Southern Sun Group Retirement Fund v Registrar of Pension Funds and Others (SCA) (unreported case no 215/2019, 2-11-2020) (Navsa JA (Zondi, Van der Merwe and Nicholls JJA and Unterhalter AJA concurring))

In the case of Southern Sun Group Retirement Fund the Supreme Court of Appeal (SCA) had to decide whether reg 35(4) of the Pension Funds Act 24 of 1956 (PFA), was beyond the powers assigned to the Minister of Finance (third respondent). In a letter dated 9 January 2015 the Registrar of Pension Funds (first respondent) rejected the Southern Sun Group Retirement Fund’s (the Fund’s) 2010 actuarial valuation report, in terms whereof the Fund sought to release a portion of the funds it held in respect of unclaimed surplus benefits. The Fund asserted that it was entitled to release funds held, in terms of s 15B(5)(b) of the PFA, on the basis that the beneficiaries are unlikely to ever claim them. It also sought to release funds, so it said, held in terms of s 15B(4)(b), in respect of members whose benefits could not be calculated on an individual basis due to poor data. The Fund contended that there was nothing in law that prevented the release of those funds. The Financial Sector Conduct Authority (FSCA) did not agree.

The Registrar, referred to the preceding paragraph, which set out the basis for the rejection:

‘[I]n terms of s 15B(5)(b) of the PFA and thus to hold a lesser liability for these s 15B surplus benefits … The release of s 15B surplus is, at least in part, a contravention of regulation 35(4) … The PFA and the regulations do not give the Fund discretion to hold a lesser liability even if the Fund is of the opinion that it would be unlikely that untraced members would ever claim their s 15B(5)(b) benefits. The valuator’s assumptions and recommendations in this regard are therefore contrary to law and [on] this basis the valuation report must be rejected in terms of s 16(9), read with s 15(3) of the PFA, as it does not correctly reflect the financial condition of the Fund.’

As in two related cases, the Fund lodged an appeal against the Registrar’s decision in terms of s 26 of the PFA. The appeal included a challenge to the validity of reg 35(4). Because the FSB appeal board was not empowered to deal with the validity of regulation, the Registrar’s office was amenable to the suggestion by the Fund, that the appeal be held in abeyance, pending the finalisation of a court application by the Fund, in terms of which it would seek a review and setting aside of the regulation in question.

In its application in the Gauteng Local Division of the High Court in Johannesburg, the Fund in its founding affidavit explained why, in its view, reg 35(4) was ultra vires the minister’s power and why it was inconsistent with the provision of the PFA. The following are relevant paragraphs:

‘101. The regulation is … inconsistent with the PFA and therefore ultra vires because it requires a fund, such as the Fund in the present case, to establish a separate contingency reserve account and credit that account with specific amounts, when it is clear, from the definition of the term “contingency reserve account” in the definitions [section] of the PFA, that:

101.1 The establishment of the contingency reserve accounts falls within the sole discretion of the board of trustees of a fund; and

101.2 The determination of any amounts to be credited to (or be debited from) that account is a matter for the board of a fund to decide after consulting the fund’s valuator.

102. Any regulation which purports to fetter the discretion explicitly granted to the board of trustees of a fund (such as the discretion granted to the board of trustees by the very definition of what constitutes a “contingency reserve account”) is inconsistent with the purposes of the PFA and accordingly ultra vires the powers of the Minister, who, in terms of s 36, may only make regulations consistent with the PFA.’

The SCA said that it was important at the outset to have a brief meaning of an actuarial surplus. A surplus arises in a pension fund when an actuary determines that its assets exceed its liabilities. Prior to 2001, how a pension fund dealt with a surplus was determined by its rules. The Pension Funds Second Amendment Act 39 of 2001 came into effect on 7 December 2001. It was enacted to regulate the distribution of a surplus by pension funds. It became known as the surplus legislation. The surplus legislation inserted definitions relating to pension funds surpluses and also introduced ss 14A and 14B, and ss 15A to 15K into the PFA.

The Fund registered as a pension fund in terms of the PFA, was established as a defined benefit fund with effect from 1 March 1994. It later converted to a defined contribution fund but retained certain guaranteed benefits. It was, therefore, classified as a defined benefit fund at the same time that surplus apportionment legislation, which constituted amendments to the PFA, came into operation. The Registrar, holds office in terms of s 3 of the PFA and was the executive officer defined in s 1 of the Financial Services Board Act 97 of 1990 (the FSBA).

In an opposing application, the Registrar, at the outset, pointed out that the purpose of the impugned regulation was to ensure that pension funds have sufficient funds to meet the claims of every former member for whom the board has been able to determine an enhancement in terms of ss 15B(5)(b) or (c) of the PFA and that this was a legitimate government purpose. That purpose had to be viewed against the rationale for the surplus apportionment amendments, which was to undo the wrongs of the past and to ensure a fair surplus distribution. The Registrar referred to the Fund’s acceptance that a former member’s entitlement to be paid endured and that it could not extinguish its liability in that regard. The Registrar insisted that the Fund’s assertion that the regulation resulted in a sterilization of funds was fallacious.

