THE (ALMOST) AFTERMATH OF SURPLUS APPORTIONMENT ...

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THE (ALMOST) AFTERMATH OF SURPLUS APPORTIONMENT ...

THE (ALMOST) AFTERMATH OF SURPLUSAPPORTIONMENTDistinguished lawyers, ladies and gentlemenThere has been much debate concerning those fundswhose surplus schemes were submitted and approvedand who have subsequently encountered errors in theirapproved schemes. The debate has revolved aroundwhat should the funds then do?Should a fund apply to a High Court having jurisdiction toreview and set aside the Registrar’s approval of itssurplus scheme, or should the fund lodge an appeal tothe Appeal Board of the FSB ?1


On 1 February 2010, in an article published in the“Without prejudice” Law Magazine. 1 , the learnedattorney made reference to the Registrar’s “position”and the apparent “insistence” of my office on the reviewapplicationroute being followed. The conclusion reachedby the author is that it will be “a risky decision for a fundto take a chance in the High Court”, the danger beingthat “someone might successfully challenge theRegistrar’s reluctance to make use of appeal procedure”.I do not intend to use this forum as a means ofresponding to the contents of the article (it is after all, asyou lawyers will point out, just an opinion), but rather toenlighten you about the “position” that my office hasadopted in dealing with funds which have encounterederrors in their schemes subsequent to approval.1The article was entitled “The language trap” and the author is Pasno N Nyachowe, an attorney in the employ ofBowman Gilfillan attorneys. A copy of the article is attached.2


In our view, the legally correct, most efficient and costeffective remedy must be implemented. All of this musttake place within the framework of the law. Let us firstlyexamine , therefore , the significant aspects of surplusapportionment , having regard to what the Legislatureintended to achieve:1. The approval of a fund’s surplus apportionmentscheme is an administrative act by the Registrar.2. Upon approval, a scheme confers rights andreasonable benefit expectations upon thosestakeholders to whom surplus has beenapportioned.3. Once a scheme is approved, the Registrar is functusofficio.4. There is no provision in the Pension Funds Act whichallows the Registrar to revisit his decision to approve3


a scheme, such as the power of the Registrar to setaside section 14 certificates. 25. An approved scheme that contains errors of factcannot and should not be implemented. It should beset aside as expeditiously as possible to ensure thata revised scheme is submitted, considered andapproved.6. The setting aside of an incorrect scheme will bringabout legal certainty for the fund and itsstakeholders and will open the door for the correctscheme to be approved and implemented in theinterest of stakeholders.7. Where material errors of fact are uncovered in aSAS,the remedy of a review will be available to boththe Registrar and any party prejudicially affectedthereby.2Section 14(6) of the Pension Funds Act4


Whilst it is undoubtedly correct that the review andappeal procedures are the only possible remedies toaddress the setting aside of an approved surplus scheme,the question that must be answered in each instance iswhether or not an appeal is necessarily an internalremedy that is available to a fund whose schemecontains errors of fact. In the past, criticisms leveledagainst the Registrar in respect of the perceived“position” that he had adopted seem to have been basedsolely on an analysis of the provisions of PAJA (thePromotion of Administrative Justice Act )and moreparticularly the requirement that all internal remediesmust first be exhausted before review proceedings in aCourt may be instituted. The following two aspects seemnot to have been factored into the equation:5


1. The exact nature of what the Registrar approves interms of a surplus scheme; and2. The jurisdictional requirements of section 26 of theFinancial Services Board Act for an appeal.With regard to the first point, a surplus scheme isapproved in accordance with the provisions of sections15B(8) and (9) of the Act. The Registrar’s approval is inrespect of the apportionment of actuarial surplusamongst the different classes of stakeholders.Where the distributable surplus in a fund is utilisedexclusively for the top‐up of benefits for pensioners andformer members, the Registrar approves a first‐tierdistribution of the fund’s surplus. The Registrar does notconsider or approve the individual payment orcalculation of the increased benefit payable to eachformer member or pensioner. The Registrar approves6


surplus apportionment on a globular or stakeholderlevel.The same applies to a second‐tier distribution where theboard of a fund apportions the residual surplus betweenthe various classes of stakeholders whom it haddetermined should participate in the apportionment. Theapportionment scheme for the distribution of residualsurplus expresses the apportionment of surplus to thedifferent stakeholders as a percentage of the totalsurplus. This is what the Registrar considers andapproves, namely the distribution of surplus on aglobular or stakeholder level.This approach by the Registrar was in fact confirmed bythe Appeal Board in the determination of the SouthernSun Group Retirement Fund. 33The determination was issued on 30 April 2008.7


