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[2020] ZASCA 142
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Southern Sun Group Retirement Fund v Registrar of Pension Funds and Others (215/2019) [2020] ZASCA 142 (2 November 2020)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 215/2019
In
the matter between:
SOUTHERN
SUN GROUP RETIREMENT
FUND APPELLANT
and
THE REGISTRAR OF PENSION
FUNDS FIRST
RESPONDENT
THE
CHIEF MASTER OF THE HIGH COURT
SECOND
RESPONDENT
THE
MINISTER OF
FINANCE THIRD
RESPONDENT
LF
SMITH
NO FOURTH
RESPONDENT
In
his capacity as former member representative
Neutral
citation:
Southern
Sun Group Retirement Fund v The Registrar of Pension Funds and Others
(Case no 215/2019)
[2020] ZASCA 142
(2 November 2020)
Coram:
Navsa, Zondi, Van der
Merwe and Nicholls JJA and Unterhalter AJA
Heard:
21 August 2020
Delivered:
This judgment was handed down
electronically by circulation to the parties’ representatives
via email, publication on the
Supreme Court of Appeal website and
release to SAFLII. The date and time for hand-down is deemed to be
10:00 am on 2 November 2020.
Summary:
Whether regulation promulgated by Minister,
in terms of which a board of a pension fund is obliged to place
calculable enhancements
due to former members who cannot be traced in
a contingency reserve fund from which it cannot be released, except
as payment to
such members or as a result of crediting the Guardian’s
Fund or some other fund, is beyond the Minister’s power and
not
in accordance with the
Pension Funds Act 24 of 1956
– Minister
arrogating power at odds with the Act – against the
principle of legality.
ORDER
On
appeal from
:
Gauteng Division of the High Court,
Johannesburg (Siwendu J sitting as court of first instance):
1 The appeal is upheld with no order as to costs.
2 The order of the court below is set aside and
substituted as follows:
‘
Regulation 35(4)
of the
Pension Fund regulations is declared invalid and unenforceable in
that it exceeds the Minister’s powers under the
provisions of
the
Pension Funds Act 24 of 1956
.’
JUDGMENT
Navsa
JA (Zondi, Van der Merwe and Nicholls JJA and Unterhalter AJA
concurring):
[1]
This is one of three related appeals that were heard on the same
day.
[1]
This appeal, like the other two, is directed against a decision of
the Gauteng Division of the High Court,
[2]
in terms of which an application by a pension fund, registered in
terms of s 4 of the Pension Funds Act 24 of 1956 (the PFA), to
have
regulation 35(4) of the Regulations, promulgated by the First
Respondent,
[3]
the Minister of Finance (the Minister) declared invalid on the basis
that it exceeded the Minister’s powers under the PFA,
was
dismissed. In all three cases the high court had made no order as to
costs.
[2]
The principal issue in all three appeals, as it was in the high
court, is whether the regulation in question is
ultra
vires
the powers
assigned to the Minister in terms of the PFA. Put differently, the
question is whether the Minister has, by way of the
regulation in
issue, arrogated power at odds with the PFA, thereby offending
against the principle of legality. The three appeals
require
consideration of the person/functionary in whom, in terms of the PFA,
the power to apportion an actuarial surplus in a
pension fund and to
create contingency reserve accounts vests. The impugned regulation
has to be viewed against the relevant provisions
of the PFA. Neither
the second respondent, the Chief Master of the High Court, who is in
control of the Guardian’s Fund,
nor the fourth respondent, who
is the former member representative of former members of the
appellant, the Southern Sun Group Retirement
Fund (the Fund),
participated in the proceedings in the court below or before us.
[3]
The historical path leading up to the commencement of litigation, and
the manner in which the issues were framed by the respective
appellants in the three appeals, are not identical. There is also the
accusation before us, on behalf of the Minister, that in
at least
two, if not all three appeals, the respective funds have departed
from their initial challenge to the regulation and are
now advancing
submissions beyond those raised in their founding affidavits and
before the high court. Whether that complaint is
justified and
whether the appellant and the other funds ought to have been granted
the relief sought requires scrutiny of the pleadings
in each case,
hence the necessity for three, separate judgments. There will, of
course, in each judgment be references, where relevant,
to the other
two appeals. The analysis of the law and the conclusions reached will
essentially be the same. All three appeals are
before us with the
leave of the court below.
[4]
The Financial Sector Conduct Authority (the FSCA) is a juristic
person established under s 56 of the Financial Sector Regulation
Act
9 of 2017 (the FSRA), and came into existence on 1 April 2018,
[4]
replacing the Financial Services Board (the FSB), which owed its
existence to the Financial Services Board Act 97 of 1990 (the
FSBA).
[5]
The main objectives of the FSCA include, enhancing and supporting the
efficiency and integrity of financial markets, protecting
financial
customers through promoting fair treatment by financial institutions
and assisting in maintaining financial stability.
[6]
[5]
It is necessary at the outset to have brief regard to the meaning of
an actuarial surplus, since that concept is at the centre
of this
appeal. Simply stated, a surplus arises in a pension fund when an
actuary determines that its assets exceed its liabilities.
Prior to
2001, how a pension fund dealt with a surplus was determined by its
rules. The Pension Funds Second Amendment Act 39
o
f
2001 came into effect on 7 December 2001. It was enacted to regulate
the distribution of a surplus by pension funds. It became
known as
the surplus legislation. The surplus legislation inserted definitions
relating to pension funds surpluses and also introduced
ss 14A and B,
and ss 15A to 15K into the PFA.
[7]
This appeal turns on the interpretation and application of relevant
provisions of the surplus legislation, located within the PFA.
I
shall, in due course, deal with the historical factors that gave rise
to the surplus legislation.
