1 of 2020
Adjudicator sets aside the R40 million order against an actuary
Discussion points:
“Complaint” in the Act relates to prejudice suffered by a complainant as a result of the maladministration of the fund. Any services not relating to the administration of the fund, the investments of its funds or the interpretation and application of its rules, does not fall within the jurisdiction of the Adjudicator. It is important for funds to ensure that service agreements in respect of services required from actuaries that do not form part of the statutory valuation, be complete and accurate in order for funds to have recourse against the actuary in the case of breach of contract.
This case suggests that complainants, which includes retirement funds, do not have recourse by approaching the Adjudicator against any party that does not form part of the definition of complaint in the Act.
Amplats Group Provident Fund and Others (“Complainants”) v Implicated Board Members of the Complainant (“Board”); Vivan Cohen (“Actuary”) and Sanlam Life Insurance Limited (“Sanlam”)
Following the decision of the Pension Funds Adjudicator (“Adjudicator”) which held the Actuary liable to the Fund for the loss of R40 million plus interest (refer to PFA rulings 3/2018), the Actuary submitted an application for reconsideration to the Financial Services Tribunal (“Tribunal”). The Tribunal set aside the Adjudicator’s decision which found the Actuary liable for compensation to the Fund for the loss and remitted this order back to the Adjudicator for reconsideration.
The Tribunal held that the Complainant had to rely on the definition of complaint in the Act, which refers to prejudice suffered by a complainant as a result of the maladministration of the fund. As the Actuary was not administering the fund or performing any function prescribed by the Act and the complaint did not relate to the investment of funds or the interpretation and application of rules, the liability of the Actuary was based on the breach of contract between the Fund and the Actuary. The error and loss was not caused in the fulfilment of duties connected to the duty to complete the statutory valuation. The error was made during the completion of a contractual duty with which he was tasked. The Adjudicator therefore did not have jurisdiction in the matter.
The Adjudicator invited all parties to make further submissions for reconsideration. The Fund and Administrator were not impacted by the Adjudicator’s decision and thus did not make further submissions.
The Adjudicator found that the Actuary failed to execute his mandate with due diligence, skill and care as required of a reasonable actuary and confirmed the Tribunal’s decision that he ought to have been found liable on the basis of a contractual breach and not because he violated provisions in the Act as she had initially ordered.
The Adjudicator held that it was clear that the error did not arise from the Actuary’s fulfilment of his statutory duty in accordance with the rules or the Act and therefore she had no jurisdiction over the matter. In the interest of the members the Fund must lodge the application with the correct forum.
The Adjudicator therefore set aside the order that the Actuary was liable for the R40 million loss to the Fund.
This results in the Fund having to make a decision whether to lodge the application against the Actuary in the High Court on the basis of a contractual breach.
Withdrawal benefits vs early retirement benefits
JD Senyane (“Complainant”) v Metal Industries Provident Fund (“Fund”) and Metal Industries Benefit Funds Administrators (Pty) Ltd (“Administrator”)
The Complainant was receiving a disability income benefit until he decided to exit from the fund.
The options and tax implications of choosing a lump sum were explained to the Complainant, but he still opted to receive a lump sum and completed a withdrawal claim form. The Complainant is unsatisfied about being paid a withdrawal benefit instead of an early retirement benefit.
The Adjudicator held that in terms of the rules of the fund, a retirement benefit is payable to a member who is retiring early as a result of ill health. The rules further provide that once a member reaches early retirement age (age 55 in this case), such member is eligible to receive a retirement benefit. A withdrawal benefit is only payable before a member becomes eligible to receive a retirement benefit.
The Adjudicator stated that the Fund should have adhered to its rules and paid the Complainant a retirement benefit instead of a withdrawal benefit as he was 59 years old, was receiving an ill-health benefit and qualified for an early retirement benefit, despite having completed a withdrawal claim form.
The Adjudicator held that the Fund had violated its own rules by paying the Complainant a withdrawal benefit instead of a retirement benefit and as such the Complainant attracted a tax liability that could have been averted had the Fund acted in compliance with its rules.
The Adjudicator ordered the Fund to cancel the tax directive and apply for a new tax directive reflecting the correct reason for the Complainant’s termination of service, i.e. retirement.
Discussion points:
The fund violated its rules by paying a withdrawal benefit instead of a retirement benefit, whilst the member was eligible for a retirement benefit. The member opted to receive his full benefit in cash and the Fund should have taxed the benefit as a retirement benefit. The situation would have been different had the member belonged to a pension fund and still insisted on receiving all of his benefit in cash, in which case the only option would have been to receive a withdrawal benefit and be taxed as such. In such a situation, it is important for funds to consult the rules to ensure that the rules indeed make provision for a member who is older than the early retirement age to be entitled to take a withdrawal benefit.
However, the definition of “pension fund” in the Income Tax Act requires a fund to provide annuities to members on retirement from employment. In terms of General Note 4/95, if the rules of a pension fund, directly or indirectly, provides a withdrawal benefit to a member at retirement or close to retirement where the member is actually retiring from service, it will be regarded that the fund was not established for the purpose of providing annuities for members on retirement from employment and it will be followed by the withdrawal of the fund’s approval for income tax purposes.
Therefore if a fund allows a member to receive his withdrawal benefit close to retirement while the member is in fact retiring from employment, it could result in SARS’s withdrawal of the income tax approval of a fund. Unfortunately “close to retirement” is not defined, but in determining whether a person is bona fide resigning from employment, SARS would consider the intention of the member upon leaving the services of his/her employer, in other words a member cannot “resign” from the fund and receive a withdrawal benefit, but retire from the employer in order to receive benefits from the employer related to retirement.
