Friday, March 31, 2006

Participating employers in South African registered pension funds, including multi-nationals with branches or subsidiaries in South Africa, should beware of being implicated in indirectly discriminatory practices in or by those pension funds.

Under South African law, a pension fund is a legal entity independent of its members and of the employers that contribute to it on behalf of their employees. 

South African pension funds must be managed by a board consisting of at least four board members, at least 50% of whom the members of the fund have the right to elect.  Accordingly, the responsibility for all aspects of the management of a pension fund rests with the board of management.  Invariably, however, certain aspects of the administration of a pension fund are delegated by the board of management to professional administrators, usually divisions or subsidiaries of life assurance companies approved for that purpose by the registrar of pension funds (“the registrar”).

Multi-employer funds are common in South Africa and are becoming increasingly popular.  Multi-employer funds are also ultimately administered by a board of management, the difference being that the board is comprised of persons appointed, in most cases, by the company that acts as the administrator of the fund.  Although the PFA does not expressly provide a statutory framework for multi-employer funds, they are numerous in South Africa and are treated and regulated in the same manner as traditional single-employer funds.

The dramatis personae in a typical retirement funding arrangement in South Africa are therefore the participating employer, its employees who are members of the fund, the pension fund itself, its board of management and its administrator.

Let us assume that an employer-company participates in a multi-employer fund which is administered by an administrator whose delegated responsibilities include the administration of the investments of the fund.  Prior to commencing its participation in the fund, the employer and employees are made to understand by the administrator that the fund allows its members individual member investment choice.  However, in the interests of ease of administration, and also in the interests of financially unsophisticated or disinterested members, the fund adopts differing default asset spreads in relation to different age-bands of members.  In the absence of instructions to the contrary, younger members would automatically have the assets that make up their members’ shares invested in an aggressive (high-risk, high-growth) portfolio.  Members within a given number of years of their anticipated retirement date would be invested automatically in a conservative portfolio. The remaining members’ attributable assets would be invested automatically in a medium-risk, medium-growth portfolio.  A member’s investment would be switched automatically into the appropriate portfolio upon the member’s attaining the relevant age. 

The administrator makes it clear to the employer and employees that members who so wish, may customise their investment portfolios, subject to an administration fee, or may instruct the fund that they wish to be invested in a portfolio other than the applicable default portfolio, subject only to a switching fee, but no ongoing additional administration fee.  The fund informs members that, due to the structuring of the administration fee in respect of customised portfolios, it would generally be inadvisable for members with assets of less than Rand 100 000 under investment to elect individual member investment choice, and that that option would also be inadvisable for members without sufficient investment knowledge or access to appropriate financial advice.
Upon joining the fund, as she is compelled to do in terms of her employment contract with the employer, an employee approaches the employer with a concern.  She has a relatively short period of service with the employer and has amassed only an insignificant amount as her member’s share in the fund.  She is financially unsophisticated, but has learnt that all of the three default portfolios entail investments in which she is prohibited from having an interest, or from which she is prohibited from deriving a benefit, by virtue of the tenets of her faith.  Accordingly, she would either need to forego the returns generated from the offensive investments, or would need to opt for a customised portfolio at considerable, unjustifiable cost to her.  She is not prepared to accept either of those consequences.

What, then is to be done, and who is required to do it?  These questions introduce a spectrum of legislative instruments enacted with the intention of eliminating discrimination and promoting equality in South African society.  For present purposes, there is not scope to explore whether or not this scenario necessarily gives rise to unfair discrimination which is unjustifiable, and that is accordingly assumed.

The employer cannot simply lay the blame at the fund’s or the administrator’s doors.  In terms of the Employment Equity Act (“EEA”) it “must take steps to promote equal opportunity in the workplace by eliminating unfair discrimination in any employment policy or practice” [.  If the employer takes no steps to comply with this positive duty, then the employee would be entitled to refer a dispute to the CCMA, a statutory tribunal for conciliation, and if conciliation were to fail, to the Labour Court or to arbitration before a CCMA commissioner.  The court or arbitrator could award appropriate declaratory or substantive relief.

The employee could (alternatively) refer a dispute to the CCMA on the ground that by compelling her to participate in the fund on the fund’s terms, the employer is committing an “unfair act … relating to the provision of benefits to an employee” which amounts to an unfair labour practice under the Labour Relations Act (“LRA”).  The CCMA is empowered to determine the dispute on terms that it deems reasonable, which may include just and equitable compensation not exceeding the value of twelve months’ remuneration.