The second aspect that must be considered is therequirement of section 26 of the FSB Act that a person“who is aggrieved” by a decision of a decision‐maker(such as the Registrar) may appeal against that decisionto the Appeal Board of the FSB.Who is an aggrieved person? And what does it mean?Our courts have decided that “a person aggrieved” issomeone against whom a decision has been pronouncedwhich has wrongfully deprived him of something, orwrongfully affected his title to something. 4Such aperson is someone whose legal rights have beeninfringed – he is a person harbouring a legal grievanceand not just a person who is disappointed ordisgruntled. 5 The Appeal Board itself has on occasionpronounced on the content of this jurisdictional4Ex Parte Sidebotham (1880) 14 SHB 458 (AC) per James LJ5See Janse van Rensburg v The Master 2004(5) SA 173 (T) at 180, LL Mining Corporation v Namco (Pty) Ltd (inliquidation) and Others 2004(3) SA 407 (C) and Francis George Hill Family Trust v South African Reserve Bank &Others 1992(3) SA 91 (AD) at 102C‐D.8


equirement in, for instance, the appeal matter of ThreeDiamonds Trading 35 (Pty) Ltd v Registrar of FinancialServices Providers.So, in order to have an internal remedy that must first beexhausted, it is necessary to determine whether or not aprospective appellant will satisfy the jurisdictionalrequirements of section 26 of the FSB Act. That enquiry isa factual enquiry which must be determined withreference to the facts of each particular case.Allow me now to briefly discuss the various cases thathave presented themselves in this regard.The very first scheme in which errors of fact wereuncovered subsequent to its approval was that of the ICLSouth African Pension Fund. The error subsequentlyuncovered by the fund was that its actuarial surplus wasunderstated as a result of an option that was valued asnil, but which had an actual value of R29 million. The9


approved scheme comprised both a first tier and aresidual distribution.The Fund made it clear in its founding papers that neitherthe Fund nor the board had suffered any legal grievanceas a result of the Registrar’s approval of the scheme.Hence the internal remedy of an appeal to the AppealBoard was not available to the Fund. If you will allow me,I shall put it a little more bluntly: Neither the Fund northe board can be aggrieved persons where theysubmitted the incorrect information to the Registrar.In the matter of the Mount Nelson Hotel PensionScheme a similar application for the review and settingaside of the Registrar’s approval of the fund’s surplusscheme was served on the FSB. The error of factuncovered was that incorrect pensioner details wereused by the fund’s valuator when calculating theactuarial surplus available for distribution. This resulted10


in the distributable surplus being understated byapproximately R500 000.When considering a surplus apportionment scheme, thecalculations done by a valuator are not something withwhich the Registrar is presented. Whilst the basis uponwhich the liabilities of a fund is determined is provided tothe Registrar, it is simply the formula (or put differentlythe “result” of the valuator’s calculations). The particularapplication of the formula to the specifics of a fund is notsomething that the Registrar interrogates to see forinstance whether or not the valuator made any errors.Once again: The Fund could not have been aggrieved as aresult of the Registrar’s approval of the scheme when thefund itself submitted the incorrect scheme.The application was granted by the High Court on anunopposed basis after the Registrar indicated in a letterto the Fund that an appeal under section 26 of the FSB11


