South Africa: The Transfer Of A Business As A Going Concern: The Effect On Retirement Benefits

Last Updated: 14 January 2000

January 2000

What pension benefits must be transferred with the employees?

This was the issue addressed by the Pension Fund Adjudicator in the complaint between Younghusband and others ("the complainant") and Decca Contractors (South Africa) Pension Fund and its Trustees ("the respondent").

Litton Industries ("LMS") purchased the assets and business of Racal Electronics ("Racal"), previously known as Decca, as a going concern. Racal was the only participating employer in the respondent pension fund.

In terms of the Labour Relations Act ("LRA"), all the rights and obligations between Racal and the employees employed (including the complainant) in the business sold, constituting approximately 60% of the active members of the respondent fund, continued in force as if there were rights and obligations between LMS and the employees.

LMS did not have its own pension fund and wished to establish its own pension arrangements for the transferring members. Accordingly, it retained actuaries, to do so and an umbrella fund, of which LMS became a participating employer was established.

The complaint related to a difference of opinion which emerged between Racal and LMS as to the proper basis for the calculation of the amount transferable in respect of the transferring members. Racal too the view that the amount in respect of each member was the actuarial liability (effectively the value of each member's investment) in respect of that member, while LMS took the view that a proportionate share of the surplus, including the investment reserve, was also transferable.

The pension fund adjudicator observed that the Pension Funds Act recognises that pension rights amount to deferred pay, rather than gratuities bestowed within the benevolence of the employer, and that members are entitled to have their investment values preserved where their employment relationship modified as a consequence of corporate restructuring over which they have no control.

He also found that no amalgamation of any business carried on by a fund, or the transfer of any business of any business from any person to a fund shall have any legal force or effect unless the Registrar was satisfied with various aspects of the scheme affecting the proposed amalgamation or transfer.

Racal took the view that there was no transfer of the business of the fund as there was no transfer by the Fund of part or all of its business, in other words, of assets and liabilities: benefits had become due and payable to the members and the Fund would simply pay them. The transaction was likened to a retrenchment as it envisaged an early withdrawal by the members of their benefits under the Fund.

The Adjudicator noted that the expression "transfer of business" is not defined in the Act, but that in his view the transfer of 60% of the members of the respondent fund would constitute a transfer of business as envisaged by the Act. Accordingly, the Adjudicator concluded that the transfer of the complainants out of the respondent pension fund, as part of the purchase and sale transaction between LMS and Racal, involved a transfer of business from a registered fund to another person and that the respondent was therefore obliged to comply with the provisions of the Act.

The Adjudicator also drew trustees' attention to the pronouncement in a recent High Court case where it was found that the "reasonable benefit expectation of members' was above and beyond the defined benefits".

In the Younghusband case, the Adjudicator ruled that he could not prescribe to the trustees how to exercise their discretion concerning the transfer and the transfer values as he found on the facts before him that the trustees had not exercised this discretion. Accordingly, the arguments concerning the source and distribution of the surplus were found to be premature.

It was mentioned that where there is no rule which grants the trustees the power to effect a transfer of business in a manner which is reasonable and equitable, then the Act requires the trustees to amend the Rules to eliminate the inconsistency.

The Adjudicator ordered that the trustees of the respondent be directed to take all steps, including any necessary rule amendments, to comply fully with the provisions of the Act. We are informed that the matter is being taken on appeal.

What pension benefits must be provided to employees who have been transferred?

The recent Labour Appeal Court case of Foodgro v Keil (incidentally, a case in which Webber Wentzel Bowens acted for the successful respondent employee) has confirmed the effect of Section 197 of the Labour Relations Act of 1995, that in circumstances where a business or part thereof is transferred as a going concern, all employees are automatically transferred across from the "old" employer to the "new" employer on the same terms and conditions of employment, unless otherwise agreed. Thus, if membership of a retirement benefit fund is provided to the employees of the "old" employer as part of their terms and conditions of employment then, given section 197 and unless otherwise agreed, the "new" employer will be obliged to provide membership of a retirement benefit fund to the employees who are transferred across.

An important question which arises for consideration is whether or not this means that the "new" employer must provide these employees with exactly the same benefits as they enjoyed under the retirement benefit fund which they belonged to whilst employed by the "old" employer? This issue has not been entertained by our courts to date and accordingly we do not have the benefit legal precedent to guide us on this issue. The Pension Funds Act ("the Act") does not deal with the matter directly either.

One way of providing identical benefits to the employees in question is for those employees to remain members of the "old" employer's retirement fund, with the "new" employer being admitted to participate in the fund as an employer. This is not, however, always an option open to the "new" employer who may for various reasons transfer the employees into a new fund to be established or into one of the "new" employer's pre-existing funds.

If the "new" employer chooses this latter option, is the "new" employer obliged to provide exactly the same retirement benefits enjoyed by the employees under their previous retirement fund? The provisions of the Act relating to the "transfer" or "amalgamation" of the business of a registered fund shed some light on this problem. In short, these provisions provide that where the assets of one fund are to be transferred to another fund, certain requirements have to be complied with. One of these requirements is that the scheme for the proposed transaction must be "reasonable and equitable and must accord full recognition to the rights and reasonable benefit expectations of the member of the fund as well as to any additional benefits, the payment of which has become established price".

The ambit of the transfer and amalgamation provisions would seem to be very wide. Thus the Registrar of pension funds has apparently adopted the view that the amalgamation and transfer provisions of the Act apply to all transfers out of a fund except voluntary withdrawals of individuals. This would certainly seem to include the situation where employees are transferred from one retirement fund to another, in consequence of the transfer of the business as a going concern.

The practical difficulties of providing identical retirement fund benefits are apparent if one considers the fact that the benefits provided by a retirement fund are largely dependent on the matter in which the fund has been administered and the returns on the investments that have been made. These issues are not determined by the employer but by the Trustees of the fund in question.

For further information, please contact us.


The material contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage, which may arise from reliance on information contained in this article.

© Copyright Webber Wentzel Bowens 1999. All Rights reserved.

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