[6]
The background culminating in the present appeal is set out
hereafter. The Fund, registered as a pension fund in terms of the
PFA, was established as a defined benefit fund with effect from 1
March 1994. It later converted to a defined contribution fund
but
retained certain guaranteed benefits. It was therefore classified as
a defined benefit fund at the time that surplus apportionment
legislation, which constituted amendments to the PFA, came into
operation. The first respondent, the Registrar of Pension Funds
(the
Registrar), holds office in terms of s 3 of the PFA and was the
executive officer defined in s 1 of the FSBA.
[7]
In a letter dated 9 January 2015 the Registrar rejected the Fund’s
2010 actuarial valuation report,
[8]
in terms whereof the Fund sought to release a portion of the funds it
held in respect of unclaimed surplus benefits. The Fund asserted
that
it was entitled to release funds held, in terms of s 15B(5)
(b)
of the PFA, on the
basis that the beneficiaries are unlikely to ever claim them. It also
sought to release funds, so it said, held
in terms of s 15B(4)
(b)
,
in respect of members whose benefits could not be calculated on an
individual basis, having regard to poor data. The Fund contended
that
there was nothing in law that prevented the release of those funds.
The FSCA did not agree.
[8] The following part of the letter from the Registrar,
referred to in the preceding paragraph, sets out the basis for the
rejection:
‘
In
terms of s 5 of the 2010 valuation report, the fund purported to take
a decision, as recommended by the valuator, to release
a
portion
of the unclaimed surplus benefits held in terms of s 15B(5)
(b)
of
the PFA and thus to hold a lesser liability for these s 15B surplus
benefits…
The release of s 15B surplus is, at least in part, a contravention of
regulation 35(4)… The PFA and the
Regulations do not give the
Fund discretion to hold a lesser liability even if the Fund is of the
opinion that it would be unlikely
that untraced members would ever
claim their s 15B(5)
(b)
benefits. The
valuator's assumptions and recommendations in this regard are
therefore
contrary
to law and [on] this basis the valuation report must be rejected in
terms of s 16(9), read with s 15(3) of the PFA, as
it does not
correctly reflect the financial condition of the Fund.’
(E
mphasis
added.)
As
can be seen, regulation 35(4) of the Regulations was central to the
Registrar’s view. The provisions of regulation 35(4),
within
the full text of regulation 35, will be dealt with in due course.
[9]
As in the other two related cases, the Fund lodged an appeal against
the Registrar’s decision in terms of s 26 of the
PFA. The
appeal included a challenge to the validity of regulation 35 (4).
Because the FSB appeal board was not empowered to deal
with the
validity of the regulation, the Registrar’s office was amenable
to the suggestion by the Fund, that the appeal be
held in abeyance,
pending the finalisation of a court application by the Fund, in terms
of which it would seek a review and setting
aside of the regulation
in question.
[10] The Fund launched its application in the Gauteng
Division of the High Court, Johannesburg, during June 2015. In its
founding
affidavit the Fund explained why, in its view, regulation
35(4) was
ultra vires
the Minister’s power and why it
was inconsistent with the provisions of the PFA. The following are
the relevant paragraphs:
‘
101.
The regulation is … inconsistent with the PFA and therefore
ultra
vires
because it requires a fund, such as the Fund in the present case, to
establish a separate contingency reserve account and credit
that
account with specific amounts, when it is clear, from the definition
of the term ‘contingency reserve account’
in the
definitions s of the PFA, that:
101.1 The establishment of the
contingency reserve accounts falls within the sole discretion of the
board of trustees of a fund;
and
101.2 The determination of any
amounts to be credited to (or be debited from) that account is a
matter for the board of a fund to
decide after consulting the fund’s
valuator.
102. Any regulation which
purports to fetter the discretion explicitly granted to the board of
trustees of a fund (such as the discretion
granted to the board of
trustees by the very definition of what constitutes a “contingency
reserve account”) is inconsistent
with the purposes of the PFA
and accordingly
ultra vires
the powers of the Minister, who,
in terms of s 36, may only make regulations consistent with the PFA.’
For
reasons that will become apparent it is not necessary to deal with
the Fund’s challenge to the impugned regulation on
the basis
that it is irrational.
[11] The Fund also set out the details of the history of
its prior valuations in terms of s 16 of the PFA. The first was
submitted
in 2005, then again in 2007, and revised in 2008. In the
revised apportionment scheme approved by the Registrar, the Fund
recorded
the following:
’
58.1
[T]
here
were
9 157 former
members for whom the calculations could be performed, this
constituting 95% of all former members;
58.2
there were 529 former membe
r
s
in respect of whom insufficient information was available to perform
the calculations (this being
the
'poor
data'
category of former members … referred to above)
,
this
constituting 5% of all former members; and
58.3
of the former members, 1 251 had been traced and validated, this
constituting 13% of all former members.
’
[12]
In respect of former members the Fund noted that there were 529 in
respect of whom there was insufficient information to perform
a
calculation. The board of the Fund considered itself to be acting
within the terms of s 15B(4)
(b)
when it included
those former members in the surplus apportionment scheme, rather than
excluding them.
[13]
Then there were other former members of the Fund, for whom benefits
could be calculated but who could not be traced. Like the
other funds
in the related appeals, the Fund had expended much effort in attempts
to trace former members. Brochures and letters
were despatched, and
advertisements were placed in national newspapers.
[14]
In 2010 the Fund became aware of a legal opinion provided to another
pension fund to the effect that the impugned regulation
was
ultra
vires
the powers of
the Minister. The Fund, in turn, obtained a legal opinion from senior
counsel. The opinion was to the effect that
the regulation in
question was
ultra
vires
.
[15]
In its 2010 valuation the Fund sought to release a certain portion of
monies previously held in relation to those former members
who could
not be traced for distribution to those who had been traced. The Fund
was at pains to stress that this did not mean that
liability to those
who could not be traced, but who someday might appear and put in a
claim, was extinguished. It did however adopt
the attitude that given
that the balance owing to those who could not be traced was
actuarially unlikely to be drawn upon, it would
be irrational not to
distribute it to those who had been traced.