It was contended that there was no conflict between the impugned regulation and the provisions of s 15B(5)(e). The regulation, so the Registrar asserted, dealt with former members whose enhancements could be calculated but who could not be traced, whereas the aforesaid subsection deals with former members for whom enhancement could not be calculated, irrespective of whether it could be traced.

The minister, in opposing the application, at the outset, raised the question of unreasonable delay in the bringing of the application. In this regard s 7 of the Promotion of Administrative Justice Act 3 of 2000 (PAJA) was referred to. The minister pointed out that 12 years had passed since the promulgation of the regulation. The minister noted that on the Fund’s own version of events it had become aware of the legal opinion regarding the validity of the regulation as far back as December 2010 but only launched its application in July 2015. The minister’s application submitted that condonation should be refused.

The minister in the application, referred to s 36 of the PFA, which grants wide powers to make regulations. Regulations, so the minister asserted, should promote the objects of the Act under which it was promulgated. According to the minister, the definition of ‘contingency reserve account’ was inserted by the surplus apportionment amendments so as to hold what would otherwise have been surplus assets available for distribution. These amounts, so the minister said, would then be used for contingencies for which they had been earmarked and would be excluded from the surplus that had to be distributed in terms of ss 15B and 15C of the PFA.

The High Court adjudicated the dispute. The court recorded that after the decision of the SCA in Mostert NO v Registrar of Pension Funds and Others 2018 (2) SA 53 (SCA), the Fund changed its position and now asserted that it was no longer basing its challenge on PAJA, but that the application should be viewed as a legality review.

The High Court, after referring to case law, held that the making of reg 35(4) was administrative action in terms of PAJA. In relation to the delay in bringing the application Siwendu J took into account that on the Fund’s own version of events it became aware of the challenge to the validity of regulations five years before it launched the application. The High Court went on to consider whether it should extend the period in terms of s 9 of PAJA. The court, in favour of the Fund, took into account that it launched the application within 180 days of the Registrar’s rejection of its valuation report. The court considered the importance of the issue and decision in relation thereto. The court, further, held that it was in the interest of justice that the time be extended. Thus, condonation was granted.

The High Court dealt with the contention on behalf of the Fund that the minister could not direct a contingency reserve account other than in terms of the PFA. The High Court accepted the submission on behalf of the minister that there was nothing in the PFA that restricted the meaning of ‘contingency reserve account’ and the minister’s power to promulgate the regulation and directing, in terms thereof, the creation of a specific contingency reserve account. The application was dismissed without any order being made as to costs. The SCA said that it was against the dismissal of the application and the conclusion on which it was based that appeal was brought to its court.

The SCA pointed out that, counsel for the respective pension funds in each of the three appeals aligned with each other and made common cause in their quest to have the regulation set aside or declared ultra vires the powers of the minister. The SCA added that the counsel for the FSCA and the minister, likewise, supported each other in resisting the application brought by each of the three pension funds. The SCA said that during the oral argument the counsel representing the FSCA and the minister that, in this case, the High Court, in considering whether to overlook the delay, took into account, inter alia, the importance of the issue, including the nature and consequence of the impugned regulation, and had concluded that it was in the interests of justice to condone the delay; and there was no cross-appeal in relation thereto, by either of them.

It was pointed out that it would be most peculiar to decide the merits in one case and not in the other two, because condonation was not warranted, despite the fact that a finding in the one case would determine the legal position in relation to all three. After conferring, counsel on behalf of the FSCA and the minister informed the SCA that the delay should no longer be considered an issue between the disputants and that the matter should be decided on the merits in all three matters. The SCA, added that it would be recalled that the FSCA had always adopted a neutral stance on the question of delay. The SCA said in its view the concession was rightly made. That the High Court took into account all the relevant factors when it exercised its discretion in favour of the pension fund.

With regard to the merits, the SCA started by saying that it must be recognised that the surplus legislation was a milestone in pension law. That before it came into operation, as pointed out by the FSCA, the subject that exercised the mind of many pension fund legal practitioners and administrators was the following: Who owned the surplus in a pension fund at any given time? The SCA noted that the debate around this question endured for a long time before the decision of the SCA in Tek Corporation Provident Fund and Others v Lorentz 1999 (4) SA 884 (SCA). In that case the core conclusion was the following:

‘Once a surplus arises it is ipso facto an integral component of the fund’.

The SCA in Tek acknowledged that the legislature was best placed to deal with that manner in which surpluses should be apportioned. At that stage there had already been a consultation process concerning pension fund surpluses, involving government, business and labour. The SCA said that process culminated in the surplus legislation.