Act is not available to it, as the fund was not aggrieved bya decision of the Registrar but rather as a result of itsown actuary and consultant having made an incorrectcalculation.Two further applications for the review and setting asideof the approval of surplus schemes were received : onefrom the Grinaker Group Pension Fund and the otherfrom the Sentrachem Group Pension Fund.· In respect of the Grinaker scheme it was uncoveredthat the Fund’s actuary had made an error in thecalculation of the Fund’s liabilities. The effect of theerror did not affect the amount of distributablesurplus, but was such that whilst the initial approvedscheme comprised both a first tier and a residualdistribution, a revised scheme would only cover aproportional first tier distribution to formermembers.12


· In respect of the Sentrachem scheme it wasdiscovered that the valuation upon which thesurplus scheme was based had failed to provideproperly for the transfer values payable in respect ofsome members who had ceased to be contributorymembers of the Fund at a particular date, but whosetransfer applications had not yet been approved.The effect of the error was that the fair value ofassets was overstated by an amount of R16.5million.In neither of the two applications did the funds addressthe appeal procedure under section 26 of the FSB Act orthe requirement to first exhaust an internal remedybefore embarking upon a review application. No doubt,both funds were advised that they would not satisfy thejurisdictional requirement of an “aggrieved person” inorder to lodge an appeal to the Appeal Board. Both13


schemes were set aside on application to the High Courtafter the Registrar filed answering affidavits in which heindicated that the relief sought was not opposed, butthat the errors of fact occurred not as a result of theactions of the Registrar, but rather as a result of thevaluators having made incorrect calculations.My office has already been informed of two furtherintended review applications to set aside approvedsurplus schemes.In both instances the legalrepresentatives of the Funds concerned interacted withmy office to discuss the nature of the errors and theappropriate remedy.And this, ladies and gentlemen, has been an approachthat I welcome. At the heart of the matter lies the rightsand reasonable benefit expectations of the stakeholders.Acting in their interests, my office has been at pains toassist where possible, to do what is necessary to ensure14


that incorrect schemes are not implemented, and thatthey are overturned as quickly as possible. In getting tothat point my office has no “preference” in respect of theappropriate remedy to set aside an approved surplusscheme that contains errors.· What is of importance is that an incorrect schemecannot be implemented and should be set aside assoon as possible to ensure legal certainty;· Coupled with legal certainty is the need to satisfy thelegitimate benefit expectations of pensioners andformer members – people who are waiting for theirshare of the surplus and to whom even a smallbenefit allocation might make a big difference;· In each instance careful consideration is given to thenature of the errors, the effect thereof and whetheror not an appeal against the Registrar’s decision toapprove the scheme is available. By now you will15


appreciate that the jurisdictional requirement of an“aggrieved person” might in most cases be astumbling block for a fund or its board (being thevery persons who submitted the scheme) to take thematter on appeal.The review application route has, thus far, proved to bethe appropriate remedy. Not only that, but it has alsoproved to be effective as all of the applicationsmentioned above served before Court within a period ofapproximately 2 to 3 months after having been issued.This is very quick when compared to simply theprocedural aspects applicable to appeals before theAppeal Board –· an appeal must be noted within 30 days from thedate of decision,· the Registrar must provide reasons within 1 monthafter the appeal was noted and16


· the appellant must file grounds of appeal within 1month thereafter.So working simply on these periods an appeal might noteven be ripe for hearing at the end of 3 monthssubsequent to the approval of a scheme. And since theAppeal Board of the FSB is not in permanent sitting, butis convened ad hoc for specific cases as and whenmatters are ripe for hearing, it inevitably takes evenlonger to enroll an appeal for hearing. It might well takeup to 6 or 8months for an appeal to be heard.Two further aspects relating to the nature of an appeal tothe Appeal Board must be highlighted.The first is whether a person who has not received acorrect amount of money in respect of an approvedsurplus scheme can appeal against the approval of thescheme to the Appeal Board. Can such a person be saidto be aggrieved as a result of the Registrar’s approval of17


