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South Africa: The Constitutional Court confirms that retrospective rule amendments may not apply before registration by FSCA

3 August 2023
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Overview

  • On 2 August 2023, the South African Constitutional Court handed down judgment in the matter of Mudau v Municipal Employees Pension Fund and others [2023] ZACC 26.
  • In a unanimous decision, the Constitutional Court set aside a decision of the Supreme Court of Appeal and confirmed that a retrospective rule amendment may not apply before it is registered by the Financial Sector Conduct Authority (FSCA).
  • This decision accords with what has always been understood in the retirement fund industry that retrospective rule amendments may not impact on accrued benefits and that a fund cannot act upon or implement unregistered rules before the FSCA approves and registers the rules in terms of the Pension Funds Act.

On 2 August 2023, the Constitutional Court handed down judgment in the matter of Mudau v Municipal Employees Pension Fund and others [2023] ZACC 26.  In a unanimous decision penned by Justice Kollapen, the Constitutional Court set aside a decision of the Supreme Court of Appeal (SCA) and confirmed that a retrospective rule amendment may not apply before it is registered by the Financial Sector Conduct Authority (FSCA).

Background

Mr Mudau (the appellant) was a municipal employee and a member of the Municipal Employees Pension Fund (Fund). He resigned on 31 May 2013 at which time the Fund’s rules stated that upon resignation, a member would be entitled to a withdrawal benefit equal to three times the member’s contribution plus interest (Old Rule). Based on this Old Rule, Mr Mudau would have been entitled to a withdrawal benefit of just over ZAR 2 million.

On 21 July 2013, however, the trustees of the Fund resolved to amend the Fund’s rules to the effect that a member’s withdrawal benefit would be reduced to one and half times their contributions plus interest (New Rule). Following the decision and on 22 July 2013, the Fund submitted an application to the FSCA to approve the New Rule with retrospective effect from 1 April 2013.

The Fund calculated Mr Mudau’s withdrawal benefit in terms of the New Rule (which was slightly under ZAR 650 000) and made payment to him on 16 October 2013.  The FSCA, however, only approved and registered the New Rule on 1 April 2014 with retrospective effect on 1 April 2013. Accordingly, the Fund paid Mr Mudau a reduced withdrawal benefit based on the unregistered New Rule.

Naturally aggrieved by the Fund’s decision, Mr Mudau lodged a complaint with the Office of the Pension Funds Adjudicator. The Adjudicator agreed with Mr Mudau’s contention that he was entitled to a withdrawal benefit in terms of the Old Rule because his rights had already vested in terms of the Old Rule on the date he terminated employment, and as such, the Fund was not entitled to pay him a withdrawal benefit calculated in terms of the unregistered New Rule that applied with retrospective effect.

The High Court and the SCA

Aggrieved by the Adjudicator’s decision, the Fund and its Administrator unsuccessfully reviewed the Adjudicator’s decision. The matter went on to a full bench of the High Court where the Adjudicator’s decision was upheld, which led to an appeal to the SCA.  Surprisingly, the SCA held that the Fund’s rules read with the Pension Funds Act, 1956 (PFA), allowed the Fund to amend its rules and to determine the effective date of the amended rule. By this, the SCA concluded that the New Rule could apply retroactively to include Mr Mudau’s claim.

The Constitutional Court

Aggrieved by the SCA’s decision, Mr Mudau brought an application for leave to appeal before the Constitutional Court to set aside the whole judgment and order of the SCA.  The Constitutional Court reiterated the SCA’s finding in Mostert N.O v Old Mutual Life Assurance Co (SA) Ltd (2001) in that, although amended rules may have retrospective effect after registration, they do not have binding effect before registration by the FSCA in terms of section 12 of the PFA.

The Constitutional Court held that section 13 of the PFA is clear that it is the registered rules of a fund that are binding on the Fund itself and its members. Thus, only the Old Rule could apply at the time Mr Mudau’s withdrawal benefit accrued. The Constitutional Court rejected the Fund’s reasoning that it paid Mr Mudau’s claim in terms of an amended rule stating that such a decision would have been fatally flawed because there was no amended rule in October 2013 when the Fund made payment to Mr Mudau – as the FSCA only approved the New Rule on 1 April 2014.

The Constitutional Court further held that the SCA’s decision was irreconcilable with the facts before it in that it was indisputable that the Fund has applied a rule that was not registered in quantifying Mr Mudau’s benefits and having accepted that, it should not have decided as it did.

The Constitutional Court also rejected as unsustainable the Fund’s proposition that it was not an unregistered rule that it applied, instead, it was the retroactive application of the New Rule. In drawing the distinction between retrospectivity and retroactivity, the Constitutional Court found that the latter does not even arise in the circumstances because it is thwarted by the trite principle that a rule amendment cannot be applied before it is registered.

As such, when the New Rule was approved by the FSCA on 1 April 2014, Mr Mudau’s claim was no longer in existence for the New Rule to apply to him.  That is, when the Fund made payment to Mr Mudau in October 2013, the Fund was required to finalise Mr Mudau’s claim based on the Old Rule which was the only valid and binding rule at that time.

Key takeaways

It has always been understood in the retirement fund industry that retrospective rule amendments may not impact on accrued benefits and that a fund cannot act upon or implement unregistered rules before the FSCA registers the rules. Therefore, whilst this decision by the Constitutional Court may come as no surprise to many in the retirement fund industry, it was critical that the apex Court confirm this decision to provide much needed certainty on an important socio-economic subject.  The Constitutional Court’s decision thus has a fundamental impact on the security of retirement fund benefits and, importantly, the faith which members contributing to retirement funds have about their financial security.

A copy of the judgment can be accessed here.