[16]
It was stressed by the Fund that the duty of the valuator of a
pension fund is to determine from time to time what amount should
prudently be reserved against a future risk. That view was the view
expressed in the legal opinion that had been obtained by the
Fund.
[17]
The board of the Fund, on the valuator’s recommendation, had
determined the amount to be set aside in a ‘contingency
reserve’ in respect of former members for whom calculations
could not be done. The amount set aside in relation thereto was
also
reduced. The Fund was adamant that there was nothing in the PFA or
the regulations that prohibited this.
[18] The following are the relevant parts of the
valuation report submitted by the Fund:
‘
At
the valuation date the unpaid surplus due to former members totalled
R65 373 000 and is reflected in the benefits payable in
the
financial
statements at the valuation date.
For a
number of members the data available
to
perform
calculations was not considered adequate
to
determine
a final value for payment at the
time
the
surplus
apportionment scheme was approved in February 2009. As a result, no
allocation was
done
on
a member
individual
level
for those members and an aggregate reserve was established instead.
For any members that came forward additional information
was obtained
and a final value for payment
was
determined
.
To
date only a few members
have
come
forward.
’
[19]
The valuation report was accompanied by a report on the steps that
had been taken to trace former members, including efforts
made to
obtain data from the Department of Home Affairs. The deaths of a
number of former members could also, according to the
Fund, not be
ruled out.
[20] The 2010 valuation report also pointed out that
only 51% of former member surplus funds had been paid out. The Fund
proposed:
’
79.1
…r
eleasing
an amount of approximately R6.5 million in respect of those members
for whom the calcula
ti
on
cou
l
d
not be done (ie
the
“poor data” category);
79.2
…releasing an amount of approximately R 16.3 million from the
reserves held in respect of members fo
r
whom
t
he
calculation could be done but who could not be traced (the
untraceable category); and
79.3
…releasing an amount of approximately R3.4 million from the
contingency reserve in respect of former membe
r
s
who
w
ere
statistically likely to have died before [the Surplus Apportionment
Date].’
[21]
The Fund, in its founding affidavit, referred to a draft circular
issued by the Registrar, which had been in draft form at
the time
that the Fund submitted its valuation report. The circular envisaged
that a valuator of a pension fund was permitted to
place a value of
less than 100 % of the full associated liability to former members
who could not be traced, by using reasonable
assumptions. The
circular was never issued. Subsequent to the submission of the
valuation report there were a number of exchanges
between the Fund
and the Registrar’s office. This ultimately resulted in the
rejection of the valuation report by the Registrar
on 9 January 2015.
[22]
The Fund accepted that the Minister, in enacting the regulation in
question, was concerned to ensure that boards of Pension
Funds would
not be quick to decide that former members could not be traced and
thereafter apply surplus funds towards unauthorised
purposes. The
Fund contended, however, that the impugned regulation had the effect
of sterilizing a portion of a fund’s assets,
in circumstances
where that sterilization is likely to endure indefinitely. There is
also no warrant, so the Fund contended, for
the unclaimed monies to
be transferred to the Guardian’s Fund, where it might
ultimately be lost to all the former members.
[23]
The Fund asserted that the challenge to the impugned regulation was
brought in terms of the Promotion of Administrative Justice
Act 3 of
2000 (PAJA) and sought condonation, in the event that the court found
that it was necessary, because of the delay in launching
the
application.
[24]
The Registrar, in opposing the application, did not take issue with
the condonation sought, stating that it was for the Fund
to satisfy
the court that condonation was justified. The Minister, on the other
hand contested the application for condonation,
but more about that
later.
[25]
In opposing the application, the Registrar, at the outset, pointed
out that the purpose of the impugned regulation was to ensure
that
pension funds have sufficient funds to meet the claims of every
former member for whom the board has been able to determine
an
enhancement in terms of ss 15B(5)
(b)
or
(c)
of the PFA and that this was a legitimate government purpose. That
purpose had to be viewed against the rationale for the surplus
apportionment amendments, which was to undo the wrongs of the past
and to ensure a fair surplus distribution. The Registrar referred
to
the Fund’s acceptance that a former member’s entitlement
to be paid endured and that it could not extinguish its
liability in
that regard. The Registrar insisted that the Fund’s assertion
that the regulation resulted in a sterilization
of funds was
fallacious.
[26]
The Registrar was adamant that to permit the Fund’s
contemplated release of funds would be to incentivise pension funds
not to employ their best efforts to trace and assist former members
so as to enable them to pursue their claims.
[27]
It was contended that there was no conflict between the impugned
regulation and the provisions of s 15B(5)
(e)
.
The regulation, so the Registrar asserted, dealt with former members
for whom enhancements could be calculated but who could not
be
traced, whereas the aforesaid subsection deals with former members
for whom enhancements could not be calculated, irrespective
of
whether they could be traced.
[28]
In relation to that part of the regulation that provided for the
possible release to such funds as the Guardian’s Fund,
the
Registrar contended that it was up to the board of the Fund to decide
whether it should transfer the funds.
[29]
In relation to the Fund’s contention that the regulation was
prescriptive in relation to placing funds in a contingency
reserve
account, contrary to the provisions of the PFA, which afforded the
board a discretion in that regard, the Registrar submitted
that a
purposive interpretation of the regulation does not result in
inconsistency with the PFA .
[30]
The Registrar insisted that ’contingency reserve account’
in the regulation ought to be read not as having to deal
with a
contingent liability but with actual liability. In respect of
International accounting standards the Registrar adopted the
position
that, whereas in terms thereof, ‘contingent liability’ is
defined as encompassing both a possible obligation
depending on
whether some uncertain future event occurs and a present obligation
that arises from a past event, the amount of which
cannot be measured
reliably or in respect of which the obligation is not recognised,
because ‘it is not probable that an
outflow of resources
embodying economic benefits will be required to settle the
obligation’, the regulation recognises the
liability towards
former members as established upon the approval of a pension fund’s
surplus apportionment scheme.