the scheme? This is not a situation with which the FSBhas been confronted as yet, but one of which we areacutely aware since complaints are received virtually ona daily basis about the allocation of surplus. Although, asI have indicated, each case must be determined withreference to its peculiar facts, it would seem that wherean incorrect amount is paid to a former member orallocated to a pensioner or other stakeholder based onan error of calculation, the appeal remedy would also notbe available to such a person. The reason? The Registrardoes not consider or approve the calculations of benefitspayable to individual stakeholders. He approves theapportionment of surplus (expressed as a percentage) tothe classes of stakeholders. To hold that individualstakeholders are aggrieved at the Registrar’s approval ofa fund’s surplus scheme will open the floodgates andliterally incapacitate the Appeal Board of the FSB. Toillustrate the point, my office has recently been18


approached by a fund who incorrectly implemented anapproved scheme. The fund’s administrator made amistake in calculating the amounts payable to individualstakeholders – some were paid too much, others toolittle and some who were not entitled to a minimum topupwere even paid an enhancement. When the error wasuncovered, some even suggested that the scheme shouldbe set aside and amended to be brought in line withwhat was paid. Having considered the matter my officewas at pains to point out that there was no error in thescheme that was approved and that it should beimplemented as is. The fact that the fund may have ashortfall to effect the balance of payments due in termsof the scheme is an altogether different issue that has tobe addressed by those responsible for the error.The second point in respect of the nature of appeals isthat prior to February 2009 such appeals were appeals in19


the wide sense, that is, they amounted to a total reconsiderationof the matter and the Appeal Board(having stepped into the shoes of the Registrar) was atliberty to take into account new and further informationthat did not inform the Registrar’s original decision.However, since the promulgation of the FinancialServices Laws General Amendment Act, No 22 of 2008,this is no longer the position. Appeals are now narrow asunderstood in the traditional sense and must be decidedon the written evidence, factual information anddocumentation submitted to the decision‐maker beforethe decision, which is the subject of an appeal, wastaken. Further or new evidence (such as the errorssubsequently uncovered in surplus scheme) my only beintroduced by an appellant on application and on goodcause shown. The FSB Act now provides that if suchfurther evidence or information is allowed into the20


ecord of appeal, then the matter must revert back tothe decision‐maker concerned for re‐consideration andthe appeal is deferred.So even if one can arguably conceive of the notion thatthere might be a way in which the existence of the errorsmay be introduced on appeal for reconsideration by theRegistrar, the Registrar has not been granted the right toset an approved scheme aside. The Act provides that theRegistrar may take a “final decision” once he hasconsidered the further evidence. However, that “finaldecision” entails an indication by the Registrar whetherhe stands by his original decision (oppose the appeal) orwhether he will abide the decision of the Appeal Board(not oppose the decision) should the appeal proceed.And whilst the introduction of the errors in a scheme byway of additional information in an appeal record may bepossible, it will not address or solve the jurisdictional21


equirement that the person appealing must be a personaggrieved at the Registrar’s decision. I raise this issue,but point out that all of the review applicationsmentioned earlier were instituted prior to the 2008amendment of the FSB Act. They were all institutedbefore the nature of the appeal and the appealprocedures were changed.In conclusion, I assure you that my office takes the errorsuncovered in surplus schemes very seriously. Weappreciate that such errors do occur and there willundoubtedly be many more schemes in which sucherrors are uncovered in the future. Careful considerationis given to each case to determine exactly what would bethe legally correct remedy. Review applications to theHigh Court have turned out not only to be the correct,but also the most expedient and cost effective remedy.22


The remedy must be expedient because stakeholders’rights and reasonable benefit expectations must besatisfied and I am afraid patience in the public space hasrun out with both the Regulator and the Retirement Fundindustry in respect of the finalisation of the surpluslegislation that was enacted more than 9 years ago.The remedy must also be costs effective – someone mustpick up the costs for the errors – and in this regard theRegistrar’s position is also clear – the stakeholders in anygiven scheme should not be prejudiced by the errors ofothers.And in that regard, ladies and gentlemen, you, as pensionlawyers, have a critical role to play in determining whoshould be held responsible, which is something thatlawyers are especially good at ,as I have learnt from themany criticisms leveled against my office!23


I THANK YOU AND TRUST YOU ENJOY THE REST OF YOURCONFERENCE IN THIS WONDERFUL PART OF OURCOUNTRY.24

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