Molefe: The curious case of rule 28

NEWS ANALYSIS

Are you confused about the Brian Molefe saga? Did he resign or take early retirement or was he retrenched from Eskom? Are you baffled by how the failure to cough up a proposed R30-million pension package resulted in Molefe getting his job back? You are not alone.

The bizarre series of events that culminated in Molefe’s return to the power utility has pension law experts scratching their heads. After a number of mixed messages, the most recent grounds provided for the proposed package was based on an Eskom pension fund rule — rule 28 — allowing for early retirement by way of retrenchment.

The nature of Molefe’s exit is still not clear. Statements at the time by Public Enterprises Minister Lynne Brown said he resigned. Molefe’s statement spoke of voluntarily leaving Eskom’s employ. The Eskom board called it a decision to “voluntarily step down”. But last week the Eskom board said Molefe had applied for early retirement.

Brown refused the proposed R30-million payment, saying it lacked legal rationale. Molefe and the board failed to come to another “mutually acceptable pension proposal”, so the board “rescinded its approval of Molefe’s early retirement application” and reinstated his employment contract.

Needless to say, there is a marked difference in the benefits a person will get depending on the grounds under which they exit a pension fund.

So what are some of the scenarios?

Jonathan Mort, director at pensions law firm Jonathan Mort Inc, explained some of the relevant rules of the Eskom Pension and Provident Fund (EPPF).

When a person resigns before pensionable age (65) they are entitled to no less than the minimum benefits outlined in the Pension Funds Act. The EPPF allows for early retirement once a member has reached 55, Mort says, but with a penalty to ensure that the fund is not prejudiced by having to pay out benefits to someone earlier than their pensionable age. The employer can waive the penalty if it pays into the fund the additional benefit liability as calculated by the fund actuary, said Mort. In other words the employer “pays in” or credits the employee with the additional years of pensionable service needed to reach 65. Molefe is 50 so does not qualify for “early retirement” here.

But there is one circumstance — rule 28 — that allows for early retirement at 50 if the member has given at least 10 years of pensionable service, says Mort.

The fund’s chief executive, Sibusiso Luthuli, confirmed this, saying on the grounds of rule 28 a person can be granted early retirement at 50, provided that the employer (Eskom) agrees to grant the employee the additional years of service and pay the associated penalty calculated by the fund.

Rule 28 only applies, according to Mort, if there is a “reduction in or reorganisation of staff, or … the abolition of [the member’s] office or post … to facilitate improvements in efficiency or organisation or to retrenchment generally”.

It was “hard to see how any of these criteria could have applied to Mr Molefe”, he said. If they do not, and a retrenchment benefit was paid that did not comply with rule 28, there would be a breach of the fund rules and the fund’s tax status could be compromised, Mort said.

Luthuli next said Eskom agreed “to exit the employee” and the fund “actuarially calculated the exit cost, which amounted to R30.1-million”. Eskom would pay, although money was not paid directly to the member, going instead to the fund, he noted. A member does have the option to “commute up to a third of his total pension benefit into a cash lump sum”, paid upfront, Luthuli said, with the rest converted into a pension.

Molefe was paid out about R7-million, the board said, but will pay this back now that he returns to his post.

A critical factor is Molefe’s employment contract and whether it was permanent or fixed term, said Mort.

Eskom refused to answer follow-up questions, saying it had been served court papers and could not comment.

But Eskom chairman Ben Ngubane told Fin24 that in 2015, when Molefe was appointed to Eskom, he was supposed to be permanently employed. But Cabinet told the board his appointment had to “be five years”.

“The losses that he would suffer because of that change came to the fore and our people in governance sat with him, recommended to the board … that we buy 10 years’ pension for him to compensate for the gap that we created in his pension when he retired in five years’ time,” Ngubane reportedly said.

Mort said an employment contract for five years can provide for the benefit of 10 years’ pensionable service at the employer’s cost. But how the extra years are credited — for instance, whether they accrue at the end of the five years or proportionately over the period — is important. If the member breaks the five-year contract by resigning, at best only a proportionate accrual should apply, said Mort.

But the entire arrangement for Molefe, according to the EPPF, is predicated on rule 28, which is for retrenchment only.

“How could Mr Molefe have been retrenched, receive the benefit for that and then go back to exactly the same position?” Mort asked.

He added that the employer must tell the fund the reason for a member’s exit. The fund “should question a patently incorrect reason”.

Brown’s spokesperson did not answer detailed questions. Her comments to a press briefing suggest that Molefe’s employment contract may be key. She said there “isn’t another solution other than paying Mr Molefe the R30-million or him taking Eskom to court”.

It was on those grounds, and provided the step was legal, that Brown said she supported Molefe’s reinstatement.

When asked by a journalist if this meant Molefe had Eskom’s board “over a barrel”, Brown dodged.

Interestingly, she also asked her department to ensure that the pension packages negotiated with executives at parastatals “are in line with the Cabinet-approved remuneration standards”. This leads to the question: Are there similarly onerous contracts at other cash-strapped state-owned firms?

When asked to explain how rule 28 could have applied to Molefe’s case, the fund only repeated its statements that it does “not involve itself in the exit negotiations between the employer and employee”.

Granting early retirement benefits, without penalties, can only be initiated at the request of the employer, it said, and is usually preceded by an agreement, which the fund is not party to, between the employer and the employee.

In the meantime, more allegations about Molefe’s involvement in the Gupta-owned Tegeta’s purchase of Optimum Coal were revealed by the amaBhungane Centre for Investigative Journalism.

But this will not stop Eskom, Molefe and Brown from defending his reappointment in court. They lodged their intention to oppose the Democratic Alliance’s court interdict to stop his return to work and have his reinstatement set aside. 

Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.
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