PENSION BENEFITS AND THE EMPLOYMENT CONTRACT
Recent developments in South African law have seen ‘pension law’ start to emerge as a specialised area of law in its own right. This has raised issues around where to locate ‘pension law’ in the broad legal spectrum. More frequently pension lawyers are being faced with the question as to whether pension law is something completely separate from employment and labour law or whether, and to what extent, they are linked.
This issue emerges most starkly when considering the extent to which an employer is permitted to unilaterally amend pension benefits. Recent amendments to the pension legislation in South Africa have prompted a move, on the part of many employers, from defined benefit funds to defined contribution funds.(2) The question that arises is whether an employer may do so unilaterally or whether the employer is obliged to obtain the consent of the employees concerned. The answer to this question may depend upon the extent to which the pension promise is incorporated into the employment contract, if at all.
In addition, there are a range of employment decisions that impact the content and delivery of the pension promise. These would include, for example the retirement age set by the employer, the reason for the termination of employment, the restructuring and/or the sale of a business which may require the consequent transfer of employees to a new employer, the employer’s decision to liquidate or withdraw from a fund. The employer’s discretion in relation to these issues may be located in the employment contract, or in the fund rules, or both. The issue that then arises is which is the appropriate forum, and branch of law, to resolve these disputes. Understanding the link between pension benefits and the employment contract is, therefore, important in this context also.
As a starting point it should be noted that South African law has accepted the integral link between pension benefits and employment. Moreso, it has accepted that pension benefits are part of remuneration as opposed to gratuities bestowed within the benevolence of the employer.(3) The precise content of the pension promise made by the employer to an employee is, however, not always apparent.
Pension benefits may be express terms of the employment contract. Most often, however, such express terms are limited to membership of the fund, and perhaps the contribution rates. Usually a contract would merely state that the employee is entitled to the benefits in terms of the rules of the fund. This type of contract may lead employers to assume that benefits, and perhaps even the fund arrangements themselves, can be varied at will without the need for negotiation or consultation with affected employees. However, as is becoming clearer, this may not be the case.
The extent to which pension benefits may be incorporated into the employment contract is an extremely complex issue and is not yet clear in South African law. Current thinking postulates at least three possibilities, each of which is supported by case law and academic authority. Much of the uncertainty in the law stems from the fact that at the moment all three of the possibilities discussed below are being applied in different ways, leaving employers uncertain as to their obligations with respect to pension benefits.
The first possibility is that there is no incorporation of the pension benefits into the employment contract at all. On this theory, although the benefits arise out of the employment relationship, once they come into existence, and the employee joins the fund, these benefits are governed independently of the employment contract. One difficulty with this approach is that it would seem to suggest that pension benefits may be discretionary and could be subject to change by a simple rule amendment. Further, the employer’s exercise of the withdrawal rule could result in an employee being forced to join another fund with significantly less benefits. On this approach, the employee’s remedy would lie in challenging the exercise of the discretion as opposed to enforcing a contractual right to such benefits.
A further difficulty with the no incorporation theory is that it seems to have created an overlapping jurisdiction over employment issues in the office of the Pension Funds Adjudicator and the labour forums such as the Labour Courts and the Commission for Conciliation, Mediation and Arbitration. This may lead to forum shopping which in turn breeds uncertainty, unpredictability and delay in the resolution of pension disputes.
The second possible relationship between pension benefits and the employment contract is that because pension benefits arise out of, and as a consequence of, the employment relationship the rules governing the granting and administering of such benefits are wholly incorporated into the employment contract.
South African courts have accepted that pension benefits may well fall within the scope of conventional terms and conditions of employment.(4) One possible mechanism whereby such benefits could be argued to be incorporated into the employment contract, as implied terms, is by means of the officious bystander test, whereby a court would accept that certain terms and conditions were so obvious that their mention at the time of contracting was not necessary.
One difficulty with the argument that all the rules are incorporated as terms and conditions of the employment contract is that some rules are simply not appropriate for incorporation. For example, those procedural rules that deal with the election of trustees, or their powers and duties, are misplaced as part of an employment contract between the employer and employee.
A further feature of the full incorporation approach is that the employer’s amendment, withdrawal and liquidation powers would also be incorporated into the employment contract. As such this would afford employers the same rights under the employment contract that they have under the rules to amend benefits or to liquidate or withdraw from a fund. It does not, however, offer employees more protection with respect to their benefits, as their contractual rights are more limited in nature.
An example of the full incorporation theory appears to be Labour Court case of Coetzee v Moreesburgse Koringboere Kooperatief BPK(5), in which the court made statements to the effect that: “[i]t is common cause that in July 1986 the [employer] changed the terms and conditions of employment by changing the terms and conditions of the pension fund”, and that “the [employer] had committed an unfair labour practice in seeking to change unilaterally his terms and conditions of employment by virtue of a change to the regulations of the pension fund.”
