending
before the
Appeal Board was the very issue of target level pensions to the
Registrar’s functionaries when they submitted
the rule
amendments.
[21] The Registrar submits that by not mentioning the pending new
appeals when the rule amendments were submitted for approval
and
registration, the respondents misled the Registrar, even though it
was not deliberate or
mala fide
.
[22] The respondents submit that they cannot be blamed for processing
inefficiencies in the Registrar’s office. There was
no duty on
them to inform the Registrar’s functionaries of the ongoing
dispute. Whilst this Court accepts that the respondents
were not
under a duty to do so and that it is due to negligence on the part of
the Registrar’s office in not informing its
functionaries of
issues in dispute, this Court cannot ignore the fact that the
functionaries who approved the rules were not aware
of all the
circumstances surrounding the dispute. The functionaries made a
decision in the public interest and this Court is of
the view that
the fact that they were not aware of the appeals that their decision
ought to be set aside, because if they were
aware of the appeals they
would not have approved the rule amendments.
[23] The Court was aware in
PEPCOR
of the dangers of
recognizing a material mistake of fact as a ground of review.
[49] Whether a review should
succeed in a matter such as the present will depend on a
consideration of the public interest in having
the decision corrected
and other factors, and in particular, the interests of the person in
whose favour a decision has been made.
Ultimately, a value judgment,
balancing all the relevant factors, will be required.
[24] I am accordingly of the view that by failing to mention the
pending appeals at the time of submitting the rule amendments
for
approval and registration and by stating that the rule amendments
were aimed at clarifying provisions relating to the provision
of
target pension when the respondents’ rules did not contain such
provisions, the Registrar’s functionaries did not
take into
account relevant considerations and the review should succeed in
terms of sections 6(2)(e)(iii) and 6(2)(i) of PAJA.
[25] The Registrar requested the respondents to withdraw the
amendments pending the outcome of the appeal, which they refused.
Had
the respondents agreed to the Registrar’s proposal it would
have obviated the need for the application.
[26] As a result of the ruling which I make, I am of the view that it
is not necessary for this Court to deal with the definition
of target
level pension or the issues which are before the Appeal Board. The
matter must be dealt with by the Appeal Board.
[27] The following order is made:
27.1 The first applicant’s decision of 14 October 2011 to
approve and register amendment No 4 to the rules of the first
respondent in terms of section 12(4) of the Act, is hereby set aside.
27.2 The first applicant’s decision of 12 October 2011, in
terms of section 6(2) and 8(1) of PAJA, to approve and register
Amendment No 2 to the rules of the second respondent in terms of
section 12(4) of the Act, is hereby set aside.
27.3 The respondents are directed to pay the costs of this
application, jointly and severally the one paying the other to be
absolved.
COUNSEL FOR THE PLAINTIFFS: A M BREYTENBACH SC
ASSISTED BY J THEYSEN
(Instructed by:
Shepstone & Wylie
24 Richefond Circle
Ridgeside Office Park
UMHLANGA ROCKS.)
COUNSEL FOR THE DEFENDANTS: A E FRANKLIN SC
ASSISTED BY: M A CHOHAN
(Instructed by:
Evershed Attorneys
c/o John Hudson & Company
303 Florida road
Morningside
DURBAN.)
DATE OF ARGUMENT: 28 JANUARY 2013
JUDGMENT DELIVERED ON: 15 APRIL 2013
1
Page
31 of the indexed papers.
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Pages
38 to 48 of the indexed papers.
3
Pages
53 to 56 of the indexed papers.
4
Pages
57 to 82 of the indexed papers.
5
Pages
83 to 84 of the indexed papers.
6
Pages
85 to 94 of the indexed papers.
7
Pages
86 to 88 of the indexed papers.
8
Page
97 of the indexed papers.
9
Pages
99 to 100 of the indexed papers.
10
2003
(6) SA 38
(SCA).
11
Pages
112 to 113 of the indexed papers.