[31]
The Minister, in opposing the application, at the outset, raised the
question of unreasonable delay in the bringing of the
application. In
this regard s 7 of the PAJA was referred to. The Minister pointed out
that twelve years had passed since the promulgation
of the
regulation. The Minister noted that on the Fund’s own version
of events it had become aware of the legal opinion regarding
the
validity of the regulation as far back as December 2010 but only
launched its application in July 2015. It submitted that condonation
should be refused.
[32]
In dealing with the merits of the application, the Minister referred
to s 36 of the PFA, which grants wide powers to make regulations.
Regulations, so the Minister asserted, should promote the objects of
the Act under which it was promulgated. According to the Minister,
the definition of ‘contingency reserve account’ was
inserted by the surplus apportionment amendments so as to hold
what
would otherwise have been surplus assets available for distribution.
These amounts, so the Minister said, would then be used
for
contingencies for which they had been earmarked and would be excluded
from the surplus that had to be distributed in terms
of ss 15B and
15C of the PFA.
[33]
It was submitted on behalf of the Minister that other than amounts
determined by a board of a pension fund to be placed in
a contingency
reserve fund, there is nothing in the Act that says that the Minister
cannot prescribe other amounts to be placed
in a contingency reserve
account There was therefore no inconsistency between the regulation
and the provisions of the PFA.
[34]
The High Court, Gauteng Local Division, Johannesburg (Siwendu J),
adjudicated the dispute. The Court recorded that after the
decision
of this court in
Mostert
NO v Registrar of Pension Funds and Others
,
[9]
the Fund changed its position and now asserted that it was no longer
basing its challenge on the PAJA, but that the application
should be
viewed as a legality review.
[35]
The court below, after referring to case law, held that the making of
regulation 35(4) was administrative action in terms of
the PAJA. In
relation to the delay in bringing the application Siwendu J took into
account that on the Fund’s own version
of events it became
aware of the challenge to the validity of the regulation 5 years
before it launched the application. The court
went on to consider
whether it should extend the period in terms of s 9 of the PAJA. The
court, in favour of the Fund, took into
account that it launched the
application within 180 days of the Registrar’s rejection of its
valuation report. The court
considered the importance of the issue
and of a decision in relation thereto. The court held that it was in
the interest of justice
that the time be extended. Thus, condonation
was granted.
[36] In respect of the merits the court had regard to s
15B(4)
(a)
of the PFA and the board’s discretion in terms
thereof. It dealt with the contention on behalf of the Fund that the
Minister
could not direct a contingency reserve account other than in
terms of the PFA. The court accepted the submission on behalf of the
Minister that there was nothing in the PFA that restricted the
meaning of ‘contingency reserve account’ and the
Minister’s
power to promulgate the regulation and directing, in
terms thereof, the creation of a specific contingency reserve
account. The
court went on to hold as follows:
‘
Where
a former member cannot be traced but the calculation and allocation
has been apportioned to that member or former member,
a legal
obligation to meet the allocation will have been created. The
peremptory provision of the regulation pertains to instances
where
the board in its discretion has determined the allocation of the
enhancement. Its discretion to determine the apportionment
and
allocate the amount due remains intact. In my view, the regulation
does no more than entrench a legal position germinating
from an
antecedent decision by the board. The board decides the participation
in the apportionment. I find
that
the
board's powers are not usurped as complained
.’
[37]
As stated above, the application was dismissed without any order
being made as to costs. It is against the dismissal of the
application and the conclusions on which it was based that the
present appeal is directed.
[38]
Before us, counsel for the respective pension funds in each of the
three appeals aligned with each other and made common cause
in their
quest to have the regulation set aside or declared
ultra
vires
the powers of
the Minister. Counsel for the FSCA and the Minister, likewise,
supported each other in resisting the application
brought by each of
the three pension funds. During oral argument before us it was
pointed out to counsel representing the FSCA
and the Minister that,
in this case, the high court, in considering whether to overlook the
delay, took into account, inter alia,
the importance of the issue,
including the nature and consequence of the impugned regulation, and
had concluded that it was in
the interests of justice to condone the
delay; and there was no cross-appeal in relation thereto, by either
of them. It was pointed
out that it would be most peculiar to decide
the merits in one case and not in the other two, because condonation
was not warranted,
despite the fact that a finding in the one case
would determine the legal position in relation to all three.
[39]
After conferring, counsel on behalf of the FSCA and the Minister
informed this court that delay should no longer be considered
an
issue between the disputants and that the matter should be decided on
the merits in all three matters. It will be recalled that
the FSA had
always adopted a neutral stance on the question of delay.
[40]
In my view the concession was rightly made. The court below took into
account all the relevant factors when it exercised its
discretion in
favour of the pension fund.
[10]
I turn, now, to address the merits.
[41]
As a starting point, it must be recognised that the surplus
legislation was a milestone in pension law. Before it came into
operation, as pointed out by the FSCA, the subject that exercised the
mind of many pension lawyers and administrators was the following:
Who owned the surplus in a pension fund at any given time? The debate
around this question endured for a long time before the decision
of
this court in
Tek
Corporation Provident Fund and Others v Lorentz
.
[11]
A core conclusion in that case was the following:
‘
Once a
surplus arises it is ipso facto an integral component of the
fund
.’
[12]
This
court in
Tek
acknowledged that the legislature was best placed to deal with the
manner in which surpluses should be apportioned.
[13]
At that stage there had already been a consultation process
concerning pension fund surpluses, involving Government, Business and
Labour. That process culminated in the surplus legislation.
[42]
The surplus legislation is remedial in nature in that it was designed
to redress past abuses of surpluses by a number of employers,
but its
other purpose was also to ensure fairness in the distribution of a
fund’s surplus on an ongoing basis. The surplus
legislation put
paid to any notion that the employer owned a surplus in a fund. The
relevant parts of the PFA against which the
impugned regulation has
to be viewed are set out hereafter.
