Billions of rands in unclaimed retirement benefits could be released into the hands of current and former retirement fund members, including pensioners, if an application to the Gauteng High Court is successful.
If the application succeeds, it could have major implications for the economy as money locked up in interest-earning deposits becomes available.
But success could create new complications, warns top pension funds lawyer Jonathan Mort, who believes that the application should succeed.
The application has been brought by Tony Mostert, the liquidator of the Picbel Groepvoorsorgfonds. This is one of a number of retirement funds, of which Mostert is either curator or liquidator, that were subject to surplus-stripping by employers in the 1990s.
Mostert wants the court to declare ultra vires(literally, beyond the powers) and unenforceable the regulations issued under the Pension Funds Act that require unclaimed retirement fund surplus benefits to be transferred to contingency reserve funds, including unclaimed-benefit funds and the Guardian’s Fund.
The Financial Services Board (FSB) and the Minister of Finance, among others, are named as respondents, but it is not yet clear whether they will oppose the application.
The FSB issued a brief statement saying it is not in a position to respond at this time, because the Registrar, FSB chief executive Dube Tshidi, “is currently studying the application to determine the most appropriate response”.
However, it is understood that both the FSB and National Treasury are unlikely to oppose the application.
Mostert’s application is narrowly focused on retirement fund surplus benefits due to former members of the Picbel fund who cannot be traced. But any court decision in favour of Mostert’s application is likely to set a precedent that will have an impact on the many billions of rands of other unclaimed retirement fund benefits from surpluses and in respect of ordinary benefits that members have not claimed.
The value of unclaimed surplus benefits in all funds is currently unknown, but the FSB is doing an audit, and the value is expected to exceed a billion rands. However, there is an estimated further R25 billion or more in unclaimed retirement fund benefits due to members who left funds as a result of resignation or retrenchment or who reached pensionable age, and dependants of fund members who died before retirement.
FSB deputy executive in charge of retirement funds, Rosemary Hunter, indicated in a book on the Pension Funds Act she wrote before her appointment to the FSB that she is in agreement with Mostert’s view.
Hunter also questioned the validity of the disputed regulation at the recent Pension Lawyers Association annual conference, but added that while the regulation was in place, the FSB was obliged to enforce it.
Mostert argues that the regulation governing unclaimed surplus benefits is inconsistent with and contradicts other provisions of the Pension Funds Act. He says that no legal provision is made for the release of funds from a contingency reserve account or the Guardian’s Fund, even when there is no reasonable possibility of a beneficiary being traced.
He says that when the regulation was promulgated in April 2003, the Minister of Finance had “no power to make regulations that are inconsistent with legislation passed by Parliament” and they are “ ultra vires and therefore void”.
Mostert says: “The regulation is, in any event, irrational, since it is incapable of achieving any legitimate object contemplated by the Pension Funds Act.”
Mort agrees with Mostert, saying the disputed regulation is in breach of the provisions of the Act and was “promulgated in excess of the power of the Minister of Finance”.
He says: “I am not saying that the former members should not receive what is due to them – they should – but rather that where they are not traceable, for whatever reason, then the surplus amount should revert to the fund.”
Mort says that if Mostert’s application is successful, it will make “a very significant difference to many pension funds that have been sitting on undistributed surpluses in the form of unclaimed benefits”.
He says there is no reason, where there is no reasonable prospect of unclaimed benefits being paid because the beneficiaries cannot be traced, they should not be allocated first to improving the solvency of defined-benefit funds and thereafter being distributed among other stakeholders, including active members, former members, pensioners and employers.
But he warns there will be consequences if the application is granted. These include:
* Funds may need to amend their rules to allow money retained in a contingency reserve account to revert to the fund. He says the FSB should allow the rule change. It was a common provision in the old defined-benefit funds that unclaimed benefits could, after a certain period, revert to the fund.
* Funds will have to do a proper assessment that all reasonable steps have been taken to trace members to justify the transfer of surplus amounts back into a fund.
* Many funds have already transferred unclaimed benefits to unclaimed-benefit funds, and they may seek to have those returned to them. Mort says that, as far as he knows, there is no basis in law for compelling an unclaimed-benefit fund to return benefits, but it may be that some unclaimed-benefit funds would be prepared to co-operate.
DISPUTED REGULATION
The disputed regulation 35(4) of the Pension Funds Act reads:
“Where a board (of trustees) is able to determine the enhancements due in respect of a particular member in terms … of the Act, but is unable to trace that former member in order to make payment, the board shall put the corresponding enhancement into a contingency reserve account specific for the purpose. Notwithstanding anything in the rules of the fund, monies may not be released from such contingency reserve accounts except as a result of payment to such former members or as a result of crediting the Guardian’s Fund or some other fund established by law to include such payments.”
LEGAL ISSUES SURROUNDING LIQUIDATED FUNDS
Unclaimed retirement fund benefits were ill-defined before November 1, 2008, when the Pension Funds Act was amended to recognise pension fund entitlements that had not been paid to the rightful beneficiaries.
In terms of the Act, an unclaimed benefit from a retirement fund is any amount, whether it is a benefit at retirement, resignation or retrenchment, or a death benefit due to dependants of a fund member, that has not been claimed 24 months after the date on which the benefit became legally due, or a longer period that can be justified by a fund’s trustees.
The Act includes any unclaimed or unpaid benefits due in terms of a surplus apportionment, and any unpaid or unclaimed benefits due to members or former members when a fund is deregistered or liquidated.
Most unclaimed benefits result from three things:
* Poor record-keeping by retirement funds or fund administrators.