Finally, the employee could approach the Labour Court or the High Court for the ordinary remedies for breach of contract, on the basis of the employer’s duty of good faith.  In IBM Pensioners Action Group v IBM SA (Pty) Ltd & Another, the Pension Funds Adjudicator referred to the English case of Imperial, in which the court held that –

In every contract of employment there is an implied term – ‘that the employers will not, without reasonable and just cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.’
Although the fund is not subject to the provisions of the EEA or the LRA, its board is nevertheless obliged, in terms of section 7D(f) of the PFA to “ensure that the rules and the operation and administration of the
fund comply with … all other applicable laws”, which include the national Constitution and the Promotion of Equality and Prevention of Unfair Discrimination Act (“PEPUDA”).
Section 9 of the Constitution provides that no person (a pension fund is a person) may unfairly discriminate directly or indirectly against anyone on one or more grounds, including race, gender, sex, pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability, religion, conscience, belief, culture, language and birth.  Although the employee would be bound by the rules of the fund, she would be entitled to approach the Equality Court or the Adjudicator to obtain a ruling that the rules that require her to choose between investing against her belief and suffering lesser benefits than her peers of other faiths are unfairly discriminatory and unconstitutional.  Both of those fora would be prepared to entertain a prayer for constitutional damages. 
The employee could also approach the Adjudicator or the High Court for an order that the board is in breach of its statutory duty to procure the adherence of the fund to applicable law.  The likely outcome of such an application would in all likelihood be a compliance order.
The board members and the administrator would also need to be aware that the employee could lay a criminal charge against the individual members of the board, and against the administrator, in terms of the Financial Institutions (Protection of Funds) Act (“the FIA”), which provides, in section 2(1)(a), that –
“A director, member, partner, official, employee or agent of a financial institution or of a nominee company who invests, holds, keeps in safe custody, controls, administers or alienates any funds of the financial institution or any trust property … must, with regard to such funds, observe the utmost good faith and exercise proper care and diligence”
It is not clear in South African law whether unconstitutional conduct necessarily amounts to a failure to observe the utmost good faith or to exercise proper care and diligence, but in a sufficiently compelling case, it would be unsurprising (in my opinion) if a court were to come to that conclusion.  The FIA provides that a person who contravenes or fails to comply with any provision of the Act is guilty of an offence and on conviction liable to a fine or imprisonment for a period not exceeding 15 years.  In addition, a court making such a finding may (among other things) order the transgressor to compensate the fund for any damage suffered as a result of the contravention or failure, and order that the transgressor may not serve as a director, member, partner or manager of any financial institution for such period as the court may deem fit.
The Adjudicator has held that where an employer carries out duties or exercises a right given to trustees in terms of legislation, then that employer is bound by the same standard of care as the legislation imposes on the board.  Presumably he would reach the same conclusion when considering the duties of an administrator mandated to manage the investments of a fund.  The Adjudicator has on several occasions assumed the power to make awards of compensation in terms of section 15 of the FIA.  Accordingly, the employee may simply approach the Adjudicator should she not wish to institute criminal proceedings.
Even if the employee were to proceed against the administrator, the board would do well to heed the comments of the Adjudicator in the matter of Twerefoo v Liberty Life Association of SA Ltd and Others. In that case he stated that the board –

“[C]annot abdicate all responsibility for the investment performance once they have delegated this duty. They retain the residual duties as regards the investment of the fund’s monies as one of the key operations of a fund, which [they] must direct, control and oversee.”
This statement by the Adjudicator raises for the board the spectre of, at best, joint and several liability on the basis of contributory negligence, or at worst, ultimate liability for the conduct of the administrator.
It is therefore clear that a wide array of statutory remedies would be available to the employee on the given facts.  Presumably the employer could seek to avoid liability by moving its employees to a pension fund that does not require the employee to make the choice between her faith and her retirement savings, or the employer could undertake to subsidise employees in her position to the extent necessary to eliminate the discriminatory effect.  Such conduct would not, however, exculpate the fund.  The employer and the fund would probably be best advised to seek to procure a rule amendment in terms of which the administration fee is waived in cases where failure to waive it would result in unfair discrimination.  The ultimate impact of such a rule amendment would be a cross-subsidy among the members of the relevant sub-fund (unless administration costs were for the employer’s expense, which is not necessarily the case), and such a result appears to me to be a fair one.