[43] In s 1 of the PFA, as it stood at the time that the
regulation in question came into being, ‘actuarial surplus’
was defined as follows:
‘“
actuarial
surplus”, in relation to a fund which is—
(a)
subject to
actuarial valuation, means
the
difference between
—
(i) the value that the valuator
has placed on the assets of the fund less any credit balances in the
member and employer surplus
accounts; and
(ii) the
value that the valuator has placed on the liabilities of the fund in
respect of pensionable service accrued by members
prior to the
valuation date
together
with the value of those contingency reserve accounts which are
established or which the board deems prudent to establish
on the
advice of the valuator
…’
(Emphasis
added).
[44] Presently, the definition of ‘actuarial
surplus’ reads as follows:
‘“
Actuarial
surplus”, in relation to a fund which is—
(a)
subject to
actuarial valuation, means
the
difference between
—
(i) the value, calculated in
accordance with the prescribed basis, if any, that the valuator has
placed on the assets of the fund
less any credit balances in the
member and employer surplus accounts; and
(ii) the
value that the valuator has placed on the liabilities of the fund in
respect of pensionable service accrued by members
prior to the
valuation date
plus
the amounts standing to the credit of those contingency reserve
accounts which are established or which the board deems prudent
to
establish on the advice of the valuator, calculated in accordance
with the prescribed basis, if any.
’
(Emphasis
added).
[45] The definition of contingency reserve account at
the time of the promulgation of the regulation in question read as
follows:
‘“
Contingency
reserve account”, in relation to a fund, means an account of
the fund to which shall be credited or debited such
amounts as
the
board
shall determine, on the advice of the valuator where the fund is not
exempt from actuarial valuations, in order to provide for
explicit
contingencies…’
Section 1
of the
Pension Funds Amendment Act 11 of 2007
amended the definition of ‘contingency reserve account’
by adding words after ‘… an account of the fund’
as it appears in the definition immediately above. The following are
the words that were added:
‘…
which
has been amended in accordance with the requirements of the
Registrar, or which has not been disallowed by the Registrar…
’
That
amendment was part of a list of definitions and provisions that were
deemed to have come into operation on 7 December 2001,
in terms of
s
40B
, which caters for retrospectivity
.
It appears to relate to those
funds that were yet to obtain approval for their surplus
apportionment schemes. It does not apply
to the Fund. The Financial
Services Laws General Amendment Act 45 of 2013 brought about a
further change. Presently, the definition
of ‘contingency
reserve account’ in s 1 of the PFA reads as follows:
‘“
contingency
reserve account”, in relation to a fund, means an account
provided for in the rules of the fund, which has been
amended in
accordance with the requirements of the Registrar, or which has not
been disallowed by the Registrar, and to which shall
be credited or
debited such amounts as
the
board
shall determine, on the advice of the valuator where the fund is not
valuation exempt, in order to provide for a specific category
of
contingency.’
(Emphasis
added).
[46]
Because there are references to ‘valuators’ and
‘valuations’ and actuaries in the definitions referred
to
above and in the applicable provisions of the PFA, it is necessary,
first, to have regard to the definition of ‘valuator’
in
s 1 of the PFA.
Presently
‘valuator’ means an ‘actuary who, in the opinion of
the Registrar, has sufficient actuarial knowledge
to perform the
duties required of a valuator in terms of this Act’.
[14]
Second, I deal with the definition of ‘actuary’.
Presently, ‘actuary’ is defined as ‘a natural
person
admitted as a fellow member of the Actuarial Society of South
Africa or any other institution approved by the Registrar...’
[15]
Third, it is necessary to appreciate that actuaries are experts in
statistics and are used to assess risks and calculate insurance
premiums, and are routinely employed in the field of pensions, as the
repeated references to actuarial valuations and actuarial
surplus in
the PFA demonstrate.
[16]
Lastly, ‘surplus apportionment date’, as defined in s 1
of the PFA, ‘means the first statutory actuarial valuation
date
following the commencement date’.
[47] As can be seen from the definitions set out above,
a pension fund board features prominently in relation to an actuarial
surplus
and a contingency reserve account. The status and
responsibility of a board in relation to a pension fund can be
gleaned from the
object of a board set out in s 7C(1) of the PFA:
‘
The
object of a board shall be to direct, control and oversee the
operations of a fund in accordance with applicable laws and the
rules
of the fund’.
In
pursuing that object it is required to act in the best interests of
members and to act with ‘due care, diligence and in
good
faith’.
[17]
[48] As explained earlier, the surplus legislation
included ss 15A to 15K. In most of those ss of the PFA the board of a
pension
fund itself features prominently. Section 15A(1), in line
with the dictum from
Tek
cited above, reads as follows:
‘
All
actuarial surplus in the fund belong to the fund.
’
[49]
Section 15B(1) deals with the apportionment of an existing surplus
and provides that the board of every fund that commenced
prior to
March 2002, must submit to the Registrar a proposed apportionment of
an actuarial surplus. This provision was fundamental
to the new
pension surplus regime introduced by the surplus legislation. In
proposing the scheme, a board had to provide details
of any surplus
historically improperly utilised by an employer who participated in
the fund at the time of the improper utilisation.
[50]
‘Statutory actuarial valuation’, in relation to a pension
fund, means ‘an investigation by a valuator contemplated
in s
16’. That section provides for an investigation by a fund, once
at least every three years, into its financial condition
and for a
report in relation thereto by a valuator at the instance of its
board. The report is to be lodged with the Registrar.
[51]
Section 15B also sets the rules of general application for
all
apportionments, in favour of members, former members and employers.
Section 15B(2) provides that a scheme may the involve improvement
of
benefits to existing members, increases to benefits or transfer
values in respect of former members, the crediting of an amount
to a
member’s surplus account, the crediting of an amount to an
employer’s surplus account or any two of the aforesaid.
In
terms of s 15B(3) a board must appoint someone to represent the
interests of former members and such person must then be of
assistance to the board in identifying former members, communicating
proposals to them and to the funds to which they might have
transferred, communicating proposals from former members to the board
and collating any objections by former members to the scheme.