It is advisable for funds to implement a process or checklist in the case of withdrawals close to retirement to ask the necessary questions to the employer to establish whether the member is bona fide resigning from employment. The employer should also be aware of the risk should they attempt to manipulate the termination of employment forms to enable members who are retiring to receive their withdrawal benefit.
Payment of a withdrawal benefit without the member’s consent
C Cockeran (“Complainant”) v FundsAtWork Umbrella Provident Fund (“Fund”); MMI Group Limited (“Administrator”) and Kiddies Lodge (“Employer”)
The Complainant is dissatisfied with the Employer authorising the payment of her withdrawal benefit without her consent and she alleged that it caused her financial loss. She further contends that her employment and resignation date were incorrectly stated on her tax directive.
According to the Complainant’s knowledge, she should have been given an opportunity to complete the withdrawal claim form and indicate whether the money should be paid to her in cash or transferred to another fund.
The Administrator stated that the withdrawal claim form was completed and submitted by the Employer using the Fund’s online portal. The Complainant’s withdrawal benefit was paid in accordance with the instructions on the withdrawal claim form.
The Fund submitted that when the Complainant questioned why her withdrawal benefit was paid to her in cash, it offered to reverse the transaction and cancel the tax directive. The Complainant declined the offer and indicated that the transaction does not need to be reversed. The Fund stated that the Complainant had not suffered any damages due to its actions.
The Fund rules provide that a withdrawal notification could be submitted online by either a participating employer or the member.
According to the Employer, they sent a notification to the Complainant regarding the payment of her withdrawal benefit. The Complainant consented that her withdrawal benefit should be paid out. The Employer stated that a broker was willing to assist her to re-invest her funds and that the Complainant had ample opportunity to decline the payment and failed to do so.
The Adjudicator held that a fund administrator is required to act in the best interest of members at all times. She found that there was no negligent act by either the Fund or the Administrator in processing the Complainant’s withdrawal benefit and dismissed this portion of the complaint.
The Adjudicator however held that as a tax-payer’s history is cumulative, information on the tax directive must be correct and ordered the Fund to reapply for the Complainant’s tax directive indicating the correct period of employment.
Discussion points:
Submission of a claim form by an employer on behalf of its former employee is sufficient provided the rules allow for it. This determination was however made before the effective date of the default regulations, although only reported recently. In the light of the default preservation requirements, it is important that processes be put in place to ensure that the member wants the withdrawal benefit to be paid. Communication must be very clear that a member does not have to receive the withdrawal benefit, but that the benefit may be preserved in the fund.
Legal dependency does not amount to financial dependency
Naidoo (“Complainant”) v Coca Cola Shanduka Beverage Provident Fund (“Fund”) and Alexander Forbes Financial Services (“Administrator”)
Following the decision of the Pension Funds Adjudicator (“Adjudicator”) to dismiss the complaint and uphold the Board’s decision to pay the deceased’s benefit into the deceased’s estate [refer to PFA rulings 4/2019], the Complainant submitted an application for reconsideration to the Financial Services Tribunal (“Tribunal”).
The Tribunal found that on the face of it, the Complainant was still the deceased’s spouse at the time of his death and the Act makes provision for a spouse to benefit from a death benefit. The Tribunal held that the starting point should have been to acknowledge that the Complainant was a legal dependant. The Fund still has the discretion to determine whether the Complainant was entitled to be allocated a portion of the benefit.
The Tribunal therefore set aside the Adjudicator’s decision which found that the board of the Fund had performed a reasonable investigation, followed a proper process and exercised its discretion by considering all the relevant factors and remitted this order back to the Adjudicator for reconsideration.
The Adjudicator invited all parties to make further submissions for reconsideration and the Complainant made no further submissions.
The Fund submitted that the Complainant failed to prove that he and the deceased were reconciling prior to her death. It stated that the overriding factor for death claims is financial dependency at the time of the death of the deceased which the Complainant failed to prove. The Fund submitted that the burden of proof was on the Complainant to substantiate his claims that he and the deceased were reconciling, akin to a beneficiary alleging that they were financially dependent on a deceased at the date of death wherein they are required to prove this allegation by submitting affidavits and bank statement.
The deceased’s executor had informed the Fund that the Complainant had two immovable properties registered to his name, was gainfully employed, young and qualified enough to earn a good living and care for himself. The Fund submitted that the Complainant was therefore not destitute following the death of the deceased.
The Complainant and deceased had entered into a settlement agreement that confirmed that neither party would have any claim against the other’s party’s pension or policies.
The Adjudicator submitted that the rationale behind section 37C was to ensure that all those who were financially dependent on the deceased during the lifetime of the deceased are not left destitute when he/she dies. The Complainant confirmed that he was not financially dependent on the deceased. Albeit that the Complainant qualifies as a legal dependant, he was not financially dependent on the deceased and thus not a factual dependant.
The Adjudicator held that being a legal dependant only entitles one to be considered as a beneficiary. She also found that the Complainant had failed to submit any evidence to prove that he and the deceased were in the process of reconciling prior to her death.
The Adjudicator held that she had considered the issues raised by the Tribunal and found that the Complainant was still not entitled to a portion of the death benefit and again dismissed the complaint.
Discussion points:
A spouse is a legal dependant, even if the deceased and spouse were in the process of divorce.
Being a legal dependant does not automatically entitle one to be allocated a portion of a death benefit and thus requires boards to investigate whether the person was factually and financial dependent. Factors like the spouses are separated and therefore do not share a common household, a settlement agreement indicating that there is no dependency and a person being able to take good care of him/herself, may be taken into consideration when determining the financial dependency of a person.