Issue: April/May 2006
RETIREMENT FUNDS – DISTRIBUTION OF SURPLUS
This is another article in our series on the boards of trustees of retirement funds, sponsored by
Liberty Life to inform trustees in the public interest. Liberty Life does not endeavour to
promote, through the content, its own products or services.
The Act provides that, after deducting the cost of increases to former members and pensioners, the balance of the actuarial
surplus should be equitably split between existing members, former members and the employer, in such proportions
as the board has to determine after taking into account the financial history of the fund.
This article looks in more depth at the distribution of surplus in retirement funds.
The Pension Funds Act was amended to redress what is now perceived by the authorities to be
abuses of surplus in the past. This was brought about by the Pension Funds Second Amendment
Act, 2001 (“the Surplus Act”), and it provides for the distribution of actuarial surplus to:
- Former members who, on leaving the fund after 1 January 1980, received less than their full share
of the fund.
They may be entitled to receive the difference between the benefit they actually received
and their full share of the fund or the actuarial reserve at the time, together with interest
calculated to the present day.
Pensioners receiving an income from the fund, and deferred pensioners, if the pensions have
not been increased to counteract inflation since their retirement.
Pensioners who have been outsourced by the fund at the surplus apportionment date are former
members and will qualify to share in a surplus distribution.
After the needs of former members and pensioners have been met, existing members and the
employer should be looked at.
Surplus apportionments must be done to the later of 1 January 1980 and the commencement of the fund.
What is surplus?
Surplus in relation to a defined-contribution fund means the assets in excess of the total sum of the
individual shares of the members.
This surplus could have arisen from:
- Members leaving the fund with a benefit less than their full share of the fund.
- Any additional or ad-hoc contributions made by the employer.
In relation to a defined-benefit fund surplus is the excess of assets over the actuarial liabilities of the
fund, based on actuarial assumptions. Surplus could arise due to:
- Investment returns in excess of those anticipated by the actuary in setting the contribution rates.
- Over-contributions made by the employer.
In terms of the Surplus Act, members are also entitled to minimum benefits upon the occurrence of
certain events. The minimum benefit is the member’s “minimum individual reserve”.
In the case of a defined-benefit fund, the minimum individual reserve is the full actuarial value, and in the
case of a defined-contribution fund, it is the member’s share of the fund. In both instances this
means a refund of both employer and member contributions with fund interest, as well as a share in certain
As regards active members, minimum benefits are payable irrespective of the member’s reason for
leaving the fund, ie on:
- Conversion from defined-benefit to defined-contribution fund, and
- Liquidation of a fund after 7 December 2001
Minimum pension increases
The Act also prescribes minimum pension increases where pensions are being paid from a pension fund,
ie the lesser of a full inflation adjustment and the increase that the fund can afford.
In addition, trustees must set and communicate a policy concerning a target pension increase and must
aim to pay increases in line with or in excess of the amount implied by this policy.
The minimum pension increases must be reviewed at each statutory valuation date, which in the
case of a defined-benefit pension fund is once every three years and probably once a year for a
Timing of minimum benefits
The effective dates on which minimum benefits became payable, were as follows:
The minimum withdrawal benefit payable on a member’s resignation, dismissal, retrenchment or
transfer to another fund applies within 12 months of the fund’s surplus apportionment (statutory
- Funds in existence at 7 March 2002
Any fund that liquidates or converts from defined benefit to defined contribution after 7 December
2001, but before the fund’s surplus-apportionment date, must introduce minimum benefits from the date of
liquidation or conversion, as the case may be.
Minimum pension increases apply from the surplus apportionment date on or after 7 December 2001.
The minimum benefits on withdrawal and the minimum pension increases apply from the date of
registration and must be provided for in the rules of the fund.
- Funds registered on or after 7 March 2002
Although the legislation envisages that valuation exempt funds (eg insured defined-contribution
funds) should also be subject to the surplus-apportionment and minimum-benefit provisions, it does
not provide for dates from which such provisions can be effected.
Regulation 36, which was issued in April 2003, rectifies this omission.
Regulation 36 provides that the Registrar must withdraw valuation exemption from a fund at the end
This will be the fund’s surplus-apportionment date and the fund must submit an actuarial valuation to
the Registrar as at such scheme anniversary or financial year-end.
- financial year after 7 December 2003 if the fund is audited
- scheme anniversary following 7 December 2003 if the fund was audit-exempt.
A fund that, after compliance with these requirements, satisfies the Registrar that there is no surplus to
apportion, can reapply for valuation exemption.
The surplus-apportionment process
A valuation is required to determine if the fund has a surplus.
- Step 2
The actuary must value any improper usage of surplus* by the employer prior to the surplus-
apportionment date and add it to the above.
If the amount allocated to the employer pursuant to the surplus-apportionment exercise is less than
the value of improper usage, the difference constitutes a debt that the employer owes to the fund. The
employer must then pay the debt within such period as agreed with the trustees of the fund.
