Jumping from one retirement fund to a rival: Can it be done during your period of employment?

November 1st, 2019
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The Supreme Court of Appeal (SCA) in Municipal Employees Pension Fund v Natal Joint Municipal Pension Fund (Superannuation) and Others [2016] 4 All SA 761 (SCA) at para 1, highlighted an intense competition for members between rival retirement funds. This rivalry raises three fundamental legal questions that not only the Pension Funds Adjudicator (the Adjudicator) but also courts have been called on to answer:

  • First, can members exercise their right to freedom of association, while they are actively employed, to choose the fund they wish to join?
  • Secondly, can members during the period of their employment voluntarily withdraw from their funds with a view to joining a rival fund?
  • Thirdly, can members voluntarily initiate a process that would lead to their fund credits being transferred to a rival fund, which is associated with their employer?

This article examines whether the Pension Funds Act 24 of 1956 (the Act) provides a legal framework that can assist South African courts to answer these questions. I will also reflect on how the Adjudicator and the courts have sought to answer these practical legal questions.

Adjudicator’s approach

There are various reasons that can induce retirement fund members (members) to decide to leave their current funds while in their employer’s service and join other funds. These include –

  • low investments (Van den Heever v Cape Joint Retirement Fund and Another [2002] 4 BPLR 3372 (PFA) at para 12);
  • maladministration of their funds (Brown v National Oil Pension Fund and Others [2001] 5 BPLR 1992 (PFA); and
  • benefits not accumulating desired interests and other funds perform better (Mtyhopo and Others v South African Municipal Workers’ Union National Provident Fund [2013] 2 BPLR 203 (PFA) at para 3.3).

In Mtyhopo, members requested the fund to transfer their fund credits to another fund associated with the employer. The fund refused to comply with the members’ request on the basis that it was precluded from doing so by a collective agreement concluded in the industry bargaining council, which placed a moratorium on employees’ ability to transfer from one fund to another while still actively employed (para 2.1). The Adjudicator was required to determine whether members were entitled to transfer their fund credits to another fund in which their employer participated (para 5.4). In order to deal with this issue, the Adjudicator had to consider the rules of the fund and the provisions of the Act.

The Adjudicator evaluated rs 3.2 and 11.11 of the South African Municipal Workers’ Union National Provident Fund Rules. Rule 3.2.1 specifically provides that ‘[a] member may not withdraw from the fund while he remains in service’. The Adjudicator determined that members are not entitled to withdraw from their current fund and further that while this rule infringes members right to freedom of association, it is nonetheless not unreasonable or unconstitutional (para 5.7 to 5.8). The Adjudicator reasoned that this rule merely prevents members who are still employed from cashing in their fund credits while they are still employed. The Adjudicator also evaluated r 11.11.1(a), which basically empowers the Board when a portion of the business of the fund is transferred to another fund or the fund amalgamates with another fund to ‘determine the amount to be transferred … in respect of each member who is to be transferred from the Fund, which amount shall consist of the Member’s share’. While the Adjudicator correctly held that the collective agreement did not bind the fund because the fund was an independent entity governed by its rules, the Adjudicator nonetheless, incorrectly interpreted r 11.11 as not prohibiting the transfer of members to other funds. In particular, the Adjudicator determined that members ‘are entitled to transfer their fund values to a local authority fund of their choice in which their employer is the participating employer in terms of the provisions of the approved rules of the local authority fund concerned’ (at para 5.12). The Adjudicator reached the same conclusion in Mtyapha v South African Municipal Workers’ Union National Provident Fund [2013] 2 BPLR 197 (PFA) and TP Moss v South African Municipal Workers’ Union National Provident Fund (unreported case no PFA/EC/11061/2012/PGM, 25-7-2012).