The
person appointed to represent former members is also required to
report in writing to the board, inter alia, on the adequacy
of the
steps taken to involve former members.
[52] Section 15B(4), which, for present purposes, has to
be read with the material parts of s 15B(5), provides:
‘
The
board shall determine
who may participate in the apportionment of actuarial surplus, and
shall include in such apportionment existing members and any
former
members who left the fund in the period from 1 January 1980 to the
surplus apportionment date: Provided that—
(a)
the board
may exclude
from participation former members in respect of whom the board
satisfies the Registrar that insufficient records are available
to
enable the additional benefits that may be due to such former members
to be calculated, after the board has taken reasonable
steps—
(i) to obtain such records from
the administrator;
(ii) to construct such records
from the records of the—
(aa)
employer;
(bb)
any fund to
which former members transferred; or
(cc)
a trade union
or staff association active in the workplace during this period; or
(iii) if the steps in
subparagraph (i) and (ii) do not yield sufficient information, to
obtain such records from potential claimants
themselves following an
advertisement—
(aa)
on a national
basis and in the area where the former members used to work; or
(bb)
on a more
limited basis as approved by the Registrar if representations by the
fund
satisfy the Registrar that
limited advertisement will be adequate,
inviting the former members to
come forward with evidence to substantiate their claim, after which
advertisement the board should
wait at least six months but no longer
than nine months before excluding any former members because of a
lack of sufficient information
to enable the calculations to be
performed;
(b)
rather than
excluding former members whose individual benefits cannot be
determined,
the
board may set aside a
portion
of the actuarial surplus in a contingency reserve account explicitly
established to satisfy claims of former members in terms of
subsection (5)
(e)
.’
(Emphasis added).
As
can be seen, this subsection makes
a
board
the
determinant of which categories of persons shall participate in the
surplus apportionment. The board is obliged to include for
participation, those who departed the fund in the period 1 January
1980 up to the surplus apportionment date, including untraced
members. It may exclude unquantifiable members. Section 15B(4)
(b)
does, however,
provide the option of establishing a contingency reserve account in
order to satisfy the potential claims of unquantifiable
members in
terms of the proviso in s 15B(5
)(e)
.
[53] Sections 15B(5)
(a)
and
(b)
read as
follows:
‘
(
5)
The
board shall apportion the actuarial surplus
between the various classes of stakeholders whom
the
board has determined
shall participate in the apportionment in terms of subsection (4),
following which such portion as is due to the employer shall
be
credited to the employer surplus account: Provided that—
(a)
the actuarial
surplus to be apportioned shall be increased by an amount of
actuarial surplus utilised improperly by the employer
prior to the
surplus apportionment date as determined in terms of subsection (6);
(b)
former
members shall have the benefits previously paid to them, or the
amounts previously transferred on their behalf, increased
to the
minimum benefit determined in terms of s 14B(2) or 14B(6) as at the
date when they left the fund, with such increase adjusted
to the
surplus apportionment date with fund return over the corresponding
period…’
(Emphasis added).
The remainder of this subsection deals with an
adjustment for pensioners and for a
proportionate
downwards revision in the event that the actuarial surplus to be
apportioned is insufficient to permit such increases.
[54] Section 15B(5)
(e),
which is crucial in the
determination of the appeal, reads thus:
‘
(5)
The
board shall apportion the actuarial surplus
between the various classes of stakeholders
whom
the board has determined shall participate in the apportionment in
terms of subsection (4)
,
following which such portion as is due to the employer shall be
credited to the employer surplus account: Provided that—
…
(e)
the board
shall determine how, in the case of existing members and former
members, the allocated portion of actuarial surplus shall
be applied
for their benefit
,
including the crediting of any portion to the members’ surplus
accounts or to the members’ individual accounts, as
the case
may be: Provided further that the board may allocate a portion of the
actuarial surplus to be used for former members
to a contingency
reserve account which will be used to satisfy the claims of former
members—
(i) who have been identified in
subsection 4
(a)
but who cannot be traced; or
(ii) who did not substantiate
their claim during the nine-month period following the advertisement
in subsection (4)
(a)
(iii) but who do so after the end of the
period...’
(Emphasis
added)
[55]
The statutory provisions referred to in the preceding paragraphs,
including the definitions referred to earlier, show that
a board is
the
protagonist in directing and controlling the operations of a pension
fund. Of course, that is subject to such measures as the regulator,
the FSCA, might employ in terms of the PFA. It is a board’s
prerogative to determine how to apply a surplus apportionment
for the
benefit of former members, including those who have not yet been
traced. Section 15B(5)
(e)
has to be read with
the rest of the provisions of s15B. There is a cross reference to s
15B(4). These sections, read and understood
contextually, make it
clear that a board determines how a surplus is to be allocated and
then decides how it is to be applied for
the benefit of various
categories of beneficiaries, including the establishment of
contingency reserve accounts. Its discretion
is not limited by s
15B(5)
(e)
to the establishment of such an account only in relation to
unquantifiable members. The submissions to the contrary advanced by
the FSCA and the Minister, and the finding by the court below that
that a board is so limited, are erroneous.
[18]
[56]
It was correctly submitted before us on behalf of all the funds in
the three related appeals that an actuarial surplus in a
fund is an
actuarial calculation of a fund’s assets over its liabilities
and need not be represented by an actual cash fund
in the calculated
amount. When a surplus is apportioned the fund assumes liabilities to
its members. It vests in members a claim
against the fund. That is
how s 15A should be understood, where it speaks of rights acquired by
members, former members and employers
when a surplus is apportioned.
[57]
At this stage it is necessary to turn to consider, alongside the
statutory provisions referred to above, the provisions of
regulation
35(4). Before considering the scheme of regulation 35, regard should
be had to the source of Minister’s power
in terms of the PFA to
make regulations. It is located in s 36, the relevant parts of which
read as follows:
‘
(1)
The Minister may make regulations, not inconsistent with the
Provisions of this Act—
(a) in regard to all matters
which by this Act are required or permitted to be prescribed by
regulation…’
The
introductory part of that subsection is typical and is meant to keep
the regulation making within the parameters of the authorising
Act.
