Background

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Background
Pension Fund Dispute
The dispute is not about who owns the
surplus, But rather about whether or not it is a
surplus
Members reserves
Employers surplus
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Background
The dispute is not about who owns the
surplus, But rather about whether or not it is a
surplus
COSATUs ordinary surplus versus extraordinary
surplus
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Let bygones ... ... be bygones!
- R80 to R200 billion -
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Let bygones be bygones!
- R80 to R200 billion -
FSB estimate excludes impact of company
contribution holidays over the past decade.
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Let bygones be bygones!
- R80 to R200 billion -
Future pensions under-funded
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Future pensions under-funded
Like planting crops . If the seeds go missing,
therell be no crop to harvest . Current pension
contributions will impact on the economy of our
country over the next few decades ..
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Let bygones be bygones!
- R80 to R200 billion -
Overseas-owned companies are dis-investing us of
our pension investments
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Let bygones be bygones!
- R80 to R200 billion -
Converting pension reserves into company profits
is stripping our country of its savings
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Examples of what has happened over the past 20
years .
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Sentrachem Pension Fund
February 1992 Surplus R5 million R650
million Pension Fund
March 1998 Surplus R408 million 6 000
Members transferred retrenched
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Sentrachem Pension Fund
February 1995 Shortfall on budgeted
investment returns of R57 million R650 million
Fund
March 1998 Members transferred retrenched
Surplus of R408 million
The Bill will not fix this Funds practice
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Revlon Pension Fund
Negotiated mass-transfer --- At the time of the
transfer the Pension Fund was under-funded by 30
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Revlon Pension Fund
After the conclusion of the negotiation but
immediately prior to the transfer, the actuary
was instructed to re-value the Fund using a 9
post-retirement interest rate. This had the
effect of changing the funding level from being
70 funded to being 94 funded
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Revlon Pension Fund
After the conclusion of the negotiation but
immediately prior to the transfer, the actuary
was instructed to re-value the Fund using a 9
post-retirement interest rate. This had the
effect of changing the funding level from being
70 funded to being 94 funded
The Bill will not fix this Funds practice
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Revlon Pension Fund
What effectively has been achieved by amending
this basis has been that every member in the
pension fund at the time of transfer was given a
fair share of the assets which existed at that
time
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Revlon Pension Fund
What effectively has been achieved by amending
this basis has been that every member in the
pension fund at the time of transfer was given a
fair share of the assets which existed at that
time
The Bill will not fix this Funds practice
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IBM Pension Fund
. Unanimous decision by trustees in
favour of granting an inflation-related increase
to pensioners.
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IBM Pension Fund
The Fund actuary confirmed that provision had
been made for an inflation related
increase .. Based on investment
returns, sufficient funds were available
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IBM Pension Fund
Company overruled trustees decision
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IBM Pension Fund
The Adjudicator
In truth the employer is seeking to get the best
deal for itself in the distribution of surplus
and is holding out on its position by refusing to
pay a special increase beyond the normal practice
(Two-thirds of CPI)
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IBM Pension Fund
In truth the employer is seeking to get the best
deal for itself in the distribution of surplus
and is holding out on its position by refusing to
pay a special increase beyond the normal practice
(Two-thirds of CPI)
Regulation 15
Actuarial
surplus
Murphy surplus
Investment
Reserve
Actuarial Value of Assets
Market Value of Assets
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Reflects Common Practice in SA
Murphys Law Pension Funds Adjudicator,
Professor John Murphy, states Surplus is
simply the difference between the assets and the
liabilities
R20 m
Murphy surplus
Investment
Investment reserve
Market Value of Assets required to fund
liabilities R120 m
Actuarial Value of Assets R100 m
Actuarial Value of Accrued Liability R100 m
100 funding
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Murphys Law The attempt to separate out the
investment reserve from the surplus is sophistry
Regulation 15
Actuarial
surplus
Investment
Reserve
Market Value of Assets
Market Value Surplus
Actuarial Value of Assets
Reflects Common Practice in SA
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Surplus according to Regulation 15
15 (2) d a comparison of the actuarial value of
assets with the accrued liabilities, on the bases
contemplated in paragraph (b) (iv) and c (ii),
showing the resultant surplus or deficiency and,
in the case of a deficiency, the percentage ratio
of assets to liabilities.
R20 m
Investment
Investment reserve
Market Value of Assets required to fund
liabilities R120 m
Actuarial Value of Assets R100 m
Actuarial Value of Accrued Liability R100 m
100 funding
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Regulation 15 Not section 15 of the Pension
Funds Act
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Regulation 15 Every Pension Fund must report its
statutory valuation in terms of this Regulation
and make good deficiencies in terms of 15 2 if
they exist.
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Murphys Law of Surplus
There is no legal definition of a surplus either
in the statute, the rules, or the common
law. After a textual analysis of the language of
the rule (reserve value) I held that actuarial
reserve value equates to the applicants actuarial
liability
120 funding
R20 m
Market Value of Assets required to fund
liabilities R120 m
Investment
Investment reserve
100 funding Regulation 15
Actuarial Value of Assets R100 m
Actuarial Value of Accrued Liability R100 m
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?
