Edition: June - August 2015
Editorials

PENSION LAW

Freedom to choose

Legal interpretation clarified on powers of fund boards against rights of members.

Does an employer, on reasonable notice to an umbrella fund, have the right to terminate participation in it? This was pinpointed by Deanne Wood of the Johannesburg Bar, addressing the Pension Lawyers Association, as the main issue which the Supreme Court of Appeal had to decide. It arose from the appeal by the City of Johannesburg & Others against a South Gauteng High Court judgment in favour of the SA Local Authorities Pension Fund & Others.
Wood had summarised the central questions applicable to pension funds:

  • Does s7C of the Pension Funds Act entitle a board of trustees to litigate on behalf of the fund’s members, or should the members have been joined in the litigation? (It does entitle the board not to be joined by members, the SGHC had held.)
  • Can an employer withdraw from a fund, and commence participation in a new fund, prior to the Registrar’s approval of the transfer under s14? (There must be compliance with s14 before an employer can commence participation, the SGHC had held.)
  • Where there is no express provision governing withdrawal, is an employer entitled to terminate its participation in a fund on reasonable notice to the fund? (Where the rules are silent on termination, the SGHC had held, an employer cannot withdraw from the fund.)

The SCA has now reversed SGHC findings by Acting Judge Foulkes-Jones. It has upheld the appeal brought by the City of Johannesburg (CoJ) and four of its municipal-owned entities (Johannesburg Water, City Power, City Parks and Pikitup) against the SALA fund (joined by three trade unions representing some members and three individual members).

For background, during June 2004 the CoJ and its entities decided to cease participation in the SALA fund. They also decided to terminate their pension-fund contributions to the SALA fund, on behalf of employees who were members of the SALA fund, and instead contribute from January 2005 to the eJoburg retirement fund. Importantly, the SALA fund is defined-benefit and the eJoburg fund is defined-contribution.

These decisions of the CoJ and its entities were challenged. The SALA fund contended that the decisions were unlawful, invalid and impermissible, as the withdrawal was not permitted by the SALA fund rules. CoJ and its entities opposed the application, further objecting to the SALA fund not having joined in court proceedings the employees who were members of its fund.

FROM THE JUDGMENT

Appeal Judge Brand, with four others concurring, stated:

In so far as s7C enjoins trustees to act in the interests of members, it must...be understood in the context of steps taken in the direction, control and oversight of the fund. It does not appoint the board as the agent or representative of members to conduct litigation on their behalf, even against the wishes of individual members.

The interests of all members of a fund do not always coincide. Further, there is the obvious potential of a conflict between the interests of the fund on the one hand and those of its members on the other. S7C(2) cannot possibly be understood to preclude the individual members, in the event of such conflict, to contest the actions of the board.

What I find somewhat ironic is that (the SALA fund) had no difficulty joining 135 contributing employers, while their risk of being prejudiced by the order sought was far less than that of the terminating members....Once joinder is found necessary, it cannot be avoided solely on the basis of the numbers involved.

In effect, the SGHC had ruled that the decisions by CoJ and its entities – to withdraw as participating employers in the SALA fund – was invalid and of no legal force. It also dismissed their objection to the SALA fund not having joined employees/fund members in the proceedings.
Overturning the SGHC judgment, the SCA found in favour of CoJ and its entities:

  • S7C of the Pension Funds Act does not entitle a pension fund or its board to litigate on behalf of its members;
  • Individual members of the SALA fund ought to have been joined as parties in the SGHC proceedings. These members have a direct and material interest. They should have been given the opportunity to say whether they preferred to remain in the SALA defined-benefit fund or switch to the eJoburg defined-contribution fund;
  • The matter must be referred back to the SGHC. The SALA fund has three months within which to join individual members in the proceedings or the SALA fund’s application against the CoJ and its entities will be deemed to have been dismissed with costs.

For the CoJ and its entities were Martin Brassey SC and Deanne Wood (instructed by Bowman Gilfillan). For the SALA fund, three unions and three individual members were Norman Arendse SC and Sandile Khumalo (instructed by Thipa Attorneys).