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Personal Finance: Shell improperly used surplus pension money

Personal Finance: Shell ‘improperly used’ surplus pension money 

January 28, 2006
By Bruce Cameron and Charlene Clayton

A ruling against oil company Shell may force many trustees to reassess whether their funds are in surplus or whether surpluses have been understated.

In the first ruling of its kind, a tribunal appointed by the Registrar of Pension Funds has found that the Southern African arm of petroleum giant Shell should repay millions of rands to its staff defined benefit pension fund.

The ruling is based on what a 2001 amendment to the Pension Funds Act on the distribution of pension fund surpluses defines as the improper use of pension fund surpluses by employers. The ruling was made even though the “improper” use of the money occurred before the promulgation of the legislation and the practice was not illegal at the time.

The ruling is likely to force the trustees of many other pension funds and their advisers back to the drawing board to assess whether their funds have a surplus, or whether any surplus has been understated because the surplus has been improperly used by the fund’s sponsoring employer.

The ruling could also have serious implications for companies that, in terms of the ruling, have used surpluses improperly, because they might have to refund the money to their funds.

Reasons for the ruling
The tribunal detailed the reasons for its ruling in a 94-page document. It found that the Shell Southern Africa Pension Fund’s surplus had been improperly used in a number of ways. These were:
Shell had enjoyed a contribution holiday since December 7, 2001, when the fund’s consultants, Alexander Forbes, had reported a surplus in the fund.

Members of other funds – mainly those of Shell subsidiaries Cera, Easigas and Veetch – were transferred into the fund. They 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. In other words, there was a shortfall that had to be made up from the surplus of their new fund.

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 pensioners not receiving the same added value when they opted to purchase a pension outside of the Shell fund.

The Registrar of Pension Funds – in effect, the Financial Services Board (FSB) – now has to decide whether the fund’s members approv-ed the improper use of the surplus, which totalled R262 million at its peak.

The tribunal was of the opinion that the members (including pensioners) did not approve the improper use of the surplus, as Shell is claiming. Shell’s claim is based on the fund’s pensioner members accepting a pension enhancement offer of about 10 percent in return for allowing the fund to outsource their pensions to life assurance companies.

If the members did approve the improper use of the surplus, Shell will not have to repay the money to the fund. If the registrar agrees with the tribunal, the tribunal will have to decide the rand amount of the improper use.

Mike Codron, the chief actuary of the FSB, says the FSB is still studying the ruling and has not yet made any decisions. He says there is not enough information in the ruling to enable the registrar to make a decision.

The tribunal, which now acts as the trustees of the fund for the purposes of distributing the fund’s surplus, will have to provide the registrar with further documentation to support its contention that members had not approved the improper use of the surplus.

Should the registrar confirm the ruling against Shell, it does not necessarily mean that the company will have to transfer money to the fund. It could mean that any share of the surplus that the trustees award to the company might be reduced.

So far, members have benefited by more than R80 million from the surplus in the form of additional benefits and higher pensions.

Jonathan Mort, who acted for the fund at the hearing, and who is a director of corporate law advisers Edward Nathan and a former president of the Pension Lawyers’ Association, says in response to questions from Personal Finance that many of the uses to which surpluses were put had been legal before the surplus distribution legislation was promulgated.

However, the surplus distribution legislation defined numerous actions as abuse of a surplus, resulting in these uses being defined as improper. In many cases, these improper uses did not benefit the employer directly.

Mort says some employers may now have to pay their funds what could be very significant amounts of money as a result of actions that were completely lawful in the past, and to which the employers may not have agreed had they known they would subsequently be required to bear the cost of the use of a surplus.

The tribunal’s ruling in this case does not set a precedent and other tribunals could find differently, but this is unlikely, particularly in light of the stature of the tribunal members.

The tribunal was headed by John Myburgh SC, who has headed numerous high-profile inquiries, including the investigation into the collapse of the value of the rand in 2000. He was assisted by another respected advocate, Eduard Fagan, and independent actuary Mickey Lowther, who consults to major pension funds.