R100 billion Overseas
Sentrachem Revlon IBM Anglo Independent Procter
Gamble
Britain USA France Germany Holland
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?
R100 billion Overseas
Sentrachem Revlon IBM Anglo Independent Procter
Gamble
Britain USA France Germany Holland
The Bill will not fix this practice
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Nedlac Pension Debate

• Savings better
• in hands of business!
• Really?

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Nedlac Pension Debate
Savings Members stays in the Fund Companies
share dividends
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Surplus means
? Market Value Surplus
Regulation 15 Surplus
Actuarial
Actuarial
surplus
surplus
Investment
Reserve
Investment
Market Value of Assets
Reserve
Actuarial Value of Assets
Actuarial Value of Assets
In the case of transfer values
In the case of valuation reports
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Liabilities means Assets!
It is correct that many transfers have taken
place with members receiving, as a transfer
value, the accrued liability..
R20 m
Investment
Investment
Investment reserve
R20 m
Market Value of Assets required to fund
liabilities Regulation 15 2 b ii R120 m
Regulation 15 2 c I cc Actuarial Value of
Accrued Liability R100 m
Regulation 15 2 b iii Actuarial Value of
Assets R100 m
The money backing the debt
The Debt
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Liabilities means Assets!
It is correct that many transfers have taken
place with members receiving, as a transfer
value, the accrued liability..
R20 m
Investment
Investment reserve
Market Value of Assets required to fund
liabilities Regulation 15 2 b ii R120 m
Regulation 15 2 c I cc Actuarial Value of
Accrued Liability R100 m
Regulation 15 2 b iii Actuarial Value of
Assets R100 m
The money backing the debt
The Debt
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Liabilities means Assets!
It is correct that many transfers have taken
place with members receiving, as a transfer
value, the accrued liability..
R20 m
Investment
Investment reserve
Market Value of Assets required to fund
liabilities Regulation 15 2 b ii R120 m
Regulation 15 2 c I cc Actuarial Value of
Accrued Liability R100 m
Regulation 15 2 b iii Actuarial Value of
Assets R100 m
The money backing the debt
The Debt
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Liabilities means Assets!
It is correct that many transfers have taken
place with members receiving, as a transfer
value, the accrued liability..
Market Value of Assets required to fund
liabilities Regulation 15 2 b ii R120 m
Regulation 15 2 c I cc Actuarial Value of
Accrued Liability R100 m
Regulation 15 2 b iii Actuarial Value of
Assets R100 m
The money backing the debt
The Debt
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Liabilities means Assets!
It is correct that many transfers have taken
place with members receiving, as a transfer
value, the accrued liability..
Implicitly revalued the assets
Market Value of Assets Regulation 15 2 b
ii R120 m R100 m
Regulation 15 2 c I cc Actuarial Value of
Accrued Liability R100 m
Regulation 15 2 b iii Actuarial Value of
Assets R100 m
The money backing the debt
The Debt
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Memorandum versus The Bill
Portion left behind
With the benefit of hindsight it was not fair to
have given transferring or retrenched members no
share of this provision against a fall in the
stock market. Having decided this, it is
necessary to legislate in order to give them any
share, because ..
30 Investment Reserve
Actuarial Value of Assets R100 million
But, the proposed legislation does not fix the
past, rather it legitimizes the past
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Memorandum versus The Bill
secondly, most of the transfers had
occurred more than three years ago, and, even
though members may now feel that they did not get
what was promised in whatever agreement was
signed between the union and the employer, they
would be unsuccessful in claiming anything
through the courts because their claim would have
become prescribed.
Portion left behind
30 Investment Reserve
Actuarial Value of Assets R100 million
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Draft Bill Supporting Regulation
Example November 2000
100 funding
Market Value of Assets required to fund
liabilities
Actuarial Value of Accrued Liability
Draft Minimum Value
R100 m
R70 m
R130 m
Regulation 15 2 a 15 2 c I ii
Draft Regulation 33
Regulation 15 2 b Iii
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Draft Bill Supporting Regulation
COSATUs
100 funding
Market Value of Assets required to fund
liabilities
Actuarial Value of Accrued Liability
Draft Minimum Value
R100 m
R130 m
R130 m
Regulation 15 2 a 15 2 c I ii
Draft Regulation 33
Regulation 15 2 b Iii
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Draft Bill Supporting Regulation
COSATUs
Market Value of Assets required to fund
liabilities
Actuarial Value of Accrued Liability
The problem with this proposal is that if it is
considered to be new legislation and is applied
retrospectively, then Business South Africa will
oppose it in court - they have little option but
to do so, and the delays will give companies an
additional few years to strip out the so- called
surpluses ...
Draft Minimum Value
R100 m
R130 m
R130 m
Regulation 15 2 a 15 2 c I ii
Draft Regulation 33
Regulation 15 2 b Iii
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Draft Bill Supporting Regulation
NACTU
Market Value of Assets required to fund
liabilities
Actuarial Value of Accrued Liability
If the transfer of full value of the assets
reserved to fund a benefit was negotiated and
agreed, then that is what must be paid. if not
then, then now .. If the actuary signed a
Section 14 transfer certificate stating that all
the same assumptions were used as were used in
the last statutory valuation, and then changed
the assumptions relating to the assets, then its
time to put it right .
