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Dealing with processing errors that cause the mismatching of retirement fund returns

8 June 2014
– 5 Minute Read

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Underpaid fund returns, irrespective of the value, do not form part of the “assets” of the fund. Instead, they form part of the benefits of those members who had exited the fund and who were entitled to receive, but did not receive, their total benefit (including fund return) as calculated in terms of the rules of the fund read with sections 14A and 14B of the PFA. Members of a fund will have rights to the assets of the fund in the form of benefits as and when their rights in respect of those benefits have vested in terms of the rules. A former member’s right vests on the day he or she exits the fund. This however does not mean that the fund has to make payment to the member where the amount is so small that it would not make any economical sense to do so – or does it?

The Registrar of Pension Funds (Registrar) on 1 March 2010 issued Interpretation Note 2 of 2010 titled “Fund return and processing mismatch” in an attempt to address the issue. This note provided guidance on the interpretation of section 14A(1)(a) read with the definition of “fund return” (prior to the definition being amended) and section 14B(1)(b) of the PFA. The Registrar said that section 14A(1)(a) can be interpreted in a “narrow” or “wide” sense. On a narrow interpretation the note states that –

  • “… it appears that the board of a fund is not entitled to exclude former members from any increase or reduction in benefits arising from the adjustment of mismatches, and which would have affected fund return, which occurred while they were active members. The definition of “fund return” does not allow for any discretion in the allocation of such returns to members’ individual accounts. It represents the actual returns (whether positive or negative) on the assets of the fund. It implies absolute accuracy in the determination of fund return. The amount standing to the credit or debit of a former member’s individual account at the time of exit, including actual fund return must be paid or recovered, irrespective of the impact thereof on the fund, and former and existing members.”

On a wide interpretation of the same sections, the Registrar said that –

  • “… it appears that the fund’s board may exclude former members and allocate any increases or reduction in benefits to address the impacts of inevitable and unavoidable processing mismatches. This is so because the legislature could not have intended obliging a fund to trace a former member, and make or recover payments, if the value of that increased or reduced benefit exceeds the reasonable cost associated with tracing a former member and making or recovering those benefits.”

According to Interpretation Note 2 of 2010, the Registrar will not object to a wide interpretation of section 14A(1)when assessing compliance with this section if –

  • the quantum of the surplus or deficit resulting from the administrative process and processing mismatches are identified at least each financial year-end of the fund;
  • the aggregate Rand value of the amount in (a), at the financial year end of the fund does not exceed 2% (positive or negative) of the value of the fund’s iabilities as at the same date;
  • the rules of the fund authorise the board, in its discretion, to allocate such amounts to existing members and/or former members. The board must consider including former members, but may decide to exclude former members in order to avoid the erosion of fund assets and existing member benefits because the reasonable cost associated with tracing a former member and making or recovering payments will exceed the value of the increased or reduced benefit; and
  • the board is able to demonstrate that any allocation and exclusion in terms of the rules was done to avoid the erosion of fund assets and existing member benefits because the reasonable cost associated with tracing a former member and making or recovering payments would have exceeded the value of the increased or reduced benefit.

The Financial Services Laws General Amendment Act 45 of 2013 (which came into effect on 28 February 2014) attempted, through the amendments made to the PFA, to resolve the issues pertaining to the processing mismatching of fund returns. This was done through the amendment of the definition of “fund return” in section 1 of the PFA to provide that “the board may use a reasonable approximation, made in such manner as may be prescribed, to allocate a fund return if there are sound administrative reasons why an exact allocation cannot be effected.” Accordingly, a board of a fund now has discretion to allocate fund return if there are sound administrative reasons as to why an exact allocation of fund return cannot be made. The Registrar has not yet “prescribed” the reasonable approximation which may be applied by a board of a fund and we trust this will be done soon.

In the interim, in the absence of any prescribed manner in terms of which a board of a fund is to apply their discretion in relation to the reasonable approximation, boards are left to have regard to what is stated in Interpretation Note 2 of 2010. Until such time as the Registrar prescribes the manner in which a board of a fund may use a reasonable approximation to allocate a fund return, funds should apply the wide interpretation as set out in Interpretation Note 2 of 2010. Of course, a wide interpretation can only be followed if the rules of the fund allow for, or allow that the board of a fund adopt a policy (which policy is subsequently adopted) for smoothing of the rate at which investment returns are allocated to member accounts within the fund.