The case contains no discussion of the basis for, and extent of, incorporation – if any at all. The court does, however, appear to accept incorporation of the fund rules into the employment contract but nonetheless permits a unilateral variation of terms and conditions, presumably on the basis that if all rules are incorporated as terms and conditions, then those rules enabling unilateral amendments must also be incorporated. Although not explicitly stated in Coetzee’s case, the full incorporation theory does appear to have influenced the Court’s finding in that ultimately, the Court’s conclusion was that the employee had “committed his destiny, insofar as it concerned his retirement benefits and his retirement age, to the hands of the pension fund when he joined the employer and his consent at the stage that this variation was proposed was not required by law. His consent had been procured when he joined the pension fund.”(6)
The third possible relationship between pension benefits and the employment contract lies somewhere between the abovementioned two extremes and suggests that there is partial incorporation, as implied terms, into the employment contract of only those rules necessary to give content and meaning to the pension promise. These rules would be, for example, those that define what benefits will be obtained on retirement or withdrawal from the fund, when they become due, rules regarding the different kinds of benefits available, the manner in which such benefits are to be calculated, the circumstances under which such benefits become due, the retirement age at which the employee becomes eligible for such benefits and so on. On this approach an employee could enforce his/her contractual right to such benefits.
Although not elaborated upon, it might be that the Adjudicator’s statement in the case of Mellet v Orion Money Purchase Fund & Another (8) was informed by this approach to partial incorporation. In this case, the Adjudicator held as follows:
“There is no direct mention in the rules of the fund of a general duty on the employer to advise a member of a contingent right of which he may be unaware. However, it is common cause that membership of the fund and entitlement to the benefits in terms of the rules of the fund are incorporated in the employment contract. One may then consider whether it is an implied term of the employment contract that the employer would bring to the attention of the employee terms of the contract between them, including the terms contained in the pension fund rules, that could be advantageous to the employee."(7)
The Adjudicator then went on to clarify that “the contractual terms (the rules of the fund) relating to pension benefits are incorporated in the employment contract”.(9)
English law appears to have dealt with the issue of partial incorporation in the context of collective agreements and emphasises the appropriateness of incorporating a particular clause or rule into the employment contract, as well as inquiring into the purpose to be served by such incorporation.(10) While South African commentators(11) have lent support to this approach, the issue has not been settled before our courts as yet.
To date, the pronouncements by South African courts and by the Adjudicator as to the manner and extent of the incorporation of pension benefits into the employment contract have been conflicting. Case law has certainly hinted that such a possibility exists. In light of this, employers ought to be mindful of any implied contractual obligations that might require them to consult and negotiate with employees before amending benefits or the fund arrangements themselves.
The question of which of the above three approaches would apply in a given dispute is largely a factual issue. Much will depend on the wording of the employment contract, the fund’s rules, any oral undertakings between the parties, the employee’s access to and knowledge of the rules and so on. These and various other factors will determine the precise content of the pension promise, if any, that is made by the employer to the employee.
At this stage the law unfortunately offers little certainty to employers and for now a cautious approach on the part of employers would perhaps be best.
1. This issue has been canvassed by the authors in some detail in the following articles: The Pension Promise: Pension Benefits and the Employment Contract (2003) 24 ILJ 1 and The Pension Promise: Regulating Employer Conduct.
2. These changes have been introduced by the Pension Funds Second Amendment Act 39 of 2001 which now regulates the use and distribution of the fund’s surplus, guarantees the participation of former members stretching back until 1980 in such a distribution, and prescribes minimum benefits for all members.
3. See Resa Pension Fund v Pension Funds Adjudicator & Others 2000 (3) SA 313 at 322.
4. See SA Society of Bank Officials v Bank of Lisbon International Ltd (1994) 15 ILJ 555 (LAC).
5. (1997) 18 ILJ 1341 (LC). We are mindful that there may be some debate as to whether this case is evidence of a ‘full incorporation’ approach or a ‘no incorporation’ approach. On either theory the result of the case would tend to be the same, and the uncertainty as to the court’s stance in this case reflects the general uncertainty in the law when faced with such matters.
6. Ibid at p1344.
8.  12 BPLR 2824.
9. Ibid at p2832.
10. See BA Hepple and O’Higgins Employment Law 3ed (1979) at p111; Burroughs Machines Ltd v Timmoney  I.R.L.R. 404 (C.S) at p406; R v IDT, Ex Parte Portland UDC  3 All E.R 18 at p25.
11. See M Wallis Labour and Employment Law (1992) at p44.