By David Geral Friday, October 08, 2004

The Pension Funds Act 24 of 1956 requires trustees of pension funds to apportion the actuarial surplus of funds as at the “surplus apportionment date” between the various classes of stakeholders, being “current members (including pensioners and deferred pensioners), former members and the employers”. Section 15B(5)(c) reads:

“After deducting the cost of increases to former members and pensioners … the balance of the actuarial surplus shall be equitably split between existing members, former members and the employer in such proportions as the board shall determine after taking account of the financial history of the fund: Provided further that the registrar may prescribe certain methods which, if used, shall be deemed to be equitable.” (Emphasis added).

Section 15B(9)(b)(ii) provides that an apportionment shall be of no force or effect unless the registrar is furnished with a certificate signed by the valuator stating, where it was necessary for the board to apply its discretion “whether the exercise of such discretion was not unreasonable taking into account the demands of equity within the bounds of practicality and the circumstances of the particular fund”. Section 15B(3)(b) contains a similar (although not identical) requirement regarding the report of the former member representative.

The term “equitable” can be defined as “just, conforming to principles of justice and right” [1], “impartial or reasonable; fair” and “equitably” is the corresponding adverb.[2] Equity can be distinguished from justice:

“Equity seeks to carry out justice in each individual case, by disregarding technicalities and by looking into circumstances of the parties. … Equity is not used to usurp the function of the law but to ensure its proper operation in accordance with the principles of justice.” [3]

Exercising a Discretion
Section 15B(5)(c) requires the trustees to exercise a discretion informed by two predominant factors: the financial history of the fund[4] and the requirements of equity. In the English case of Edge v Pensions Ombudsman[5]  the Court stated that trustees who are entrusted with exercising a discretionary power are required to exercise “the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant”.  

In the case of Harris v Lord Shuttleworth[6] the court adopted the principles laid down in Lee v Showmens Guild of Great Britain[7] which were summarised as follows:

“(a)      The trustees must ask themselves the correct questions;
(b)        They must direct themselves correctly in law, in particular they must adopt a correct construction of the pension fund rules; and
(c)        They must not arrive at a perverse decision, i.e., a decision to which no reasonable body of trustees could arrive, and they must take into account all relevant but no irrelevant factors.”

In South Africa, prior to the 2001 amendments to the Act, the Adjudicator had to assess whether or not trustees acted rationally and reasonably in the exercise of their discretion in respect of, inter alia, the distribution of the surplus in Petch vs. EIlman Plastics Pension Fund and Others[8].  He held that:

“[M]y function is not to impose views and preferences on funds but rather to ensure that a proper decision making process has been followed and that decisions taken are not unreasonable and do not unfairly discriminate against any member or group of members.”

In Jenkinson v Nedcor Pension Fund[9] the Adjudicator again commented on the test for a fair distribution of surplus:

“I am satisfied that [the basis used] constituted a rational basis to determine which category of former members of the fund should be paid the enhancement and thereby share in the surplus. The test is not one of fairness but of proportionality. The concept of proportionality in administrative law expresses the idea that the extent to which the action of the public authority may infringe individual rights should not go beyond the degree necessary for serving the public interest….”

This procedural approach, as outlined in English case law and the Adjudicator’s determinations, should inform the valuator’s approach under section 15B(9)(b)(ii) and the approach of the former member representative under section 15B(3)(b)(ii), notwithstanding that it was formulated before these sections were enacted.

Section 15B(9)(h) states that the apportionment of surplus shall be of no force or effect unless the registrar is satisfied that the scheme is “reasonable and equitable and accords full recognition to the rights and reasonable benefit expectations of existing members and former members in respect of service prior to the surplus apportionment date”. (Emphasis added). This does not expressly empower the registrar to consider the equity of the split in terms of section 15B(5)(c). However, to the extent that it could be construed to do so, the registrar should take heed of the approach outlined above.

Methods which are “Deemed Equitable”
In terms of the proviso to subsection 15B(5)(c), the Registrar has prescribed methods for apportioning actuarial surplus that shall be deemed to be equitable.[10]  In our view, if in a particular case, trustees adopted a prescribed method, but ignored other relevant considerations or took into account irrelevant ones, that scheme would be open to challenges even if the registrar were to find the scheme to be reasonable and equitable. Furthermore, the trustees may be accused of failing to apply their minds to the decision. Their actions could, potentially, be reviewable, irrespective, and independently, of the finding of the registrar under section 15B(9)(h).

Both valuators and former member representatives are required to report on the reasonableness of the exercise by the trustees of any discretion they may exercise in the context of a surplus apportionment process and should therefore be aware of the Adjudicator’s approach described above. Trustees should, similarly, ensure that when they exercise their discretion under section 15B(5)(c) they follow a “proper decision making process” and reach a conclusion which is “not unreasonable and [does] not unfairly discriminate” against any of the stakeholders. In our view, trustees cannot avoid their duty in this regard by relying on any prescribed method that may not be applicable to a particular fund’s circumstances.

[1] Black’s Law Dictionary (7 ed) 558.

[2] Collins English Dictionary (2 ed) 516.

[3] DH van Zyl, “The Significance of the Concepts of Justice and Equity in Law and Legal Thought” (1988) 101 SALJ 272 at 279 quoting Bin Cheng, “Justice and Equity in International Law” (1955) 8 Current Legal Problems 185.

[4] There is no scope in this article to explore the meaning of the concept of “financial history of the fund”. See the English case of Edge v Pensions Ombudsman (1999) 4 All ER 546 where the court held that when considering whether to increase benefits “the trustees may be expected to give weight to the claims of those whose contributions are, or will be, the effective source of the surplus.”

[5] Supra note 8

[6] [1994] ICR 991 at 999

[7] [1952] 1 All ER 1175, [1952]  2 QB 329

[8] [2003] 1 BPLR 4281 (PFA)

[9] [2001] 9 BPLR 2467 (PFA)

[10] “Methods of Apportionment Deemed to be Equitable” Board Notice 37 in Government Gazette 24809 of 25 April 2003