/ 21 March 2003

Joburg’s R1,5bn pension hole

The City of Johannesburg Metropolitan Council will for the first time disclose a R1,5-billion unfunded pension liability when it tables its annual financial statements this month.

The liability stems from apartheid-era discriminatory conditions of service, with key portions of it cemented in 1994, towards the last days of Democratic Party rule.

Though previously noted, it is the first time that the debt has been actuarially quantified. It includes R800-million for post-retirement medical assistance that pays 60% of retired members’ medi-cal aid and that of their spouses till death, increasing at the rate of medi-cal inflation. Medical inflation is consistently higher than overall inflation and currently stands at 25%.

The liability also includes, at R50-million each, payment for accumulated annual and sick leave. Employees with long service have been allowed to accumulate leave to a point where, in some cases, employees have a year’s worth of annual leave and up to 1 000 days of sick leave. In the event of departure, the pay-outs for these leave days is at current value, even though a significant portion might have accrued at a lower salary.

The amount of R1,5-billion does not include R400-million that covers payment for 13th cheques to retired employees. Whether the pensioners are entitled to 13th cheques for life is currently being contested in court.

On the March 20 financial statements, the R400-million is being accounted for as part of R1,1-billion in contingent liabilities.

Roland Hunter, executive director for finance for the City of Johannesburg, says disclosing this liability is part of a clean-up of the city’s finances. ‘Unfortunately, in the process of cleaning up you have to dig up the past and bring up such things,” he says.

The city’s financial statements have, in recent years, carried a disclaimer from the auditor general. This means the auditor general could not express an opinion on the accuracy and integrity of the records.

Hunter says he aims to receive unqualified support from the auditor general by the end of the 2005 financial year.

Makgane Thobejane, director in the strategic support unit of the city manager’s office, said the city currently contributes to 11 pension funds based on pre-1994 racially segregated municipalities.

The biggest of these funds are the Johannesburg Metropolitan Pension Fund, which caters for white members, and the City of Johannesburg Pension Fund, catering for blacks. Together, they have 12 000 currently active members and 10 000 retirees. The white members’ fund currently enjoys employers’ contributions of 20% of employees’ salaries while the black members’ fund receives 16%. Another fund, called the Benoni Fund, enjoys a 22% employers’ contribution.

Now the council would like to move all employees to a single fund, eJoburg Retirement Fund, with an employer contribution of 15%. The eJoburg Retirement Fund was established for employees who previously did not belong to any fund and enjoyed only a ‘gratuity payment” upon completion of service. These are mainly lowly paid black workers.

Earlier attempts to bring all 27 000 employees into the fund were blocked by litigation from the existing funds. The city now wants to introduce equitable contributions and extricate itself from what it deems are ‘inequitable, unaffordable and unsustainable” benefits. The benefits also include bonus years of service. For every five years fund members have been employed by the council they receive a bonus year, so that 10 years’ service accumulates 12 years’ worth of benefits.

For senior employees, every year of service attracted a bonus year, effectively doubling their period of service for benefit accumulation. The problem with these benefits is not so much their size, but the fact that they were not provided for at the time of being introduced.

Chris Todd, a director at Bowman Gilfillan attorneys and a lawyer for the council, notes that an examination of accounting records shows ‘a complete disregard and naivety about accounting practices, because what you are doing is visiting that liability on your descendants”.

The Generally Accepted Accounting Practices now require that any amount that is due to be paid in the future must be provided for in the current period and reflected as a liability, hence the need to state the amount.

The old council simply paid all these benefits from operating expenses. In the late 1980s actuaries advised the funds of the burdensome nature of their proposed benefits. The funds, whose trustees were also senior council employees and therefore beneficiaries, shifted the liability to the council.

In one instance, to ensure the continued, indefinite payment of bonus years and the 13th cheque benefit, the funds changed a rule that required them to pay out and claim from the council, so that they would pay out only if the council provided the funds up front.

In 1994 the funds took steps to ensure that future generations of councils continued to pay the council debt. A proposal was put forward to mortgage six council properties as security, but then councillor C Bass noted: ‘Mortgaging property in favour of the pension funds at this stage would create incorrect perceptions.”

At the same meeting, the late councillor Peter Asherton told the council that its payment for certain contributions was unsecured and that ‘the situation should have been remedied long ago”.

The council then entered into an agreement with the Johannesburg Metropolitan Pension Fund and City of Johannesburg Pension Fund ‘… in which the council binds itself to pay to those funds the cost fulfilling the obligation to pay the bonus service and pensioners [13th] cheques …”.

In the third week of March Ian Davidson, chairperson of the management committee at the time and now a Democratic Alliance MP, cited intricacy of detail and lapsed time as reasons for not giving comment on the matter.

Tim Sergeant, a member of the DA in Gauteng, told the Mail & Guardian: ‘We sympathise with the council for the situation they are in but do not agree with their hand-ling of the matter — which has been unilateral.”

He put the decision to bind the council down to uncertainty. ‘The councillors wanted to make sure that whatever happened to the city, they would continue to receive their benefits.”

Sergeant went on to question whether the decision should have been made perpetually binding. This is also one of the points the council will seek to have tested in court.

Thobejane emphasised the moral dimension of the matter, saying: ‘The council will not withdraw benefits in a manner that is irresponsible and inhumane.”

He noted as an example a resolution taken by the South African Local Government Association (Salga) last week. The resolution states that the council will continue to subsidise 60% of pensioners’ medical aid but this will be capped at R1 639 in the first year of implementation and will increase by the percentage of salary increase thereafter.

Salga resolved to grant 10-year notice to those still working to arrange post-retirement medical aid. Todd points out that this is far from adoption and has still to go through rigorous consultation, but agreed that it represents the kind of decreasing liability over time the council would like to achieve.

Thobejane expressed confidence that the matter would be resolved. He cited four issues as stumbling blocks that have been attended to.

  • The first is the Section 12 notice that dissolved old councils to form new ones. The notice required collective agreement on altering conditions of service. The requirement has now been amended.
  • The second is the Rationalisation of Local Government Act, which says that after changes to conditions of service have been effected, employees must not be worse off. The council is confident of obtaining an amendment from the legislature in April.
  • There is also a compliance order that said the matter had to be negotiated at national level. Thobejane says the South African Local Government Association has now changed its stance on this and will allow it to be taken up with individual councils.
  • Finally, the six weeks’ notice period the city sought to give funds to wind up was found to be unreasonable.
  • Silas Letsema, general secretary of the South African Municipal Workers’ Union, said his union required more time on the matter. The council hopes to enter into negotiations with unions by the end of April and complete integration by the end of the year.