The fund appealed all of the Adjudicator’s determinations against it to the Gauteng Local Division of the High Court in Johannesburg. Without a written judgment, the court upheld the appeal and the essence of its judgment was that members were not entitled to voluntarily initiate the process of transferring their fund credits to other funds while they are in their employers’ service (Mtyhopo v South African Municipal Workers Union National Provident Fund 2015 (11) BCLR 1393 (CC) at para 4). Soon thereafter, the Adjudicator received a complaint from a member of the same fund who was refused permission to transfer his fund credits to another fund. In line with the Gauteng Local Division order and contrary to her earlier determinations, the Adjudicator dismissed the complaint (Andreas v South African Municipal Workers’ Union National Provident Fund [2014] 3 BPLR 337 (PFA) at para 5.12).

Judicial approach

Balton J in SAMWU National Provident Fund v Umzimkhulu Local Municipality and Others [2018] JOL 39888 (KZP) at para 7[i], held that the Gauteng Local Division when dealing with the appeal by South African Municipal Workers’ Union National Provident Fund in relation to all determinations against it ‘did not set aside the Adjudicator’s determination on the merits’ (at para 13). He was convinced that the Adjudicator’s view in her earlier determinations that r 3.2 of the fund rules did not prohibit members from transferring their fund credits to other funds was correct. Further that members could use r 11.11 to voluntarily initiate a process that will lead to their fund credits being transferred to other funds while still employed. I submit that Balton J incorrectly endorsed a view, which in effect meant that members could use r 11.11 to achieve exactly what r 3.2 of the fund rules was designed to prevent. The essence of r 3.2 is to ensure that members cannot voluntarily initiate the transfer of their fund credits to other funds by withdrawing from the fund while they are still actively employed. Withdrawing from the fund while still actively employed is a clear indication that members are no longer interested in contributing to their current fund and wish to invest their money with other funds. In other words, the practical effect of the process of withdrawal is not necessarily about the member’s membership but the transfer of the member’s fund credit to another fund.

Balton J failed to read rs 3.2 and 11.11 together with r 8.1.1, which makes it explicitly clear that members can only withdraw from the fund when one of the contingent events recognised in the rules such as resignation, dismissal or retrenchment occurs (SAMWU National Provident Fund v Ntabankulu Local Municipality and Others [2019] JOL 44272 (ECM) at para 91). In other words, r 11.11 can only be used by members when they are no longer employed. Hartle J in Ntabankulu, criticised Balton J’s approach, which he referred to as ‘artificial’ in that ‘it ignores the real meaning of Rule 3.2.1 which … prohibits the Fund from doing what the municipality, the employees and the competing Fund seek to achieve, which is a cessation of membership whilst the employees remain in service of the employer’ (at para 102). The essence of his reasoning was correct that r 11.11 did not provide a self-standing basis for members to voluntarily initiate the transfer of their fund credits to other funds. The SCA in South African Municipal Workers’ Union National Provident Fund v Umzimkhulu Local Municipality and Others (SCA) (unreported case no 297/2018, 29-3-2019) (Swain AJ (Lewis ADP, Tshiqi and van der Merwe JJA and Dlodlo AJA concurring) at para 36 correctly endorsed Hartle J’s approach.

