Personal Finance: Southern African arm of petroleum giant Shell stopped from trying to grab pension fund surplus of R184 million

Headline: Shell bid to grab R184m surplus stopped

Although the ruling doesn’t set a legal precedent, it does highlight the issues involved in deciding how retirement funds should distribute their surpluses fairly. 

February 9, 2008
By Bruce Cameron

The Southern African arm of petroleum giant Shell has been stopped in its tracks from trying to grab a pension fund surplus of R184 million.

The victory for members, former members and pensioners of the Shell Southern Pension Fund follows a lengthy battle.

The final decision in their favour was made by a tribunal appointed by the Registrar of Pension Funds. The tribunal was comprised of two top lawyers and an actuary.

The victory follows:

A ruling by the tribunal that Shell had improperly used R118 million of the surplus in the pension fund to pay for a post-retirement medical scheme subsidy obligation. There was nothing illegal in this at the time, but retrospective amendments to the Pension Funds Act require an employer to pay back all improperly used money to a fund.

A Cape High Court declaratory order in 2006 following a challenge by the trustees of the Sanlam staff pension fund about the retrospective nature of the Pension Funds Act amendments. Many surplus distribution schemes were then put on hold as a result of the challenge.

An amendment to the Pension Funds Act by Parliament in October 2007 that put the issue of what constituted the improper use of a surplus beyond doubt. The amendment stated clearly that any improper use dating back to 1980 had to be considered when determining a fund’s surplus. Shell lobbied strongly but unsuccessfully against the amending legislation.

What’s at stake
The tribunal that looked into the Shell surplus had to make decisions on various complex issues that highlight the problems the trustees of thousands of pension funds face when trying to divide pension surplus spoils in line with the requirements of the Pension Funds Act.

These issues have included:

The improper use of a pension surplus. This included:

* Shell had enjoyed a contribution holiday for periods after December 7, 2001 after the fund’s consultants reported a surplus in the fund. In other words, only the members and not Shell were contributing to the fund.

Shell claimed it had over-contributed to the fund in the past, but members and pensioners argued that the surplus was a result of other factors, including unfair withdrawal benefits.

* Members of other funds were transferred into the Shell Southern Pension Fund. These members were credited with full past pensionable service, but insufficient assets were transferred from their previous funds to match the liability of their past pensionable service. The shortfall had to be made up from the Shell fund’s surplus.
* Additional pensions were granted to pensioners who agreed in the 1990s that, as a quid pro quo, Shell would no longer have to subsidise their medical scheme contributions. Different classes of pensioners were created in the medical scheme subsidy deal, with non-medical scheme subsidy pensioners not receiving the same added value when they opted to purchase a pension outside of the Shell fund.

Shell argued that pensioners had agreed to the medical scheme subsidy deal and that the retrospective nature of the legislation on improper use was unacceptable.

Actuarial valuations. These valuations can vary widely depending on the assumptions made. In the Shell case, estimates of the size of the surplus have varied on different dates and have depended on different assumptions.

Minimum benefits. This is a contentious issue in the surplus distribution legislation that affects pensioners and former members. Former members of the Shell fund received an additional R48 million.

Equity issues. In its ruling on the Shell case, the tribunal points out that some people believe that all contributions to a retirement fund by an employer amount to deferred pay for employees, and that the surplus therefore belongs to them.

Others believe the entire surplus in a defined benefit fund belongs to the employer because the employer guarantees the pensions.

The tribunal’s view is that the surplus apportionment must be based on equity and reasonableness, taking account of the history of the fund and practical issues, such as the fund’s circumstances, and the rights and reasonable expectations of members and former members.

The division of the spoils. The tribunal – advocates John Myburgh and Eduard Fagan and independent actuary Mickey Lowther – awarded:

* R22 million to members, pensioners and deferred pensioners; 

* R98 million to former fund members (in addition to the R48 million in minimum benefits); and
* R64 million to Shell.

Pension funds lawyer Jonathan Mort, a director of law firm Edward Nathan Sonnenbergs, says the tribunal’s ruling does not set a precedent in the same sense as a court sets a precedent, which then becomes law.

“It is an example of a thoughtful and well-reasoned approach that followed a very inclusive process. It is also important to stress that this is not an outcome that would nece-ssarily be appropriate for other funds, because it all depends on the facts. The circumstances here were very complicated,” Mort says.

Shell says it is reviewing the tribunal’s determination.

How to secure your claim

If you currently belong to a retirement fund, are a pensioner of a fund or are a former member of a fund, you are entitled to information about any surplus in the fund or to be told that the fund does not have a surplus.

If a surplus has been identified, the fund’s trustees are obliged to keep you informed about any surplus apportionment scheme.

Former fund members should contact their former employers to obtain the contact details of the funds to which they used to belong. You do not have a claim against your former fund if it has amalgamated with another fund or if it has been absorbed by another fund.

You must get in touch with your former fund (the administrator and or principal officer) and provide your contact details and the details of the employer for whom you worked while you were a member of that fund.

To find out if a fund still exists or if a fund is not providing you with information about a surplus distribution, telephone the Financial Services Board’s call centre on 0800 110 443 or 0800 202 087.

Most funds don’t have that something extra to give

A total of 6 858 retirement funds have made submissions to the Financial Services Board (FSB) about whether they have surpluses in their funds, as they are required to do in terms of surplus distribution legislation.

And most of the funds have declared that they do not have a surplus to distribute.

The FSB expects to receive about 8 000 submissions in total, FSB chief actuary Marius du Toit says. Although there are about 14 000 registered retirement funds in South Africa, he says many of these funds are dormant and should be deregistered.

Of the 6 858 submissions received so far, only 686 have declared a surplus, while 6 172 say they have no surplus.

The FSB has rejected claims by 18 funds that they have no surplus, as well as applications by 40 funds that want to retain their surpluses in an employer surplus account.

Du Toit says in cases where apportionment proposals have been rejected, the main problems have been inadequate communication and negotiation with stakeholders when measured against what is required in the surplus distribution legislation. “It does not necessarily say that the apportionment at the time was wrong or inequitable.”

Du Toit says the FSB is, however, concerned about the number of pended cases. “These are cases that had been submitted and where we have sent out query letters.”

He says there are numerous reasons why a fund would be sent such letters. They include incomplete documentation, insufficient information for the FSB to make an informed decision, errors and omissions, valuation-related queries, inadequate justification for reserve accounts, and unfair and inequitable apportionment of a surplus.

“So far, we have not set a time limit for funds to respond and some of them are long-outstanding. This will also be taken up with the administrators of the funds.

“A further concern is the tendency of administrators and consultants to pass the blame for delays to the FSB. You will often find that someone will claim that they submitted the scheme to the FSB and are now waiting, whereas in fact it was submitted, and the registrar responded by way of a query letter to which the fund has not responded.”

The FSB referred five funds, including the Shell Southern Pension Fund, to tribunals because the FSB did not agree with their surplus distribution proposals.

Other funds that have not submitted surplus distribution proposals are now also being referred to tribunals, Du Toit says.

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