A pension fund has been ordered to recalculate a retired employee’s pension benefits after the Office of the Pension Funds Adjudicator (PFA) found that the lump sum it provided was insufficient to secure the guaranteed pension promised under the fund’s own rules.
In a ruling issued by Deputy Pension Funds Adjudicator Naheem Essop, the ZF of South Africa Pension and Group Life Assurance Fund was directed to set aside its calculation of the complainant’s retirement benefit and determine the capital amount required to secure the pension defined in the fund’s rules.
The dispute arose after the complainant, who worked for ZF Services South Africa (Pty) Ltd from April 1995 until his retirement in October 2023, challenged the amount paid to him upon retirement. Under the fund’s rules, his annual pension was calculated at over R1.3 million equivalent to over R112,000 per month, based on his years of pensionable service and final salary.
Rather than paying the pension directly, the fund opted to provide a capitalised lump sum of R14 million enabling the retiree to purchase an annuity from a registered insurer.
However, when the complainant obtained a quotation from Sanlam, he discovered that the lump sum would purchase a monthly pension of only about R91,200, significantly below the R112,300 monthly pension promised under the fund’s formula. Sanlam advised that a lump sum of approximately R17 million would be required to secure the guaranteed pension, leaving what the complainant described as a shortfall of about R2.53 million.
The retiree argued that the fund’s rules guaranteed a defined benefit pension rather than a lump sum subject to actuarial assumptions. He further contended that the fund had effectively applied risk factors twice: first in calculating the lump sum and again when the insurer priced the annuity, thereby reducing the value of his retirement benefit. He maintained that transferring responsibility for paying his pension to an insurer did not relieve the fund of its obligation to provide the benefit promised under its rules.
The fund defended its approach, saying the lump sum was based on a reasonable actuarial reserve value calculated using accepted assumptions relating to mortality, investment returns and pension increases.
It argued that actuarial reserve values are necessary to ensure the long-term financial sustainability of defined benefit schemes and noted that the complainant’s benefit had subsequently been enhanced through a surplus distribution, increasing its value to more than R18.3 million by September 2024. The fund nevertheless acknowledged that its rules could have been drafted more clearly to reflect its intention that retirement pensions be secured through actuarial reserve values.
An independent actuary appointed by the adjudicator agreed that the complainant’s pension had been correctly calculated under the fund’s rules and found the capitalisation factor used by the fund to be reasonable.
The actuary concluded that the differences between the fund’s lump sum and Sanlam’s quotation were largely attributable to insurer pricing, commissions, product features and prevailing market conditions. However, the actuary also observed that the complainant’s interpretation of the rules was arguable, although adopting it without qualification could create financial difficulties for pension funds.
The deputy adjudicator found that the central issue was not whether the actuarial calculations were reasonable, but whether they complied with the wording of the fund’s rules. He held that the rules did not expressly authorise replacing the guaranteed pension with whatever pension an actuarially determined lump sum could purchase on the market.
He further emphasised that, in a defined benefit pension fund, members are entitled to the benefits specified in the rules and should not bear the risk of actuarial assumptions or market conditions reducing those benefits.
He also noted that the rules specifically provide mechanisms for the employer to make additional contributions, if necessary, to maintain the fund’s financial soundness, and that there was no evidence to suggest that honouring the complainant’s pension would threaten the fund’s solvency.
The adjudicator upheld the complaint, set aside the fund’s determination of the capitalised value and ordered the fund, within 30 days, to recalculate the capital required to secure the complainant’s defined pension of over R1.3 million per year.
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