Pension transfers in the 1990s left billions of Rand surplus...
why?
(Financial Services Board estimated R80 Billion surpluses in Pension Industry in 1999)
By Roger Wellsted
Pension transfers in the 1990s left billions of Rand surplus...
why?
(Financial Services Board estimated R80 Billion surpluses in Pension Industry in 1999)
By Roger Wellsted
Old Fund
Liability
Actuarial Liability is the theoretical value of the “promise” of a pension
Assets
Cash, shares, property, etc. needed to fund the “promise” or “Actuarial Liability”
Assets – includes a “reserve value” to cushion the fluctiations in the Stock and Proeprty markets – required by Law as set out in Regulation 15
Section 16 of the Pension Funds Act refers to attached Regulations of the Act – which includes Regulation 15 in which it is described how a pension “Liability” must be funded
Total value of Assets set aside to fund a pension includes the “actuarial value” placed on shares, bonds, property, cash etc + “investment reserve” or value of funds needed to protect the funds from a correction in the stock and property markets
The Transfer
Liability
The “promise” of a pension is transferred i.e. the Liability (it is also necessary to transfer assets to fund the “promise”)
Funds left behind
Assets
Funds transferred were amounts equal to a cash value of the actuarial liability (i.e. the market value of funds were not transferred)
Funds left behind were previously part of the overall “Value of Assets” needed to fund pensions in terms of Regulation 15.
According to the Financial Services Board, the estimated surpluses in Pension Funds in 1999 amounted to R80 Billion.
New Fund
Actuarial Liability
The “promise” of a pension.
A cash-only investment plan would require a significantly different “invetment assumption” than a Pension Liablility calculated on a spread-investment plan: i.e. shares, property, bonds, etc.
In many Defined Benefit Pension Funds, members were promised their full value in the Fund on transfer to a “Money Purchase Pension Scheme” .
Then, after the members agreed to transfer, the actuary changed the assumptions relating to the “Investment Reserve” and reduced the transfer value – anywhere between 10% and 40% reduction.
This explains how a large portion of the surpluses in Defined Benefit Pension Funds were derived – an estimated R80 Billion in 1999.
Government, in its Pension Funds Second Amendment Bill of 2001, claims it was “not fair” to members to have left behind this “investment reserve”
Chief Actuary says:
“While we may be able to reach agreement with all stakeholders on the way forward, redressing inequities of the past is fraught with difficulty and opposition.”
In some Funds, once the transferring members left the Fund, the actuary reverted to the original and stronger valuation method for the remaining members, many of whom were trustees of the Funds.
In some Funds, the Trustees agreeing to this method of transferring funds were shareholders in the company and benefited financially from this decision. The questions must be posed:
- In such cases, were the trustees acting legally in the best interests of their members?
- Is there a possibility that there may be a conflict of interest?
- Why did the media drop the story after Government publicly acknowledge that it was not fair to members?
Roger Wellsted