In a few weeks previous employees of Old Mutual may learn the fate of their portion of the pension fund surplus. This will determine whether qualifying former members of the Old Mutual company pension fund will receive a joint payout of R82-million or just R2-million. Former members of other pension funds are waiting for similar decisions, possibly with even greater financial implications, although when they will get clarity remains unclear.
In September last year, qualifying ex-employees of Old Mutual received letters informing them of the amount of money they would receive based on the company’s actuarial calculations of the amount of surplus funds that had been improperly used since 1980, based on a guidance note from the Financial Services Board (FSB).
In November, the Sanlam Pension Fund had won a court challenge to the FSB ruling. In terms of the court’s decision, improper use of pension fund surpluses can only be backdated to 2001 when the surplus legislation was passed. Old Mutual then sent out a letter to members in December informing them that it was “temporarily suspending” the payment until the issue had been resolved, and that the amount due to members may be reduced.
In the letter, Old Mutual stated that it would await the results of the FSB’s appeal process, which could take a further six months. However, in response to a Mail & Guardian query, Old Mutual says that it will be making a decision within the next few weeks. This is possibly due to the unhappiness of former employees who want further clarity.
The surplus debate raises the issue of the different needs of various stakeholders. On one hand, Old Mutual could save a massive R80-million for shareholders, but on the other, those employees who were expecting, for example, a R20 000 payout would be lucky to come out with R500.
Old Mutual executives have three choices. Firstly, they could go with the Sanlam ruling, informing members that their payments will be a fraction of the initial amount. However, the FSB appeal is looming and new proposed legislation goes before the Cabinet this week. If the drafted amendment of the Pension Funds Act is passed, it will allow for backdating to 1980. Should either challenge from the FSB succeed, it could be a public relations disaster if Old Mutual is then forced to pay out the higher amount. Another option is to request further patience from members, but the members could wait at least until May this year — when Parliament will decide on the legislation — or for the appeal, for which a date has yet to be set. Finally, Old Mutual could decide to go with the initial decision. However, the shareholders will ultimately foot the bill.
Leanne van Wyk, of Alexander Forbes Financial Services, recommends waiting for the appeal to be heard before making the payments. “Where the improper uses in question are significant in quantum, it is probable that a company may not simply pay an amount into a retirement fund unless it is legally required to do so. Shareholders would probably insist upon this,” she says. However, Van Wyk does conclude that this would entail a lengthy wait, which means unhappy stakeholders.
Old Mutual is not the only company facing this dilemma. According to Mike Codron of the FSB, there are pension funds that face even larger payouts. Van Wyk says that at the time of the Sanlam court case, the vast majority of surplus schemes were being finalised and former members would already have been contacted and told what to expect out of the fund’s surplus scheme. While the ruling will affect relatively few funds, for those affected it will be a significant amount of money. Sanlam has side-stepped this thorny issue by only calculating its surplus apportionment schemes from 2001, with the result that it has no surplus to pay to members.
Improper use of funds
Since 2001, funds have been required to pay out surpluses, built up by strong market performance and ex-employees only receiving their contribution to the pension fund. Improper use of these funds is defined in four cases, including when the surplus was used for the benefit of a select few members. Under previous legislation, using the surplus to benefit only some members was not illegal, which is, in part, why pension funds are not complying too easily.
Mike Codron of the FSB says the main misuse of surplus funds had to do with medical aid contributions. Previously, employers would agree to continue medical aid obligations for certain employees after their retirement. As medical costs escalated and the number of employees for which they were paying medical aid grew, they offered the employees a portion of the surplus fund to effectively “buy” the company out of its obligation. As the medical aid arrangement was between the employer and employee, the pension fund should not have been used for this purpose.