Put differently, the regulation is meant to be consonant with the
provisions of the authorising Act, the PFA
[58] More than seventeen years ago, on 22 April 2003,
the Minister, purporting to act in terms of s 36(1) of the PFA,
promulgated
regulation 35(4), which is at the centre of this appeal.
The full text of regulation 35 appears hereafter. Regulation 35, as
proclaimed
in the heading, purports to deal with ‘contingency
reserve funds’. It reads as follows:
‘
35
Establishment of Contingency Reserve Accounts—
(1) By virtue of the fact that—
(a)
the Act
vests powers
in boards of funds to establish contingency reserve accounts; and
(b)
the
establishment of contingency reserve accounts reduces the actuarial
surplus available for apportionment and increases the possibility
that actuarial surplus may be insufficient to enhance benefits
previously paid to former members to the level prescribed in terms
of
s 15B(5)
(b)
of the Act,
no fund may, with effect from
the date of commencement of this regulation, establish any
contingency reserve account under circumstances
where a reasonable
inference may be made that the establishment of the account is
contrary to the duties of the relevant board
under s 7C(2)
(b)
of the Act and motivated by bad faith.
(2) The establishment and
magnitude of any contingency reserve account by a fund—
(a)
must be
motivated by the valuator in the relevant report on the statutory
actuarial valuation; and
(b)
may, where
the Registrar is not satisfied with any such motivation, be rejected
by the Registrar.
(3) A fund must, on any such
rejection of the establishment or magnitude of the relevant
contingency reserve account, take such
steps in connection therewith
as the Registrar determines and sets out in writing to the relevant
fund.
(4) Where a
board is able to determine the enhancement due in respect of a
particular former member in terms of s 15B(5)
(b)
or
(c)
of
the Act, but is unable to trace that former member in order to make
payment,
the
board shall
put the corresponding enhancement into a contingency reserve account
specific for the purpose. Notwithstanding anything in the
rules of
the fund, moneys may not be released from such contingency reserve
accounts except as a result of payment to such former
members or as a
result of crediting the Guardian’s Fund or some other fund
established by law to include such amounts.’
(Emphasis
added).
[59]
Regulation 35 commences with the recognition that the power to create
contingency funds vests in a board. Yet, contradictorily,
it goes to
on dictate that the board ‘shall’ put funds into a
contingency reserve account.in order to meet claims from
as yet
untraced members; and that the funds may not be released except to
pay such claims or crediting the Guardian’s Fund
or some other
fund’. How can crediting the Guardian’s Fund or ‘some
other fund’ be consonant with the provisions
of the PFA?
Counsel for the Minister and the PFA were rightly constrained not to
seek to justify the envisaged potential transfer,
as it were, to the
Guardian’s Fund. In the Guardian’s Fund or some other
fund the monies that were destined for former
untraced members would
be lost to them and to the Fund. If it were to remain in the Fund and
remained unclaimed in perpetuity that
will have the effect of
sterilizing the monies from which past or present members could never
benefit. It will be recalled that
in terms of s 15A all actuarial
surpluses belong to a fund.
[60]
The Minister arrogated the power to deal with a surplus and to
establish contingency reserve funds, to the exclusion of the
board.
As demonstrated above those aspects are within a board’s
prerogative. In promulgating regulation 35(4) the Minister
acted
beyond the regulation making powers set by the PFA. The court below
erred in its interpretation of the relevant provisions
of the PFA,
especially in relation to s 15B(5)(
e)
.
That subsection is not time bound nor does it only relate to
unquantifiable former members, namely those for whom benefits cannot
be calculated. It references s 15B(4) and together they set out the
powers of a board in general terms. When a board exercises
a
discretion in allocating a surplus for the benefit of former members,
thereby creating a liability, it must concomitantly decide
how to
cater for claims that eventuate. The board’s decisions can be
interrogated by the regulator against the provisions
of the PFA, but
those decisions are within the remit of the board. Regulation35(4)
intrudes upon the board’s wide discretion
by compelling the
board to place the entire allocation in a contingency reserve account
and freezing it in perpetuity.
[61]
The Minister and the FSCA’s submissions in relation to the
meaning of ‘contingency reserve account’ in regulation
35(4) are without substance. The impugned regulation itself speaks of
a ‘contingency reserve fund’ but the Minister
and the
FSCA then sought to disown the concept and the description. In the
three related appeals the contingency relates to the
likelihood of
the claims materialising. It is in respect thereto that valuators
make assumptions. It is a regular occurrence in
the field of pensions
and in the insurance industry. The court below erred in its
interpretation of the relevant provisions of
the PFA and of the field
of operation of regulation 35(4) and the Minister’s regulation
making power.
[62]
During oral argument the court directed the parties to provide
post-hearing, written submissions on the possible effect of
setting
aside the impugned regulation. We received those submissions. In
essence the Minister and the FSCA submitted, with reference
to
Bengwenyama Minerals
and Others v Genorah Resources (Pty) Ltd and Others
[19]
that setting aside the regulation, without suspending the order of
invalidity, to provide the Minister with an opportunity to correct
it, would result in chaos and encourage maladministration. It was
submitted that pension funds would be incentivised to be lax
in
tracing former members and that boards would be free to do as they
please and build up unmanageable deficits.
[63]
A pension fund in which no contingency reserve account has been
established, but where other arrangements have been made to
accommodate potential claims, will occasion no loss of regulatory
oversight. In terms of the definition of ‘contingency reserve
account’, which appears above, credits or debits can only be
entered in relation thereto on the advice of a valuator. The
board
will reflect on the advice it receives from a valuator. In the
periodic reports submitted to the FSCA the advice and the
provision
made for claims that might eventuate. or lack of it, can be
interrogated and either approved, or rejected. Furthermore,
funds are
obliged, unless exempted, to deposit annual financial statements with
the FSCA. The FSCA can utilise s 15K to refer matters
to a tribunal
to make certain determinations. When concerns about the financial
soundness of a fund arise, s 18 of the PFA is at
its disposal. There
are a number of tools at the disposal of the FSCA to ensure
compliance with the provisions of the PFA and to
secure the financial
soundness of a fund.
