Rule amendments and accrued retirement benefits: How could the SCA get it so wrong? Quarter 2 2022

By CLEMENT MARUMOAGAE, Published in Financial Law

It is always disappointing when superior courts make unjust decisions that are devoid of any sense. This was the case in Municipal Employees' Pension Fund and Another v Mudau and Another (1159/2020) [2022] ZASCA 46 (8 April 2022) (Mudau). All the judges of appeal not only totally ignored previous decisions of the same court, but failed to seriously engage the consistent approach of the Pension Funds Adjudicator and the reasoning of the judges of the high court, who upheld the Adjudicator's determination on the same matter, which was appealed to the Supreme Court of Appeal (SCA).

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The SCA was requested to determine whether the decision of the retirement fund's board to amend its specific rule that changes the formula used to calculate retirement benefits when its members exit the fund, with a view to reduce the risk of the fund not meeting its liabilities in future, leading to members or former members receiving reduced benefits, can be applied retrospectively to reduce such members' and former members' accrued retirement benefits.

It is worth noting that in Mudau, the term 'retroactively' (which generally entails the application of new legislative provisions to conduct which occurred before that provision came into effect) was used by the SCA. However, the judges of the high court used the word 'retrospectively', which generally imposes new results in respect of a past event. It is unnecessary to distinguish these two terms in this article.

In National Iranian Tanker Co v MV Pericles GC 1995 1 SA 475 (A) 483, it was held that '[a] statute is retrospective in its effect if it takes away or impairs a vested right acquired under existing laws or creates a new obligation or imposes a new duty or attaches a new disability in regard to events already past'. For this reason, the word 'retrospective' will be used throughout this article. We will also discuss the unjust approach of the SCA with a view to demonstrate why either the SCA itself or the CC, if seized with this same issue, should overturn this decision.

Legislative framework

In South Africa, most retirement funds are regulated by the Pension Funds Act (24 of 1956) (PFA), particularly those operating in the private sector. In terms of s13 of the PFA, the registered rules of retirement funds are binding on, among others: retirement funds; members of retirement funds and persons claiming under the rules (see generally Tek Corporation Provident Fund & others v Lorentz 1999(4) SA 884 (SCA), Tek). However, s13 of the PFA expressly states that the rules are subject to the provisions of the PFA. Retirement funds cannot, through their rules, empower their boards to act or take decisions that are contrary to the provisions of the PFA. Boards of retirement funds regulated by the PFA are legislatively bound not to act contrary to the provisions of the PFA. It is also clear that boards cannot take or implement decisions that are contrary to the Constitution of the Republic of South Africa, 1996, and any legislation that may be applicable to the implementation of such decisions, such as the Interpretation Act (33 of 1957).

One of the decisions that retirement funds' boards are empowered to make is to amend the rules of their retirement funds. In terms of s12(1) of the PFA, retirement funds may, as provided for in their rules, alter, rescind or make additions to their rules. However, these are generally invalid if they affect any of the rights of the retirement funds' creditors. Section 12(4) is particularly important in understanding the function of various role players in the amendments of pension fund rules. First, this provision mandates that the Financial Sector Conduct Authority (Authority) must evaluate the amendment to determine whether it is consistent with the provisions of the PFA. Secondly, it requires the Authority to approve and register the contemplated rule amendment (see also section 12(6)(a) of the PFA). The Authority will only grant its approval if satisfied that the amendment is consistent with the provisions of the PFA, and accordingly register such amendment. Third, this provision empowers retirement funds to determine the date on which the contemplated amendment should take place, which will be the date that the amendment will take effect. As will be shown in this article, this has been interpreted as allowing retrospective application of rule amendments.