The following are regarded as improper usage of surplus:
- Benefit enhancements paid to executives from surplus on withdrawal or retirement, which they would not have received if they were ordinary members.
- Added years of service awarded to certain members and funded from the surplus.
- Any contribution holiday taken by an employer after the passing of the Act is considered an improper usage of the surplus by the employer.
- Increases in retirement benefits in lieu of post-retirement medical-aid subsidies.
The Registrar may exclude these improper usage amounts if he is satisfied that the stakeholders
properly negotiated the utilisation of the surplus at the time.
- Step 3
If the fund has a surplus, former members (ie those who left the fund on or after 1 January 1980)
must be brought up to the minimum benefits. That means they must be paid the difference between
the minimum individual reserve and the withdrawal benefit paid on the date of exit from the fund,
together with interest over the period.
Pensioners must also be brought up to the minimum pensions.
The above must be done pro rata if there is insufficient surplus.
- Step 4
The balance of the surplus will be split equitably between existing members (which include
pensioners), former members and the employer in such proportions as the board of trustees will
determine after taking account of the financial history of the fund. In this regard, the Registrar may
prescribe the methods to be followed.
The trustees must draw up a surplus-apportionment scheme as at the valuation date coincident with
or following the commencement date of the Act (7 December 2001), otherwise known as the surplus-
The responsibility for the apportionment exercise is placed squarely on the shoulders of the board of
trustees. They must investigate matters thoroughly and then exercise their discretion in the
apportionment of surplus.
The trustees must inform former members, active members, the employer and funds to which former
members may have been transferred of the surplus-apportionment scheme in a clear and
understandable manner. These stakeholders must be allowed 12 weeks from the date they receive
the communication to lodge any complaints in writing to the board. The trustees must handle any
If there are no complaints, or if the objections have been dealt with adequately, the trustees must
submit the surplus-apportionment scheme to the Registrar for approval and this must be done within
18 months from the surplus-apportionment date.
Representative for former members
The trustees must appoint a former member representative to represent the interests of former
members and to assist the board with:
- identifying former members
- communicating proposals to former members
- conveying their proposals to the board, and
- collating any objections.
The former member representative must also submit a report to the Financial Services Board on the
adequacy of the steps the trustees took to include former members in the surplus apportionment and
whether or not they have exercised their discretion in a reasonable manner in this regard.
The decision taken by the board of trustees (as reflected in the surplus-apportionment scheme) is
subject to the approval of the Registrar of Pension Funds, whose approval will be of no force and
effect unless all the prescribed documentation has been presented to him.
If the trustees fail to submit the surplus- apportionment scheme to the Registrar within
the prescribed period or cannot satisfy the Registrar that the scheme is fair and equitable, the
Registrar will require that the trustees refer the apportionment of surplus to a specialist
tribunal, which will then exercise the powers of the trustees and submit its recommendation to the
Registrar for approval.
The matter could also be referred to the tribunal at the request of the trustees or the former member
Future use of surplus
1. Active members
The Act prescribes that specific member and employer surplus accounts must be created and,
once the surplus has been allocated to the respective stakeholders, they will obtain a right thereto.
The surplus allocated to the member surplus account can be used to:
- improve the benefits of existing members
- improve the benefits previously paid to former members, or the amounts previously
in respect of former members
- reduce current member contributions
- meet expenses that would otherwise reduce benefits.
The employer-appointed trustees on the board will not have a vote on the usage of surplus allocated
to members. Only member-elected trustees may vote.
The surplus allocated to the employer may be used for the following purposes, notwithstanding
anything to the contrary in the rules:
- funding a contribution holiday
- improvement of benefits
- transfer to the employer reserve account in another fund in which the employer participates
- payment in cash, but only on liquidation of the fund, or to avoid retrenchment
of a significant
proportion of the workforce.
The surplus allocated to the employer will be under its control, therefore the member-elected
trustees will not have a vote in respect of the use of the employer surplus account.
Some practical advice to trustees
The following suggestions might be helpful to prepare your fund for the apportionment exercise:
- Conduct a preliminary exercise to see if there is likely to be a surplus. In the case of a
defined-contribution fund, the existence of a reserve account is proof that the fund has
- Prepare a standard letter to respond to enquiries. It should contain the surplus-apportionment date,
make allowance for people to leave their contact details and give the name of a contact person for
enquiries on the progress of the exercise.
The law requires that trustees actively seek out former members. A few ways of doing this are via:
- Fund records
- Trustee minutes
- Payroll records
- Advertising in the press
- Asking existing staff
- Former employees might contact you as soon as the news gets around. Insist on some proof of
former employment, such as a pay slip, tax returns or even an affidavit if necessary. Bear
in mind that some former employees may not have qualified to be members of the fund at all,
so just being employed is not necessarily adequate proof.
- Once former membership has been established, the biggest hurdle will be to work out what benefit
was actually paid so that it can be topped up to the minimum. Fund growth since leaving will also
have to be added and taken from the surplus.