[64]
The point made on behalf of the Minister and the FSCA that the
setting aside of the regulation will lead to laxity on the part
of
boards in that they will be incentivised to expend very little or no
effort to trace former members, is without substance. The
FSCA can
always question the adequacy of steps taken and issue directions in
relation thereto. In addition, the provisions of s
15B(3), referred
to above, come into play. It will be recalled that in terms thereof
the person appointed to represent former members
is required to
report to the board about the adequacy of steps taken to trace former
members.
[65]
From exchanges between the Fund and the board and from parts of the
affidavits referred to above, the complaint that the Fund’s
challenge to the validity of the regulation has changed and gone
beyond the issues raised in the pleadings is without merit.
[66]
Counsel on behalf of the funds in the three related appeals after
conferring, agreed that in the event of the appeal and the
cross
appeal being decided in their favour there should not be any order as
to costs.
[67] For all the reasons set out above it follows that
the appeal must be upheld. The following order is made:
1 The appeal is upheld with no order as to costs.
2 The order of the court below is set aside and
substituted as follows:
‘
Regulation 35(4) of the
Pension Fund regulations is declared invalid and unenforceable in
that it exceeds the Minister’s powers
under the provisions of
the
Pension Funds Act 24 of 1956
.’
________________________
M S NAVSA
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: CDA Loxton SC, with A Milovanovic
Instructed
by: Bowman Gilfillan Inc, Johannesburg
McIntyre
& VD Post, Bloemfontein
For
First Respondent: A Cockrell SC, with N Mbelle
Instructed
by: Rooth & Wessels Inc, Pretoria
Pieter
Skein Attorneys, Bloemfontein
For
Third Respondent: NH Maenetje SC, with S Khumalo
Instructed
by: State Attorney, Johannesburg
State
Attorney, Bloemfontein
[1]
The
other two being
Vrystaatse
Munisipale Pensioenfonds v The Minister of Finance and Another
(Case no 1161/18) and
Hortors
Pension Fund v Financial Sector Conduct Authority and Another
(Case no 054/2020). The unreported judgment of the court below in
the first is cited as
Free
State Municipal Pension Fund v The Minister of Finance and Others
GP 06-06-2018 case no 67954/2015; the judgment of the court below in
the second matter is reported as
Hortors
Pension Fund v Financial Sector Conduct Authority and Another
[2019] ZAGPPHC 614.
[2]
This
particular appeal is against a decision of the Gauteng Division of
the High Court, Johannesburg (Siwendu J, sitting as court
of first
instance). The other two –
Vrystaatse
Munisipale Pensioenfonds
(ibid) and
Hortors
Pension Fund
(ibid) – are appeals against decisions also of the Gauteng
Division of the High Court, though both from the Provincial
Division
(Pretoria)(Wepener J, and Kollapen J, respectively sitting as the
courts of first instance).
[3]
See GN R98 in
GG
162 of 26-01-1962.
Regulation 35(4)
was inserted in an amendment to
the Regulations: see GN R558 in
GG
24780 of 22-04-2003.
[4]
See
GN 169 in
GG
41549 of 29-03-2018; and the Regulations published in GN R405 in
GG
41550 of 29-03-2018.
[5]
Established
in terms of s
2
of the FSBA.
[6]
See
s 57
of the FSRA.
[7]
Some
of these provisions were either amended or substituted in subsequent
legislation.
[8]
In
terms of
s 16
of the PFA triennial
reports are required to be lodged with the Registrar.
[9]
Mostert
NO v Registrar of Pension Funds and Others
[2017]
ZASCA 108; 2018 (2) SA 53 (SCA).
[10]
Those factors would have been relevant whether the regulation making
in the present case constituted administrative action or
not. Of
course, in relation to
s 9(1)
(b)
of the PAJA the period to be taken into account for as a baseline,
in the assessment of whether the delay should be excused,
is 180
days. See
Buffalo
City Metropolitan Municipality v Asla Construction (Pty) Ltd
[2019] ZACC 15
;
2019 (4) SA 331
para 19.
[11]
Tek
Corporation Provident Fund and Others v Lorentz
1999
(4) SA 884 (SCA).
[12]
Ibid at 895D-E.
[13]
Ibid at 895E-H.
[14]
Prior
to amendment by Act 45 of 2013, ’valuator’ was defined
as follows: ‘ valuator means an actuary or any
other person
who, in the opinion of the Registrar, has sufficient actuarial
knowledge to perform the duties required of a valuator
in terms of
this Act.’
[15]
Prior
to amendment by the
Financial Services Laws General Amendment Act 22
of 2008
: ‘“actuary” means any Fellow of the
Institute of Actuaries of England or of the Faculty of Actuaries in
Scotland
or of the Society of Actuaries of America or of any other
institute, faculty, society or chapter of actuaries approved by the
Minister…’ And prior to amendment by the Financial
Services Laws General amendment act 45 of 2013: ‘“actuary”
means a person admitted as a fellow member of the Actuarial Society
of South Africa or any other institution approved by the
Minister.’
[16]
See
also the definition of ‘actuary’ in the Oxford English
Dictionary (OED 3 ed, 2010):
‘
A
person who compiles and analyses statistics of mortality, accidents,
etc., and uses them to calculate insurance risks and premiums.’
[17]
Section 7C(2)
of the PFA.
[18]
See, further, para 60 (infra).
[19]
Bengwenyama
Minerals (Pty) Ltd and Others v Genorah Resources (Pty) Ltd and
Others
[2010] ZACC 26
;
2011
(4) SA 113
(CC) para 81-84.