Unfortunately, s12 of the PFA, in its entirety, does not deal with members' vested and accrued rights to retirement benefits and whether rules can be amended to strip members or former members of their rights to these benefits or, most importantly, be applied to reduce their accrued benefits. Until Mudau, some of us thought that the issue of retrospective application of rule amendments on accrued retirement benefits was settled, particularly having regard to s12(2)(c) of the Interpretation Act. This provision expressly provides that '[w]here a law repeals any other law, then unless the contrary intention appears, the repeal shall not affect any right, privilege, obligation or liability acquired, accrued or incurred under any law so repealed'. In other words, the amendment of rules through the PFA should not affect accrued or acquired rights. This seems to suggest that while boards are legislatively empowered to amend their retirement fund's rules, they are not entitled to implement amendments that have the effect of either stripping members of their rights to accrued benefits or reducing such benefits, even if such amendments are meant to apply retrospectively. To the extent that the intention appears to be to subject accrued benefits to retrospective rule amendments, the question becomes whether retrospective amendments can be implemented before the amended rules are approved and registered by the Authority? As will be demonstrated, the SCA has previously answered this question in the negative, an approach that has been effective, and was incorrectly overturned by the judge who presided over Mudau.

Judicial and quasi-judicial approaches

The Adjudicator has been quite consistent that retrospective rule amendments do not apply to members whose claims against their retirement funds arose before such rule amendments were approved and registered by the authority (Hobe v Municipal Employees Pension Fund and others [2015] 1 BPLR 18 (PFA) para 5.8; Nortje v Joint Municipal Pension Fund [2007] 3 BPLR 352 (PFA) par 35; and Maree v Joint Municipal Pension Fund and Another [2005] 4 BPLR 319 (PFA) para 30).

In Schenk v Tibbett & Britten SA Pension Fund [2010] JOL 25616 (PFA) para 30, the Adjudicator specifically stated that while rule amendments can apply with retrospective effect, '[h]owever, the retrospective application of the rule cannot take away rights that have already vested …'. The essence of the Adjudicator's approach is that retirement fund members should be paid all their retirement benefits which they became entitled to claim before the contemplated rule amendments were approved and registered by the Authority. In other words, retirement funds should not enforce rules which have not yet attained legal title against members who have vested rights to their full accrued retirement benefits.

In dismissing the fund's application to set aside the adjudicator's determination in Municipal Employees' Pension Fund and Another v Mudau and Another (61555/14) [2017] ZAGPPHC 157 (29 March 2017) para 46, Ralunga J endorsed the Adjudicator's approach and reiterated that retirement fund members cannot be deprived of benefits that had already accrued by the time the rule amendment was approved and registered. Unhappy with the court a quo's order, the fund appealed to the full bench. The majority of the full bench in Municipal Employees' Pension Fund and Another v Mudau (A540/2017) [2020] ZAGPPHC 538 (22 June 2020) did not find any fault with the court a quo's reasoning and conclusion. The majority correctly endorsed the view that for the date determined by the board to be regarded as the effective date of the amendment and to be binding on the members, the amendment must first be approved and registered by the Authority. In line with established precedent, this entails that until the authority has approved and registered the rule amendment, the contemplated amendment cannot be implemented against retirement fund members in respect of accrued retirement benefits. The minority, without engagement on the significance of amendment approval and registration, merely accepted that rule amendments take effect from the date determined by retirement funds (para 19).

In Mostert NO v Old Mutual Life Assurance Co (SA) Ltd (2) [2001] 4 All SA 250 (A) para 69 (Mostert), the SCA held that 'amendments to the rules do not take effect until they are registered …'. Thus, if the member's benefits have accrued and the fund subsequently applies to the authority to amend a rule, retirement funds cannot proceed to enforce rules that are not yet approved and registered against members in relation to their accrued benefits, or even delay payment to wait for the Authority to approve and register the rule; to do so would be unfair. In Mostert, the SCA further held that '… there is simply no basis in law for subjugating the provisions of the Act and regulations to such a practice. It is one thing to give amended rules retrospective effect after registration; it is something entirely different to seek to give them binding effect before registration'. The law as we knew it before Mudau was very clear: before approval and registration, retirement funds could not implement new rules with which they sought to replace old rules to strip their members of their rights to accrued benefits, or even reduce such benefits.

