Explainer: How the surplus in pension funds works

We know that one day when we’re hobbling around, walking stick nearby, that our pension funds will give us some relief. For some of us that time is still a long way away, but many South Africans who are owed pensions might not know that around the country there are funds that have extra cash.

Defined benefit funds are slowly becoming a rarity in South Africa.
Years back, when defined benefit funds were still the norm, boards of trustees of the funds looked at their accounts after they’d paid expenses to find that they were left with a stash of cash. Put simply, the rules of defined benefit funds determine how much money employees should get upon retirement through a fixed formula. This formula is established according to how long the employee has worked and how much they have earned annually in the last few years before retirement. If, before prescribed minimum benefits became payable in terms of 2001 legislation, an employee resigned, but did not retire, they would often only receive a portion of their own contributions and the interest on it at a low rate. 

A surplus accumulated as result of employees not being paid their full credit when they left before retirement. They ended up leaving with their own contribution and a low rate of interest attached to it, and without their employer’s contributions – which the fund rules did not provide for before the 2001 legislation. There were other factors too: the fund may grow at a rate higher than expected, while at the same time, the fund’s liabilities could be lower than expected. 

Nowadays, defined benefit funds have been largely replaced by defined contribution funds, where employers and employees pay their contributions and they are invested together. When an employee leaves before or at retirement, they automatically receive a benefit consisting of  both the employer and employee payments together with fund return. 

Although there were a number of factors that led to a surplus accumulating in defined benefit funds, what really stumped people before the 2001 legislation regulated how surpluses are to be divided among members of a fund was: What happens to the extra money? Who does the surplus belong to?

The rules of a fund, often established by fund managers and employers, was supposed to be the sacrosanct text on how surplus benefits would be shared. However, in most cases the rules were silent in this regard. In 2001, so-called surplus legislation came into effect which put the onus on fund’s board of trustees to calculate the surplus and determine how it should be divided and then submit the proposed apportionment scheme to the registrar of pension funds, who would either approve or reject it. 

Despite there now being regulation in place for oversight over surplus in funds, questions still remain. Unclaimed benefits, where people who are owed surplus benefits can’t be traced, are a still a big deal. According to regulation 35(4) of the Pension Funds Act, these unclaimed benefits should be put into a contingency reserve account, where if a long-lost beneficiary rocks up, they’ll be able to collect their money, otherwise they should go to unclaimed benefit funds administered by insurers if the surplus was transferred to such a fund. The Guardians Fund is another place there the money where be stored, under the watchful eye of the Master of the High Court, but after 30 years, that money is forfeited to the state.

Regulation 35(4) of the Pension Funds Act prohibits unclaimed benefits from being removed from these accounts for other uses. Earlier this month, Tony Mostert, a well-known pension fund liquidator, had his court application, on behalf of the Picbel Fund, to release these funds dismissed. Mostert argued that the regulation was irrational because it prevented other beneficiaries who are owed money from accessing unclaimed benefits of people who actuaries determined would most likely never be found to claim the money.  

Now, the Southern Sun Provident Fund and the Free State Municipal fund have court applications pending for the regulation to be changed, too.

Many defined benefit funds have been dissolved in South Africa after surplus benefits were either paid to beneficiaries or transferred to an unclaimed benefit fund, but some of  those who remain are still lingering with money to be paid out to beneficiaries.  They are mostly old defined benefit funds. The biggest catch: beneficiaries who are still alive might not even know they have money owed to them.



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