- Deputy Pension Funds Adjudicator Naheem Essop upheld a complaint by a retired member of the ZF of South Africa Pension and Group Life Assurance Fund.
- The fund must recalculate the capital required to secure the pension promised under its rules and provide the retiree with a written explanation within 30 days.
- The ruling confirms that members of defined benefit funds are entitled to the pension guaranteed by the rules, not simply the pension an actuarial reserve can secure.
A pension fund that promised a retiree a monthly pension of about R112 300 cannot instead provide a lump sum that secures a monthly pension of only about R91 200, the Office of the Pension Funds Adjudicator has ruled.
Deputy Pension Funds Adjudicator Naheem Essop ordered the ZF of South Africa Pension and Group Life Assurance Fund to recalculate the capital amount required to secure the pension guaranteed under its own rules after finding that the fund's approach did not align with its governing rules.
Essop concluded that while actuarial reserve values remain an accepted way to calculate lump sum conversions, they cannot override the benefit promised by the fund's rules.
Retirement benefit sparked dispute
The complainant was employed by ZF Services South Africa (Pty) Ltd from 1 April 1995 until his retirement on 31 October 2023. As a member of the ZF of South Africa Pension and Group Life Assurance Fund, his retirement benefit was governed by the fund's rules.
Those rules calculate a member's pension at 2.5% of final salary for the first 20 years of pensionable service, plus 1.5% of final salary for every additional year of service, with final salary determined by averaging the previous 24 months' remuneration.
Using that formula, the complainant's pension was calculated at R1 347 595.47 per year, which works out to about R112 299.62 per month. Instead of paying that pension directly, however, the fund decided to provide members with a capitalised lump sum to purchase an annuity from a registered insurer.
The complainant received R14 468 962.88. When he approached Sanlam, he was advised that the amount would secure a monthly pension of about R91 200. According to the insurer, approximately R17 million would have been required to provide the monthly pension of about R112 300 calculated under the fund's rules.
Retiree alleged pension guarantee was undermined
The complainant argued that the fund's rules guaranteed him a defined benefit pension, not a lump sum dependent on actuarial assumptions.
He contended that, by applying risk factors when calculating the lump sum and then again when the insurer priced the annuity, he had effectively been penalised twice.
He further argued that transferring responsibility for paying his pension to an insurer contradicted the guarantee inherent in a defined benefit scheme. According to the complaint, the difference between the guaranteed pension and the pension the lump sum could secure represented an 18.9% variance, translating into an initial shortfall of about R2.53 million, with the financial impact expected to compound over time.
The complainant therefore sought an order requiring the lump sum to be increased to about R17 million, enabling him to obtain the pension promised under the rules.
Fund relied on actuarial reserve value
The fund accepted that the complainant's annual pension had been correctly calculated at R1 347 595.47, but maintained that the lump sum of R14 468 962.88, based on a capitalisation factor of 10.7368740878093, was reasonable and consistent with accepted actuarial practice.
It argued that actuarial reserve values are calculated using assumptions regarding mortality, investment returns, and pension increases to ensure the long-term financial sustainability of the fund.
The fund also noted that the complainant's benefit had subsequently been enhanced through a surplus distribution, increasing its value to R18 346 411 as at September 2024.
Although the fund acknowledged that its rules could be clearer in stating that pensions would be secured through actuarial reserve values, it maintained that its calculation complied with accepted industry practice.
Independent actuary supported methodology
An independent actuary appointed by the adjudicator confirmed that the complainant's annual pension had been correctly calculated under the fund's rules and that the capitalisation factor used by the fund was reasonable.
The actuary explained that the difference between the fund's calculations and Sanlam's quotation arose from product features, commissions, insurer loadings, and prevailing market conditions.
Although the actuary said the complainant's interpretation of the rules was arguable, he cautioned that adopting it without qualification could render defined benefit funds financially unsound. He nevertheless concluded that the fund's methodology reflected standard industry practice by calculating the pension, converting it into a capital value using actuarial assumptions, and then allowing the member to purchase an annuity.
Deputy Adjudicator interpreted the rules
Essop found that the central issue was not whether the actuarial methodology was reasonable, but whether the fund's rules allowed the substitution of a defined pension benefit with whatever pension an actuarially determined reserve could secure.
He wrote, “In a defined benefit fund, the member’s entitlement is fixed by rule, and the risk of funding insufficiency lies with the employer or the fund, not the member.”
Essop also referred to Rule 4.2.5, which allows the employer to make additional contributions if payment of benefits places strain on the fund's financial position. He found there was no evidence that paying the complainant the pension defined in the rules would threaten the fund's solvency.
He further stated, “The complainant’s benefit is defined in Rule 5.2, and the Fund must make available the capital amount necessary to secure that pension.”
Essop therefore concluded that the fund was not entitled to calculate the capital sum in the manner it had adopted.
Binding order
Essop upheld the complaint and set aside the fund’s determination that the capitalised value of the complainant’s retirement benefit was R14 468 962.88.
He ordered the fund, within 30 days, to recalculate the capital value required to secure the annual pension of R1 347 595.47, make available or procure the capital necessary to obtain that pension from a registered insurer in accordance with the fund’s rules, and provide the complainant with a written calculation and explanation demonstrating compliance with the determination.
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