Legislative framework

Our courts are often confronted with a conundrum of establishing the most suitable provision within the Act that should be applied when fund members voluntarily seek to relocate from one fund to the other, much to the objection of the members’ current funds. Members often attempt to rely either on ss 13A(5) or 14 of the Act when making out their claims that they are entitled to transfer their fund credits to other funds while still in their employer’s service. Section 13A(5) of the Act regulates persons who have ceased to be fund members for reasons not related to the transfer of assets or amalgamation of funds in terms of s 14, voluntary dissolutions of funds in terms of s 28 or liquidation of funds in terms of s 29 of the Act. This section deals with termination of membership in terms of the rules of the fund (Umzimkhulu (SCA) at para 26). In other words, it is applicable when one of the contingent events prescribed in the rules takes place. Once that event occurs, a member can request the fund – in writing – to transfer their benefit to another fund, which the fund is obliged to effect within 60 days from the date of the written request. Section 13A(5) of the Act neither regulates voluntary withdrawal of membership, nor voluntary transfer of fund credits from one fund to the other while members are still in their employers service. It provides a legislative procedure that enables members – once they have met the conditions prescribed in their funds’ rules – to make written requests for the transfer of their fund credits to other funds. This can only be done once they have ceased to be members by virtue of termination of their employment through resignation, dismissal, retrenchment or retirement. Members who are actively employed cannot rely on this section to effect transfer of their fund credits. The SCA in Umzimkhulu held that ‘cessation of the employees’ membership of the Fund in terms of its rules is a necessary condition to be satisfied in terms of s 13A(5) of the [Act], before the employees may demand in writing that any benefit, or right to any benefit to which they are entitled must be transferred to the MEPF, in terms of s 13A(5) of the [Act]. Equally, the Fund would only be obliged to transfer these benefits to the MEPF within 60 days of a written request, if the employees’ membership of the Fund has been validly terminated in accordance with the rules of the Fund’ (para 21).

Equally so, members cannot rely on s 14 of the Act to voluntarily initiate the process of transferring their fund credits to other funds while they are actively employed. This section ‘governs the amalgamation of any business carried on by a registered fund with any business carried on by any other person; and the transfer of any business from a registered fund to any person, or from any person to a registered fund’ (Pepcor Retirement Fund and Another v Financial Services Board and Another [2003] 3 All SA 21 (SCA) at para 13). The phrase ‘transfer of business’ is not defined in the Act. While it is not entirely clear which transactions generally amount to ‘transfer of business’, it appears nonetheless, that it does not cover members’ voluntary initiated efforts to have their fund credits to be transferred to other funds while still in their employers’ services. This provision appears to cover only circumstances where the fund itself initiates either the amalgamation or transfer of its assets. This is because in terms of s 5 of the Act, the assets held by the fund are owned by the fund. I submit that in order to maintain sound administration of retirement funds, it is not ideal to legislatively enable members of retirement funds to voluntarily initiate the transfer of  their funds’ assets to which they have an interest. This might encourage forum shopping, which might destabilise the management and administration of retirement funds. In Financial Services Board and Another v De Wet (in his capacity as liquidator of the Pepkor Pension Fund) and Others [2002] 4 BPLR 3259 (C) at para 284, it was held that ‘[w]hen a bulk transfer of assets is made from one pension fund to another, the transfer constitutes “the transfer of any business” within the meaning of section 14(1)’. In Younghusband and Others v Decca Contractors (SA) Pension Fund and its Trustees [2000] 1 BPLR 88 (PFA) at p 111, the Adjudicator was of the correct view that ‘[g]enerally, one may safely assume, [that] voluntary individual withdrawals fall outside the ambit of … [s 14 of the Act]’. The SCA in Umzimkhulu also confirmed that the wording used in s 14 of the Act does not describe ‘individual voluntary withdrawals from the Fund and the transfer of individual benefits to another fund’ (at para 27).

Conclusion

It is important for all legal practitioners dealing with members that seek to voluntarily withdraw their funds while they are still in their employer’s service to note that the Act does not provide a legal avenue for such members to do so. The rules on individual funds should be consulted to determine whether they allow for such transfers and the circumstances under which such transfers could be affected. It is also important for all legal practitioners that draft funds rules to ensure that such rules are clear in relation to whether the fund allows transfer when members are still in their employer’s service.

Clement Marumoagae LLB LLM (Wits) LLM (NWU) Dip Insolvency Practice (UP) is a consultant at Rambevha Morobane Attorneys and senior lecturer at the University of Witwatersrand in Johannesburg. Mr Marumoagae is also a council member of the Legal Practice Council.

This article was first published in De Rebus in 2019 (Nov) DR 19.