There is dissension in the ranks regarding pension fund surplus distribution, reports Michael Metelits
The retirement industry, like apparently every other industry on Earth from commodities to fast food, runs on investments. Large pension funds are middlemen, selling the average retirement policyholder peace of mind and buying the cash to pay for it with huge investment portfolios. The disposition of these investment funds is a matter of some contention.
The premiums we all pay the Sanlams and Old Mutuals of this world go toward investing in shares and bonds to make sure the company has enough money to pay up to everyone who will retire in a given year.
They pay actuaries much more money than these stereotypically unimaginative souls can spend to figure out how much the firm will owe in, say, 2009. Then they pay hotshot traders to take your premiums and invest it to produce that amount of money. Presumably all concerned take a cut for themselves in the process. It is, as they say, nice work.
Pension investment funds can generate surpluses if the managers are smart and/or lucky. Because the techniques used to predict how much money a fund will need at a given time are statistical guesses, occasionally funds will have more money than necessary to pay everyone retiring at a certain point. People leave surpluses behind when they drop out of a pension fund by changing jobs, for example.
What funds can do with those surpluses is currently at issue. Should the money be given to the members, used by the firms, or kept in the fund? In one type of retirement plan – defined contribution funds – surpluses must be used for retiring members’ benefit, and will be available when they purchase their annuities.
That’s because these funds operate like a savings account. Since you put the money in, it’s basically yours, no questions asked. Employee and employer contribute a specified amount of salary, and at retirement the accumulated loot is used to purchase an investment package.
Defined benefit funds are more complex. They operate on a fixed formula and instead of gathering a specified amount of money each year, promise to pay out a set amount on retirement. The amount is a factor of length of service, a “pension rate” of 2%, for example, and the amount of salary at retirement. These types of funds are more likely to generate surpluses, and the resultant question of who gets to use the surplus.
Given the recent market crunch, surplus distribution is a somewhat academic question, but in principle some guidelines would benefit everyone. A recent circular from the Registrar of Pensions, PF 99, mandates no refunds of surplus pension money, whereas a contested Bill in Parliament sponsored by the Financial Services Board provides a mechanism for paying out surpluses.
The Congress of South African Trade Unions (Cosatu) introduced amendments to this legislation last year, which would grant beneficiaries easier access to its surpluses than firms or funds receive. Cosatu sources argue that pension benefits and the surpluses they create are “deferred wages” and that access should be limited to beneficiaries.
The conditions for company access to these surpluses under the Bill include membership approval and an obligation to make good on deficits up to seven years. Of course, if things go badly for the firm, they won’t be able to fund those deficits in the pension funds, but Niel Krige, chair of Momentum Employee Benefits, supports the idea nonetheless.
“Some of these firms’ funds are in massive surplus, and the interest on that surplus can fund retirement benefits well into the future,” according to Krige, and it makes sense, in his view, to let firms have access to the extra money. Furthermore, the responsibility of a company to make good on any shortfall in the fund strengthens Krige’s opinion about company access to surpluses.
Union-affiliated members of Parliament have expressed opposition to surplus pay-outs. They would prefer that surpluses remain in the fund, particularly given recent turbulent markets, which increase the funds’ needs for cash. The argument is that surpluses can help offset recent market losses, and can be used as a reserve in lean times. At best, they would suggest membership access, rather than company access to the surplus.
Cosatu activists close to the issue say the access question is clear: the individuals who put the money into the fund should have access to its surplus, regardless of arguments like Krige’s that firms could use those funds productively.
Cosatu has expressed similar views on demutualisation, which presents nearly identical issues. While making capital available to the firm, access to pension surpluses will decrease worker control over their pensions and thus their future, and allow firms to take potentially risky investment positions with the surplus funds. Such may allow the firm to use the capital productively, but it will be potentially at the expense of the members who built the fund in the first place.
The issue is one of control and accountability, as well as the productive use of surplus capital. Krige and other proponents of surplus pay-outs argue that the firms take risks in defined benefit funds, and, therefore, should have access to surplus capital to use it productively.
Opponents of surplus pay-outs respond conservatively that market vagaries support keeping surpluses to offset future difficulties. They also say that workers and policyholders who contribute to these surpluses have the right to benefit from them, and control their investment.