South African Local Authorities Pension Fund v Msunduzi Municipality: compliance is paramount
9 December 2015
Recent cases dealing with pension and provident funds do not only illustrate the fact that this is an area in our law where some uncertainty with regard to interpretation of the rules and the legislation exists, but are also indicative of the precarious relationships that can and do exist between the different stakeholders in pension and provident funds. A recent matter postulating this is the South African Local Authorities Pension Fund v Msunduzi Municipality (994/2013)  ZASCA 172 (26 November 2015) where the amendment to the rules of the fund was found to be in contravention of the rules of the fund and section 12 of the Pension Funds Act 24 of 1956 (the Act), which deals with the amendment of rules.
The background to the matter will be succinctly discussed. The South African Local Authorities Pension Fund (the Fund) had moved to have its rules amended, insofar as they relate to the percentage of the pensionable salary to be contributed by the employer, which would see the Msunduzi Municipality (the Municipality) located in the KwaZulu-Natal Province, having to increase its contributions.
From the judgment it has been enunciated that the primary reason for this proposed amendment to the rule to effect the increase in member contributions was the unsound financial position of the Fund on a national scale and the proposal was made by the valuator of the Fund. This avenue was explored after numerous attempts had been made to resuscitate the Fund, financially. Nationally, this decision was discussed at lengths with the Provincial Committees during 2003 where the municipalities had representations. Pertinent to the matter is the fact that the KwaZulu-Natal committee passed a resolution accepting the increase on 13 March 2003, which was subsequently signed on 31 August 2005.
At this point it is essential to note that the particulars of claim of the Fund were fundamentally flawed, the court went as far as saying they were confusing. This is based on the fact that the annexures to the particulars of claim were not in tandem with each other. Putting aside the flaws of the Fund's particulars, we now turn to the crux of the matter, which is compliance with section 12 of the Act when the alleged amendments to the rules of the Fund where being made.
At this juncture it is pivotal to note what section 12 of the Act says, and it reads as follows:
12. Amendment of rules
(1) A registered fund may, in the manner directed by its rules, alter or rescind any rule or make any additional rule, but no such alteration, rescission or addition shall be valid -
(a) if it purports to effect any right of a creditor of the fund, other than as a member or shareholder thereof; or
(b) unless it has been approved by the registrar and registered as provided in subsection (4).
(2) Within 60 days from the date of the passing of a resolution adopting the alteration or rescission of any rule or for the adoption of any additional rule, a copy of such resolution shall be transmitted by the principal officer to the registrar, together with the particulars prescribed.
(3) If any such alteration, rescission or addition may affect the financial condition of the fund, the principal officer shall also transmit to the registrar a certificate by the valuator or, if no valuator has been employed, a statement by the fund, as to its financial soundness, having regard to the rates of contributions by employers and, if the fund is not in a sound financial condition, what arrangements will be made to bring the fund in a sound financial condition.
(4) If the registrar finds that any such alteration, rescission or addition is not inconsistent with this Act, and is satisfied that it is financially sound, he shall register the alteration, rescission or addition and return a copy of the resolution to the principal officer with the date of registration endorsed thereon, and such alteration, rescission or addition, as the case may be, shall take effect as from the date determined by the fund concerned or, if no date has been so determined, as from the said date of registration.
(5) A registered fund may at any time consolidate its rules, and in such event the principal officer shall forward to the registrar a copy of such consolidated rules and if the registrar is satisfied that the consolidated rules are not different from the existing rules of the fund, the registrar shall register such consolidated rules and return a copy thereof to the principal officer with the date of registration endorsed thereon, and such consolidated rules shall take effect as from the date determined by the fund concerned or, if no date has been determined, as from the date of registration thereof.
(a) The registrar may request such additional information in respect of any alteration, rescission, addition or consolidation of the rules of a registered fund transmitted or forwarded to the registrar for approval as the registrar may deem necessary.
