Explainer: How the surplus in pension funds works
Many South Africans who are owed pensions might not know that there are funds around the country that have extra cash.
This extra cash – known as surpluses in pension funds – is complex to understand, and a lack of finance know-how is one of the reasons why some pensioners or former pension fund members may never know they have money owed to them.
So, here’s the skinny on how pension funds get their hands on extra cash – and who that money really belongs to.
How pension funds get extra moolah
Nowadays, it’s rare for boards of trustees to look into their funds and find they have an extra stash of cash after they’ve paid expenses. But a few decades back pension funds worked on a different method – defined benefit pension funds – where the rules of the fund would prescribe a formula to determine the amount that would be paid in benefits.
With this type of pension fund – where members were paid a fixed amount in benefits, defined by the fund’s rules – surplus could build up easily. Why? One reason was that if an employee resigned, but did not retire, they were paid their own contribution and low interest on that contribution. However, they were not paid their employers’ contribution, which created a surplus.
This changed in 2001 when what’s known as the surplus legislation came into effect. This essentially regulated how surpluses are to be divided among members of a fund and the employer, and made minimum benefits payable – even if an employee resigned but did not retire.
Other factors were also at play in the creation of surplus in pension funds: an employer may have contributed more into the old benefit funds than was necessary, or the fund could have grown at a rate where a surplus built up even after expenses were paid.
But what really stumped people prior to the introduction of the surplus legislation was: what happens to the extra money? Who does the surplus belong to?
Whose money is it anyway?
Fast forward to today, and everyone in the pension fund game is pretty clear on what’s meant to happen when there’s a surplus to dole out. According to the surplus legislation, which forms part of the Pension Fund Act, the onus is on the fund’s board of trustees to calculate how the surplus should be divided among members and employers (this is known as the proposed surplus apportionment scheme).
The next step is to then submit that proposed apportionment scheme to the registrar of pension funds for approval.
But despite there now being regulation in place for oversight over surplus in funds, questions still remain around what happens to the surplus benefits.
When people who are owed surplus benefits can’t be traced, and therefore can’t be notified they have money owed to them, that money then becomes unclaimed benefits.
The battle to free unclaimed benefits
According to Regulation 35(4) of the Pension Funds Act, these unclaimed benefits should be put into a contingency reserve account so that if a long lost beneficiary rocks up, they’ll be able to collect their money.
Other options are to put the money in unclaimed benefit funds administrated by insurers.
The Guardians Fund is another place there the money could be stored, under the watchful eye of the Master of the High Court – but if unclaimed, that money is forfeited to the state after 30 years.
Regulation 35(4) of the Pension Funds Act prohibits unclaimed benefits from being removed from these accounts for other uses.
Earlier this month, Tony Mostert, a well-known pension fund liquidator, had his court application to release these funds (unclaimed benefits) dismissed. Mostert, the liquidator for the Picbel fund, argued that the regulation was irrational because even though, in the case of the Picbel fund, actuaries had determined that some beneficiaries were likely never be traced, the money can’t be used to top up benefits of other members of the fund who have yet to receive their full portion.
In a court response to Mostert, Finance Minister Pravin Gordhan said that Regulation 35(4) was necessary as it serves a “ legitimate governmental purpose”; the regulation exists to ensure that people whose benefits are known but can’t be traced are still protected in that their money is safe in an account waiting for them.
Where surplus in pension funds stands right now
Today most pension funds work on the basis that both the employer and the employee pay a contribution. That money is invested and then, when an employee leaves, whether before or at retirement, they automatically receive a benefit consisting of both the employer and employee payments together with the fund return.
These are known as defined contribution funds, and they leave less room for surplus to accumulate.
Many of the old defined benefit funds have been dissolved in South Africa after surplus benefits were either paid to beneficiaries or transferred to an unclaimed benefit fund. But some of the funds, such as the Picbel fund, still have unclaimed benefits which they’ve not been able to pay out to beneficiaries because of Regulation 35(4).
But liquidators are still trying to wrap up surplus in some of the old defined benefit funds. The biggest catch: beneficiaries who are still alive, might not even know they have money owed to them.