* Employers and fund administrators destroying paper-based employee records after a number of years. There is no legal requirement to retain documentation of former employees.
* Members, particularly when they leave employment, failing to update contact details. And in the case of death benefits, members failing to register the names and contact details of their dependants with the fund.
When the period expires, the trustees must decide how to manage the unclaimed assets. This may include transferring them into an unclaimed benefit fund, registered with both the Financial Services Board (FSB) and the South African Revenue Service. Unclaimed benefits can also be transferred to the Guardian’s Fund (see “Guardian’s Fund ‘has unreliable records’”, below).
But the problem becomes complicated when retirement funds are destined to be liquidated.
Currently, all transfers between retirement fund vehicles are governed by section 14 of the Pension Funds Act, which aims at protecting members. However, liquidations are exempt from the provisions of section 14 and FSB directives on transfers. This creates a problem for retirement funds and fund liquidators.
When the legislation governing the apportionment of surpluses in retirement funds was implemented in 2006, it was established that, of the more than 13 000 registered retirement funds, only about 3 500 were “active” funds.
National Treasury’s view at the time was that non-active retirement funds should be closed down.
Many thousands of funds were deregistered. Most were dormant funds with no boards of trustees and no contributing members. Some had no assets or liabilities. Others had assets and liabilities for unclaimed benefits.
The FSB allowed the funds to be liquidated and any assets to be transferred to unclaimed-benefit funds.
However, when pension fund lawyer Rosemary Hunter was appointed FSB deputy executive in charge of pension funds in 2014, she was concerned that the methodology used was not legal.
Her review of the legality of the fund closures was driven by a concern that, if any assets and liabilities had not been fully accounted for, some members, former members or their dependants may have lost out. She was also concerned that insufficient effort may have been put into locating the beneficiaries of the unclaimed benefits.
Hunter gave the assurance at the time that the FSB would re-open only those funds where it had reason to believe that the cancellation process may have caused substantial prejudice.
Hunter’s department has since been investigating whether defects in the ways in which dormant funds were closed in the past may have resulted in substantial prejudice to any of the funds or their members or former members. If it appears that there may have been substantial prejudice to fund members, the former administrators are being asked to fix the problem.
These developments raised concerns in the retirement fund industry because of the costs involved in revising the closures. There is also now no clarity on how and when a fund can actually be liquidated.
Hunter told the recent Pension Lawyers Association conference that the FSB is about to publish a draft notice of its intention to withdraw the exemption it granted funds from having to apply to the FSB to transfer assets into unclaimed benefit funds in terms of section 14 of the Pension Funds Act.
She says the FSB is concerned about transfers of benefits to unclaimed-benefit funds occurring without enough being done to trace members, and once a transfer to an unclaimed-benefit fund has occurred, the link to employer records may be broken. Requiring funds to apply for a section 14 transfer before transferring the benefits will allow the FSB to supervise the transfers.
Hunter says that, before scrapping the exemption, it will consider the industry’s views.
Of the 13 143 funds registered at the end of December 2006, between January 1, 2007 and February 13, 2014 a total of 8 298 funds were cancelled or liquidated. These consisted of 1 494 voluntary dissolutions and 6 804 cancellations of registration “on proof, to the registrar’s satisfaction, that the fund had ceased to exist”.
The transfer of members’ benefits was approved in the case of 1 208 funds, and 2 105 funds were closed. Another 1 204 funds were in the process of deregistration, but were not yet cancelled.
GUARDIAN’S FUND RECORDS ‘UNRELIABLE’
The management of the Guardian’s Fund has long been a matter of concern, attorney Tony Mostert says in his affidavit supporting an application which, if successful, will prevent unclaimed retirement surplus benefits from being put into the fund.
The Guardian’s Fund – actually a number of funds administered by the Masters of the various divisions of the High Court – manages at least R9 billion from many sources – from unclaimed benefits of retirement funds to those of heirs of deceased estates.
And money that remains unclaimed reverts to the state after five years.
Mostert says an investigation he conducted has revealed “that there appears to be very little reliable information or statistics as to the administration and distribution of unclaimed benefits from the Guardian’s Fund.
“The administration and workings of the fund is such that there exists doubt that funds deposited with it ultimately reach the intended beneficiaries.
“As far as I have been able to ascertain, the beneficiary records of the Guardian’s Fund are not updated regularly and no proper age analysis of beneficiary records is maintained.
“The prospect of identifying legitimate beneficiaries and the payments to which they are entitled from the Guardian’s Fund appears to be less than if the unclaimed benefits remained with the relevant pension fund,” Mostert says.
According to the website of the Department of Justice, the purpose of the Guardian’s Fund is “to hold and administer funds that are paid to the Master on behalf of various persons known or unknown, for example, minors, persons incapable of managing their own affairs, unborn heirs, missing or absent persons or persons having an interest in the moneys of a usufructuary, fiduciary or fideicommissary nature”.
The Guardian’s Fund, like the Government Employees Pension Fund, has no trustees, is not subject to the Pension Funds Act, is not overseen by the Financial Services Board, and does not require a licence to act as an administrator.
The assets of the fund are managed by the Public Investment Corporation and are held in interest-earning investments.
Matla Titi, the head of Alexander Forbes Trust & Beneficiary Fund Services, says that, if left to a minor, any benefits in the Guardian’s Fund become state property if they are not claimed within five years of the child reaching the age of majority – that is, they are paid over to the National Treasury.
Considering that the Guardian’s Fund does not trace beneficiaries (they list their names in the Government Gazette), a significant amount of these assets become government property every year, Titi says.