(b) If a registered fund fails to furnish the information requested by the registrar within 180 days from the date of that request, any submission for approval of an alteration, rescission, addition or consolidation of the rules of that fund lapses.
Upon a reading of the above section it crystallises that the Fund, in effecting an amendment to its rules, has to be guided by those same rules. Further to following the rules, the proposed amendment has to be approved by the registrar and subsequently registered by the registrar upon finding that the amendment conforms to the Act as contained in section 12(4) and is also a financially viable amendment.
In the matter, the process of having the proposed amendments approved by the registrar took approximately three years. A further enquiry that is fundamental is whether the Fund had diligently adhered to its own rules in its attempt to amend the rules.
The relevant rule in the matter was Rule 2.3.1, which deals with the amendment of rules and it reads as follows:
"The Trustees may by resolution amend these rules (which shall include, if necessary and after consultation with the Valuator, reducing Members‟ benefits in respect of future service or increasing Members‟ contributions). No amendment to the Rules by the Fund may be made unless the amendment has been approved by the Registrar of Pension Funds."
The court observed that the rule is in line with section 12 of the Act and that there is no inconsistency. The court identified a contravention by the Fund in its endeavours to amend its rules. The judgment read as follows:
"Thus in order for a rule amendment to be properly made, there must be a resolution taken at a meeting of the Board to amend a particular rule; that resolution must be transmitted to the Registrar within 60 days „from the date of passing the resolution‟ (s 12(2)) adopting the alteration, and the Registrar must decide whether to approve that resolution. To found a claim on an amended rule, therefore, the Fund must prove that a resolution has been properly adopted, transmitted to the Registrar timeously and approved by him or her."
At this point, the court had outlined what needed to be done in order for an amendment of rules to be successful. For our present purposes, it is essential to ponder on the passage of time from the alleged taking of the resolution to the approval of the registrar being obtained, which has been identified as three years above. The defence raised by the Fund is that the resolution was forwarded to the registrar timeously. What occasioned the delay, as per evidence given by the Fund, was the fact that the registrar's office had pointed out a few issues relating to the resolution.
The court did not deal with the delay at length. However, at this point it is necessary to reiterate that Funds need to comply with the Act and the rules in order for amendments to be done timeously and efficiently. This is the trustees’ duty. Failure to effect such changes subsequently affects the members of the Fund, as it results in contributions not being made in the correct manner. In this case the Fund was claiming ZAR324 000 plus interest from the Municipality as arrear contribution. These are funds that the Fund would have generated had it observed the Act and the rules in effecting the amendment to the rules.
The Municipality had advanced numerous defences and some of those were technical defences. The defence relevant for our purposes was that the purported amendment effected to rule 220.127.116.11 was incompetent and unlawful. Further, the Municipality contended that the resolution, which the Fund sought to rely upon, was not adopted with due process.
The court further acknowledged that the registrar does have the discretion to condone non-compliance with time periods in terms of section 33 of the Act. However, that discretion may not be exercised mero motu as the person responsible for acting within the time period needs to make such request to the registrar.
Further to the Fund's failure to adhere to the time periods as reflected in section 12 of the Act, the Fund was unable to show in the court a quo and at the appeal court when the purported resolution obliging the Municipality to contribute the increased percentage was taken. This was one of the numerous shortcomings of the Fund in establishing a case against the Municipality, hence absolution from the instance was granted, both in the court of first instance and the appeal court. Therefore, the Municipality had not been at fault by not effecting contributions reflective of the increase as contended by the Fund because the Act and the rules were not adhered to.
This case further illustrates how essential it is for the trustees to be diligent when exercising their duties in the course of advancing the interests of the members. As allude to above, the invalidity of the actions of the trustees equates to loss incurred by the members. The case law in the pension funds area is inextricably emphasising that following the Act and the rules is paramount for the trustees if they ought to perform their functions to the benefit of the members of the fund.