On 2 November 2020, the Supreme Court of Appeal (SCA) handed down its judgment in three related appeals that were all heard on 21 August 2020. The Southern Sun Group Retirement Fund (Fund), the Hortors Pension Fund and the Vrystaatse Munisipale Pensioenfonds all lodged appeals to the SCA against the decision of the Gauteng Division of the High Court relating to the distribution of actuarial surpluses.
The Fund had previously approached the High Court for an order
declaring Regulation 35(4) under the Pension Funds Act
(PFA) invalid, on the basis that the Regulation
exceeded the Minster of Finance's (Minister)
powers under the PFA. The High Court had dismissed that
application, and therefore the Fund (and the other two funds)
appealed to the SCA.
The Fund sought to release a portion of the funds held in respect of unclaimed surplus benefits from its contingency reserve account as the beneficiaries were unlikely to ever come forward to claim their benefits, and to instead, distribute those funds to former members who had been traced. The Financial Sector Conduct Authority (FSCA) rejected the Fund's actuarial valuation report which set out the above-mentioned proposed release.
The FSCA argued that the release of the surplus would be in contravention of Regulation 35(4) and that the PFA and the Regulations did not give the Fund discretion to hold a lesser liability even if the Fund believed it would be unlikely that untraced members would ever come forward to claim their surplus benefit.
In essence, the issue before the SCA was whether Regulation 35(4), was made by the Minister validly, or was beyond his powers. The regulation says that a board of a retirement fund is obliged to allocate calculable enhancements due to untraceable former members into a contingency reserve account, and that such amounts cannot be released except as payment to such former members or to the Guardian's Fund or some other fund.
The SCA found in favour of the Fund and upheld the appeal. The SCA declared Regulation 35(4) invalid with effect from 2 November 2020. The SCA found that ‘[R]egulation 35(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' which will have the effect of ‘sterilizing the monies from which past or present members could never benefit'.
Implications of the judgment on funds
The judgment is a substantial step in the right direction and goes a long way to resolving the long standing problem of unclaimed benefits being locked up in funds where there is no realistic possibility of them ever being claimed. Funds will no longer be required to ‘freeze' unclaimed surplus benefits in reserve accounts for beneficiaries who are unlikely to ever come forward and claim the benefits. Instead, funds could, if they so wish, release the assets and pay former members that have been traced. Thus, funds do not have to hold the full value of the unclaimed benefits as a reserve.
It is worth noting, however, that what funds may do with unclaimed benefits post promulgation of the Conduct of Financial Institutions Act (CoFI), is yet to be seen. The second draft CoFII Bill was published on 29 September 2020 for public comment by 30 October 2020. The CoFi Bill contains significant proposed changes to the PFA, including inserting section 37A(5) to the PFA (to be renamed the ‘Retirement Funds Act'). The proposed new section reads 'unclaimed benefits may not be reduced or utilised for any other purpose by a fund'.
An unclaimed benefit is like any other benefit and could include unclaimed surplus benefits. The ‘other purpose' referred to in the proposed section 37A(5) is not clear, however, it could be argued that if section 37A(5) comes into effect (in its current form), that funds will not be entitled to utilise unclaimed surplus benefits for the benefit of former members who have been traced, irrespective of the fact that a fund may be of the view that it would be highly unlikely that a beneficiary will come forward to claim the benefit.
It appears that the victory may be short lived if CoFI comes into effect (in its current form) next year (as is currently planned).
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