FSB awaits most distribution plans

The FSB has so far approved surplus distributions totalling R2.5 billion, but less than half the funds that are thought to be in surplus have submitted their surplus distribution schemes for approval. Funds have until April 1 this year to submit their surplus distribution schemes. The FSB will impose penalties on funds that miss the deadline. 
Codron says all retirement funds must submit surplus distribution schemes to the FSB, even if they are not in surplus. Those funds not in surplus must submit “nil surplus scheme” reports.

“The onus lies with each fund, where appropriate, to convince the Registrar of Pension Funds that the fund has no surplus to apportion,” Codron says.

The FSB expects that about 16 000 surplus submissions need to be made.

Codron says the FSB estimates that only 1 500 to 2 000 funds are in surplus. This means some 85 to 90 percent will have no surplus. Of the 6 121 surplus distribution schemes that the FSB has received to date, 119 were from funds with a surplus and 6 002 were from funds without one. This means the FSB is still waiting for some 10 000 surplus distribution schemes, Codron says.

In terms of a FSB information notice last year, funds that fail to submit a surplus scheme in time will pay penalties retrospectively to the date the fund’s statutory actuarial valuation report was due, or the date until which an extension was granted. For example, if a fund’s statutory actuarial valuation date was December 31, 2003, the due date for a surplus scheme would have been December 31, 2004. If the report is submitted after April 1, 2006, the penalties will be backdated to December 31, 2004.

If a fund does not submit a surplus distribution scheme in time, the Registrar of Pension Funds may appoint an independent tribunal to assess whether the fund is in surplus and to arrange a distribution scheme if there is a surplus.

Surpluses: Your rights
Amendments to the Pension Funds Act, which became law on December 7, 2001, give all stakeholders in a retirement fund – current members, former members, pensioners, deferred pensioners and employers – the right to a share of any surplus that has built up in the fund.

If a fund has a surplus, current members will have their benefits enhanced, pensioner members will have their pensions topped up and former members will receive a cash payout.

However, former members and pensioners get first bite at any surplus. The benefits to which they are entitled are set out in the legislation and depend on whether the fund is a defined contribution or a defined benefit fund.

If you left a fund over the past 20 years and received less than the minimum benefit (defined in the legislation), and the fund has a surplus, your benefit must be topped up to the extent to which the size of surplus allows the fund to do so.

Pensioners who did not receive inflation-linked increases over the past 20 years may also have their benefits topped up to bring their pensions in line with inflation from the date of their retirement to the surplus apportionment date of their particular fund.

Again, this will only happen if the fund from which they currently receive their pensions has a surplus, and the top-up will take place to the extent that the surplus can support such a top up.

After former members and pensioners have been reimbursed, the balance of the surplus must be shared out among all the fund’s stakeholders, which will give pensioners and former members a second bite at the surplus.

The critical questions are, firstly, whether your fund, or former fund, exists, and secondly, whether it had a surplus on the fund’s surplus apportionment date. The surplus apportionment date differs for each fund, and ranges from December 2001 to December 2004. If the answer to either of these questions is “no”, you will not get any money or benefit top-up.

According to the Pension Funds Act, all funds that identify a surplus have 18 months from the valuation date to draw up a surplus distribution scheme, which spells to whom and how the surplus must be distributed.

Fund members and other stakeholders must be notified about the surplus distribution scheme. All stakeholders have 12 weeks from the date on which the notification is sent out in which to lodge any objections to the scheme with the fund.

A total of 75 percent of a fund’s board of trustees has to approve a surplus distribution scheme. A board of trustees must address all complaints from members, former members and pensioners, and obtain the approval of the Registrar of Pension Funds at the Financial Services Board before the surplus can be distributed.

The legislation only applies to funds registered under the Pension Funds Act. State and semi-state funds, such as the Government Employers Pension Fund, do not fall within the ambit of the Pension Funds Act.

What you should do
If you currently belong to a retirement fund, your trustees are obliged to keep you informed about any surplus apportionment, once a surplus has been identified.

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 subsequently amalgamated with another fund or if it has been absorbed by another fund.

You must get in touch with your former fund and provide it with your contact details and the details of the employer for whom you worked while you were a member of that fund. It is worth being proactive in this regard because one of the biggest challenges funds face is tracking down former members going back to 1980.

To find out if a fund still exists, you can telephone the FSB call centre on 0800 110 443 or 0800 202 087.

Related article: Adjudicator tells pension funds, employers to play by the rules: July 29, 2005

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