Draft Minimum Value
R100 m
R130 m
R130 m
Regulation 15 2 a 15 2 c I ii
Draft Regulation 33
Regulation 15 2 b Iii
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Transfer Certificate
The transfer amount in respect of each member
.. . using the same valuation bases as was
used for the most recent actuarial valuation .
In reality, the actuary changed the assumptions
relating to the valuation of the assets, changing
the valuation bases to some 40less than what it
was, and did not report this in his statement to
the FSB. Now the Bill proposes that if this 40
was used for a company contribution holiday, it
should not be paid to members . In addition, the
Bill will now prevent any member from claiming
this lost 40 ..
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The Bill Supporting Regulation
Bill protects Funds from correcting past
inequities ..
. If there is not sufficient surplus in the
fund to allow the top-up, then the top-up must be
proportioned down
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British Definition
Cash equivalent should be read as reference to
transfer value.
It is a fundamental requirement, stemming from
the legislation, that a cash equivalent should
represent the actuarial value of the benefits
which would otherwise have been preserved. Such
actuarial value should represent the expected
cost within the scheme of providing such benefits
and should be assessed having regard to market
rates of return on equities, gilts or other
assets as appropriate.
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British Transfer Value
100 funding
Market Value of Assets set aside to fund
liabilities
British Transfer Value Cash equivalent
Actuarial Value of Accrued Liability
R100 m
R130 m
R130 m
Regulation 15 2 a 15 2 c I ii
Regulation 15 2 b Iii
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Transfer of Defined Benefit to Defined Benefit
Investment Reserve R20 m
Example
100 funding
Market Value of Assets set aside to fund
liabilities
Actuarial Value of Assets R100 m
Accrued Value of Actuarial Liability
Transfer liability
Transfer Assets
R120 m
R100 m
R100
R100
Regulation 15 2 b Iii
Ignore
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Transfer of Defined Benefit to Defined Benefit
Investment Reserve R20 m
100 funding
Market Value of Assets set aside to fund
liabilities
Actuarial Value of Assets R100 m
Accrued Value of Actuarial Liability
Transfer liability
R120 m
Transfer Assets
R100 m
R100
R100
The Debt
The money funding the debt
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Transfer of Defined Benefit to Defined Benefit
New Surplus
Investment Reserve R20 m
R20
Market Value of Assets set aside to fund
liabilities
Actuarial Value of Assets R100 m
Accrued Value of Actuarial Liability
R120 m
Transfer liability
Transfer Assets
R100 m
R100
R100
The Debt
The money funding the debt
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Transfer of Defined Benefit to Defined Benefit
Company contribution holiday
R20
Investment Reserve R20 m
Market Value of Assets set aside to fund
liabilities
Accrued Value of Actuarial Liability
Actuarial Value of Assets R100 m
Transfer liability
Transfer Assets
R120 m
R100
R100 m
R100
The money funding the debt
The Debt
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Transfer of Defined Benefit to Defined Benefit
Company contribution holiday Company profits
R20
Investment Reserve R20 m
Accrued Value of Actuarial Liability
Actuarial Value of Assets R100 m
Transfer liability
Transfer Assets
R100 m
R100
R100
The money funding the debt
The Debt
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Transfer of Defined Benefit to Defined Benefit
R20
Market Value of Assets set aside to fund
liabilities
Investment Reserve R20 m
Shareholders gain
R17
Accrued Value of Actuarial Liability
Actuarial Value of Assets R100 m
R120 m
83 funding
Transferred liability
Assets
R100 m
R83
R100
The Debt
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Transfer of Defined Benefit to Defined Benefit
Using same assumptions -under-funded pension
Investment Reserve R20 m
R17
100 funding level
Actuarial Value of Assets R100 m
83 funding level
Accrued Value of Actuarial Liability
Transferred liability
Assets
R83
R100
R100 m
Regulation 15 requires this under-funding to be
corrected
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The Second Amendments Bill
With the benefit of hindsight it was not fair to
have given transferring or retrenched members no
share of this provision against a fall in the
stock market. Having decided this, it is
necessary to legislate in order to give them any
share, because ..
But, it doesnt fix it,
Rather, it legalizes it
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Increases to Pensions
The Bill makes provision for actuaries to use
inflation as part of the funding mechanism This
means that companies can save money by
under-funding pensions with the full knowledge
that these pensions will never keep in line with
inflation
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What happens if you approve Bill?
You legalize the past inequitable actions.
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What happens if you approve Bill?
You make in impossible for unions to apply to
the courts to get back their lost fortunes.
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What happens if you approve Bill?
You ensure that overseas investors remain
delighted with their South African investments

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What happens if you not approve Bill?
The delays continue until all mass-transfers
happened more than seven years ago . and
then all records may be destroyed making it
impossible to correct the past inequities
.. !!!
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What happens if you not approve Bill?
In addition, companies continue taking
contribution holidays, thus slowly absorbing
members reserves into company profits .
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