Issue: December 08/February 09
Editorials

ADJUDICATOR

Goliath beats David

It’s still possible to hammer the little guy, and then some, despite government’s express intention in having set up the Office of the Pension Fund Adjudicator to protect him. If ever an example were needed of how fund members and pensioners should not be treated, this is it.

Two gents in their mid-50s, long in their jobs with the same employer, want to consider early retirement. On the basis of the latest benefit statements received from their fund, dated June 2002 (when this saga started), they reckon they can afford to retire comfortably if modestly.

Two gents in their mid-50s, long in their jobs with the same employer, want to consider early retirement. On the basis of the latest benefit statements received from their fund, dated June 2002 (when this saga started), they reckon they can afford to retire comfortably if modestly.

It is also a requirement that, within the notice period, they are to indicate whether they want a cash withdrawal or a pension from the fund. Both indicate they prefer the cash withdrawal. A matter of days before their retirement date, one picks up a letter from the fund that states his final cash amount; the other, a little later, goes to fetch his letter but is told by the principal officer he can’t receive it as the final cash amount was still being calculated.

Off they go into retirement, in March 2003, confident they’d be paid in accordance with their benefit statements. Instead, they’re paid a lot less. So they separately complain to the Pension Funds Adjudicator, and win.

Mamodupi Mohlala

Mohlala . . . order disordered

Adjudicator Mamodupi Mohlala declares that it was unlawful for the fund to have applied, after accrual of the benefits, a valuation basis that differed from the October 2002 benefit statements. She directs the fund to calculate actuarial interest on the valuation basis as it stood at end-February 2003, and orders the fund to pay the complainants their full entitlements (effectively, as per the benefit statements they’d received) plus interest.

That should have settled the matter, but it doesn’t. In fact, it gets worse. The fund claims back from the pensioners a “benefit enhancement” paid to them in May 2002, then supposedly a surplus apportionment, contending that it was invalid. It also launches an appeal against the Adjudicator’s determination, submitting that she did not have jurisdiction.

Thus are the pensioners confronted by their reduced pensions being further denuded: first, by paying back the special bonus; second, by having to defend the appeal because only through a High Court victory could they receive their full entitlements.

The special bonus was refunded without contest, although it was part of the package on which they relied in coming to their early-retirement decision. And the appeal had to be defended, although it would incur litigation costs – possibly all the way to the highest court – even if there were ultimately a judgment in their favour.

Was this bullying by the fund, fully aware that its resources to fight far outweighed those of the pensioners? Trustees have a duty to protect a fund’s financial health, and a right to use the courts for the purpose. By the same token, they have a duty to honour the pension promises made to fund members, who in turn have a right to expect fair treatment from their own fund.

In this instance, the pensioners sought to keep costs low by approaching the Adjudicator for redress. The fund, by contrast, appears to have had no similar concern on costs. It elected not to respond to the Adjudicator on the merits of the matter. Had it responded, the Adjudicator could have addressed the merits and disposed of them in her determination.

The Adjudicator therefore had to make her finding on facts that the fund had not disputed. Instead, a dispute on the facts became a basis for the fund’s appeal to the High Court against the Adjudicator’s determination. Jonathan Mort, attorney for the pensioners, noted that his clients “feel that the fund has deliberately forced them to litigate in the High Court at huge personal cost and potential exposure to an adverse cost award, knowing that as pensioners they do not have the financial might or resources of the fund”.

The fund was the Joint Municipal Pension Fund (JMPF), afflicted by over R1bn in losses through speculation on maize futures; the losses had been detected in January 2003 and announced two months later. The fund members were G B Brown and G D Krog, both municipal employees.

In other words, the maize-futures calamity hit the JMPF during the period critical for Brown and Krog entering retirement. Almost overnight, the JMPF discovered that its financial situation had materially deteriorated and that it was significantly underfunded. This was the justification it claimed, in the appeal application, for calculating the final retirement benefits of Brown and Krog differently from the benefit calculations they had been given when they provided their retirement notice.

Things changed. By the middle of this year, protracted buoyancy of the share market had caused the JMPF again to be fully funded. Yet the litigation lingered. Unable to bear the ongoing costs, Brown and Krog offered to settle. They withdrew their opposition to the appeal, tendered their own legal costs and accepted lesser amounts than the Adjudicator had awarded.

The JMPF accepted the settlement offer. It leaves Brown and Krog the poorer, as if they had not attempted in the first place to claim the entitlements on which they had made their decisions to retire. There’s a sour taste of justice denied.

JUSTICE’S IMBALANCED SCALES

A general policy poser is highlighted by the dispute of Brown and Krog with the JMPF. It is in the contradiction whereby the purpose of the Pension Funds Adjudicator is defeated.

On the one hand, the Office of the Adjudicator was set up to provide complainants with a cost-effective – even cost-free – means for redress. On the other hand, there is a right of appeal to the courts where either the complainant or respondent has grounds to contend that an Adjudicator determination is wrong.

This is as it should be, constitutionally and in equity, because nobody can be denied access to the courts. In complaints related to pension funds, resort to the courts is the ultimate check on whether an Adjudicator determination is correct.

The problem arises as soon as an appeals process is invoked. Whereas costs are hardly a factor before the Adjudicator, they are a serious factor in litigation. The longer the appeal takes, and the more complex the matter becomes, the greater the cost implications. Of course, High Court judgments can also be taken on appeal to higher courts.

This places the financially stronger party (usually, at the Adjudicator stage, a fund as respondent) at an advantage over the weaker (usually an individual fund member as the complainant). Should the former be of litigious bent, it can drag out the appeals process until the latter surrenders. Clearly, this is repugnant.

But how is the problem to be overcome? That there are no easy answers certainly makes it a topic worthy of a workshop at the next annual conference of the Pension Lawyers Association.

And from the general to the particular:

  • Brown and Krog are at an age where they will not readily find new employment. Had they been aware of the impending reduction in their pension benefits, they would at least have had the opportunity not to opt for early retirement or not to take a cash withdrawal instead of a pension from the fund;
  • To protect the fund, the JMPF actuary had adjusted the fund’s valuation downwards with retrospective effect. But employees who had elected to retire, before the rule change that permitted the adjustment, could not revise their decision with retrospective effect;
  • Different employees were treated differently. Those who retired before the rule change could take their full cash withdrawals, as per their benefit statements, whereas those who retired a month later couldn’t. Brown and Krog weren’t the only employees adversely affected;
  • At the time of this year’s settlement with Brown and Krog, five years after the dispute began, the JMPF was fully funded. Its fortunate situation would have been due partially to members’ sacrifice of benefits because of the actuarial adjustment;
  • Although the JMPF is a defined-benefit fund, to which different municipal employers contribute, there is no single employer that underwrites the fund’s liability to its respective employees. It means employees can’t call on their employers to make good on pension promises.

Let this be a warning for members of all defined-benefit funds to check the fine print of their contracts.