The SCA pointed out that the surplus legislation is remedial in nature in that it was designed to redress past abuses of surpluses by a number of employers, but its other purpose was also to ensure fairness in the distribution of a fund’s surplus on an ongoing basis. The SCA added that the surplus legislation put paid into any notion that the employer owned a surplus in a fund. The SCA noted that in s 1 of the PFA, as it stood at the time that the regulation in question came into being, ‘actuarial surplus’ was defined as follows:

‘“actuarial surplus”, in relation to a fund which is –

(a) subject to actuarial valuation, means the difference between –

(i) the value that the valuator has placed on the assets of the fund less any credit balances in the member and employer surplus accounts; and

(ii) the value that the valuator has placed on the liabilities of the fund in respect of pensionable service accrued by members prior to the valuation date together with the value of those contingency reserve accounts which are established or which the board deems prudent to establish on the advice of the valuator …’.

The SCA said that presently the definition of ‘actuarial surplus’ reads as follows:

‘“Actuarial surplus”, in relation to a fund which is –

(a) subject to actuarial valuation, means the difference between –

(i) the value, calculated in accordance with the prescribed basis, if any, that the valuator has placed on the assets of the fund, less any credit balances in the member and employer surplus accounts; and

(ii) the value that the valuator has placed on the liabilities of the fund in respect of pensionable service accrued by members prior to the valuation date plus the amounts standing to the credit of those contingency reserve accounts which are established or which the board deems prudent to establish on the advice of the valuator, calculated in accordance with the prescribed basis, if any’.

The SCA dealt with reg 35, as proclaimed in the heading, purports to deal with ‘contingency reserve funds’. It reads as follows:

‘(1) By virtue of the fact that –

(a) the Act vests powers in boards of funds to establish contingency reserve accounts; and

(b) the establishment of contingency reserve accounts reduces the actuarial surplus available for apportionment and increases the possibility that actuarial surplus may be insufficient to enhance benefits previously paid to former members to the level prescribed in section 15B(5)(b) of the Act,

no fund may, with effect from the date of commencement of this regulation, establish any contingency reserve account under circumstances where a reasonable inference may be made that the establishment of the account is contrary to the duties of the relevant board under section 7C(2)(b) of the Act and motivated by bad faith.

(2) The establishment and magnitude of any contingency reserve account by a fund –

(a) must be motivated by the valuator in the relevant report on the statutory actuarial valuation; and

(b) may, where the Registrar is not satisfied with any such motivation, be rejected by the Registrar.

(3) A fund must, on any such rejection of the establishment or magnitude of the relevant contingency reserve account, take such steps in connection therewith as the Registrar determines and sets out in writing to the relevant fund.

(4) Where a board is able to determine the enhancement due in respect of a particular former member in terms of section 15B(5)(b) or (c) 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, moneys 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 amounts.’

The SCA said the counsel for the minister and the PFA were rightly constrained not to seek to justify the envisaged potential transfer, as it were, to the Guardian’s Fund. The SCA added that in the Guardian’s Fund or some other fund the money that was destined for former untraced members would be lost to them and the Fund. If it were to remain in the Fund and remained unclaimed in perpetuity that will have the effect of sterilizing the money from which past or present members could never benefit. It will be recalled that in terms of s 15A all actuarial surpluses belong to a fund.

The SCA pointed out that the minister arrogated the power to deal with a surplus and to establish contingency reserve funds, to the exclusion of the board. The SCA added that in promulgating reg 35(4) the minister acted beyond the regulation making powers set by the PFA. The SCA said that the minister and the FSCA’s submissions in relation to the meaning of ‘contingency reserve account’ in reg 35(4) are without substance. The SCA said that the impugned regulation itself speaks of a ‘contingency reserve fund’ but the minister and the FSCA then sought to disown the concept and the description.

The SCA pointed out that the point made on behalf of the minister and the FSCA that the setting aside of the regulation will lead to laxity on the part of boards in that they will be incentivised to expend very little or no effort to trace former members, is without substance. The SCA added that the FSCA can always question the adequacy of steps taken and issue directions in relation thereto. The SCA said in addition, the provision of s 15B(3), come into play.

The SCA added that for reasons set out the appeal must be upheld. The following order was made:

‘1. The appeal is upheld with no order as to costs.

2. The order of the court below is set aside and substituted as follows:

“Regulation 35(4) of the Pension Fund regulations is declared invalid and unenforceable in that it exceeds the Minister’s powers under the provisions of the Pension Funds Act 24 of 1956”’.

Kgomotso Ramotsho Cert Journ (Boston) Cert Photography (Vega) is the news reporter at De Rebus.

This article was first published in De Rebus in 2020 (Dec) DR 27.