Unfortunately, in an ill-considered and poorly reasoned judgment in Mudau, the SCA appears to have overturned this approach and set a completely wrong precedent, which will have serious consequences for members and former members.

The SCA previously provided a sober reflection in its earlier decision of Joint Municipal Pension Fund and another v Grobler and others [2007] 4 All SA 855 (SCA) in respect of retirement funds that amend their rules just before their members become entitled to their benefits. In other words, when amendments are made immediately before events occur which entitle members to claim. In these circumstances, the SCA was emphatic that if boards are empowered '… on the eve of an event that would entitle a member to claim the benefits that have accumulated during his or her membership of the fund … to amend the rules so as to remove or reduce such benefits, is one which would permit an intolerable injustice' (para 13). If indeed a deliberate amendment that is designed to reduce the member's benefits immediately before the member becomes entitled to claim the benefit can be regarded as leading to injustice, what about a contemplated amendment rule that is enforced against the member in relation to his or her accrued benefits before the Authority approves and registers such an amendment?

SCA's incorrect approach in Mudau

Notwithstanding the weight of authority and established precedent, which was not adequately engaged, the SCA in Mudau incorrectly situated the debate from the point of view of whether retirement funds can amend their rules with a view to reduce their members' benefits. Relying on National Tertiary Retirement Fund v Registrar of Pension Funds [2009] 3 All SA 254 (SCA), the SCA in Mudau correctly pointed out that '… [a] pension fund may adopt a rule reducing a member's pension benefits, provided that it is done in accordance with the fund rules and the applicable statutory regime'.

Approaching the issue from this angle led the SCA to misdirect itself, because the issue was not whether the fund could amend its rules to reduce its members' benefits. The issue was whether the contemplated amendment could be applied retrospectively before it has been approved and registered by the Authority, when the benefits had accrued to the member. The SCA further misdirected itself by overemphasising the board's intention, which it also miscategorised as to interfere with vested rights. The SCA held that '[t]he amended rule explicitly states that it operates retrospectively and thus reduces pension benefits due to members with effect from 1 April 2013. In my view, there can hardly be a clearer indication of an intention to interfere with existing rights with effect from that date'. With respect, this was not the intention of the contemplated amendment of the rule. The amendment was designed to ensure that the benefits of all the members who exit the fund are reduced to enable the fund to meet its liabilities in future. The SCA recognised this in paragraph 5 of its judgment, when it stated that '[t]he stated rationale for the amendment was to reduce the risk of the Fund not meeting its liabilities in the future'.

In his unanimous judgment (and without explaining why the law as we know it, as reflected in the authorities discussed above) is wrong, Smith AJA incorrectly held that 'the amended rule retrospectively applied to all pension withdrawal benefits which had accrued to the Fund's members after 1 April 2013. However unfortunate this finding may be for Mr Mudau, the amended rule thus also applied to his withdrawal benefits'. This is notwithstanding the fact that Mr Mudau resigned on 31 May 2013, the fund made an application to amend its rules to reduce the benefits of its members on 22 July 2013; his withdrawal benefit was calculated and paid on 16 October 2013, and the amendment was approved and registered on 1 April 2014. In other words, the contemplated amendment was implemented to reduce his benefits before the Authority approved and registered the new rule. The court also failed, at the very least, to deal with whether benefits that accrue immediately before the fund applies for the amendment should be reduced as provided for in the contemplated amendment retrospectively, notwithstanding the fact that the amendment had not been effected.

Concluding remarks

With respect, the Mudau decision is clearly wrong and amounts to bad law that will empower retirement funds to unfairly and unreasonably reduced accrued benefits of their members through contemplated rule amendments that have been approved and registered by the Authority. The SCA effectively allowed retirement funds to utilise 'self-help' against their members. It is hoped that should either the SCA or the Constitutional Court be requested to determine this matter, it will overturn Mudau, which was incorrectly decided.

Marumoagae is an Associate Professor, University of the Witwatersrand and a practising attorney at Marumoagae Attorneys Incorporated.