ADJUDICATING INSURANCE AND PENSION PRODUCTS UNDER THE SOUTH AFRICAN PENSION FUNDS ACT 24 OF 1956

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1 ADJUDICATING INSURANCE AND PENSION PRODUCTS UNDER THE SOUTH AFRICAN PENSION FUNDS ACT 24 OF 1956 Mtendeweka Mhango Deputy Head School and Associate Professor of Law, University of the Witwatersrand 1 INTRODUCTION The jurisdiction of the Pension Funds Adjudicator, a tribunal set up in terms of section 30B of the Pension Funds Act, is one of the most litigated and academically debated subject matter in modern South African pension law. In this article I add to the debate by discussing a fairly recent case decided by the Supreme Court of Appeal (SCA) in Mungal and Another v Old Mutual. 1 In this case, the SCA had to determine whether the Adjudicator had jurisdiction to determine whether or not an insurer may apply a marketed level adjuster 2 to determine the surrender value of a withdrawal benefit from an insurance policy where a member of a pension fund withdrawals from the pension fund before the original contractual retirement date. The SCA ruled that questions of this nature fall within the jurisdiction of the Adjudicator as defined in the Pension Funds Act. In its ruling, the SCA broadly construed the Adjudicator s jurisdiction and in the process made some important pronouncements which warrant academic commentary. This article argues that Mungal should be welcomed because it clarified that the Adjudicator has jurisdiction to determine disputes against insurers of underwritten pension fund organizations. Additionally, the article argues that the broad construction of the Adjudicator s jurisdiction by the SCA is a welcome development not only because it confirms the interpretative practice of the Adjudicator and some high courts, but more importantly it brings certainty in the law governing the Adjudicator s jurisdiction over the application of a marketed level adjuster. 3 The article maintains that by broadly construing the jurisdiction of 1 Mungal v Old Mutual Life Assurance Co SA Ltd; Freeman v Old Mutual Life Assurance Co SA Ltd [2010] 1 BPLR 11 (SCA). 2 A market level indicator also known as a market-value adjuster is simply an actuarially determined rate to calculate downwards a fund s market value against its smoothed value, when the fund s market value is below its smoothed value, for an investor who surrenders his policy before it matures. It is not applied when the fund s market value exceeds its smoothed value. Its purpose is to protect investors who remain in the fund, to ensure the fund s assets are not eroded by investors who exit early at times of market weakness. The market level indicator is the mechanism by which the cross-subsidisation, which enables the smoothing of returns, can take effect. It is always a downwards adjustment; the flip-side is bonuses, which are always upwards. See, Todays Trustees, December (2008), available at ( accessed ). 3 3 N Jeram, Jurisdiction of the Pension Funds Adjudicator in Respect of Complaints by Underwritten Insurers 2010 Insurance and Tax Journal

2 the Adjudicator, the SCA has empowered the Adjudicator to achieve its mandate of disposing complaints in a procedurally fair, economical and expeditious manner, and to extend services to lay complainants. Before examining the Mungal judgment, I first discuss the emergence of the pension adjudication framework, and the notion of underwritten pension funds in South Africa. This discussion is important because it provides the reader with a context to understand the Mungal case. 2 THE EMERGENCE OF THE PENSION ADJUDICATION FRAMEWORK UNDER THE PENSION FUNDS ACT In the 1990s, South Africa went through sweeping constitutional and democratic reforms, which culminated in the signing into law the South African Constitution. As a consequence of these sweeping reforms, new legislation was mandated by the Constitution 4 and in some cases changes to existing legislation became necessary to ensure alignment with the new dispensation. 5 Professor Murphy has observed that the trend towards democratization in South Africa of the 1990s impacted directly on pension funds resulting in major legislative changes to the Pension Funds Act, the primary legislation that regulates private pensions fund organizations, such as the requirement that boards of management become representative; the subjection of pension funds to human rights standards and the requirement of reasonableness and fairness. 6 The term pension fund is defined in the Pension Funds Act to mean a pension fund organization. The term pension fund organization is in turn defined in section 1 of the Pension Funds Act as any association established with the object of providing annuities or lump sum payments for members or former members of such association upon their reaching retirement dates, or for the dependants of such members or former members upon the death of such members or former members. 4 See e.g., section 9(4) of the South African Constitution providing that No person may unfairly discriminate directly or indirectly against anyone on one or more grounds in terms of subsection (3). National legislation must be enacted to prevent or prohibit unfair discrimination ; and section 33 of the Constitution providing that Everyone has the right to administrative action that is lawful, reasonable and procedurally fair. National legislation must be enacted to give effect to these rights. As a consequence of these two constitutional provisions, the Promotion of Equality and Prevention of Unfair Discrimination Act, 2000 and the Promotion of Administrative Justice Act, 2000 were enacted. Both legislation apply to pension funds organizations. 5 See, Labour Relations Act 66 of 1995 (providing in its preamble that its purpose is to change the law governing labour relations and, for that purpose to give effect to section 27 of the Constitution); South African Schools Act 84 of 1996 (where the preamble notes that the achievement of democracy in South Africa has consigned to history the past system of education which was based on racial inequality and segregation, the objects of the Act is to provide for a uniform system for the organisation, governance and funding of schools; to amend and repeal certain laws relating to schools; and to provide for matters connected therewith). 6 Murphy Alternative Dispute Resolution in the South African Pension Funds Industry: An Ombudsman or tribunal? 2001 Journal of Pensions Management

3 In his study of dispute resolution in the South African pension funds sector, Murphy correctly notes that during 1996, pursuant to political pressures to reform the pension funds sector and recommendations made by the Mouton Committee of Investigation into a Retirement Provision System for South Africa (the Mouton Committee), the Pension Funds Act was amended to create the Office of the Pension Funds Adjudicator (OPFA) with the purpose to dispose of complaints against pension fund organizations or employers who participate in the funds. 7 It is important to point out that the Mouton Committee recommended the establishment of an ombudsman for retirement funds because the Pension Funds Act did not make provision for the Financial Services Board (FSB) to settle disputes between pension members and their pension funds. Yet, the FSB was inundated with thousands of complaints from pension members. 8 Hence, the recommendation of the ombudsman was designed to relieve the pressure on the FSB, which was estimated spending 25% of its daily routine dealing with complaints from pension members, and to provide an independent service to members of pension fund organisations. 9 As Murphy has observed, the Mouton Committee s recommendation (supported by the pension sector) was qualified with a proposal that the rulings of the ombudsman should not be binding unless characteristics of court proceedings, such as formal procedure of leading and testing evidence or allowing attorneys or advocates to present a case, were built into the process. 10 The Mouton Committee maintained that because the binding ruling by an ombudsman will be a type of legal precedent, going further than the individual case, pension fund managers may feel themselves forced into an all-out legal defense. 11 Moreover, in support of its recommendations for an ombudsman with the power to issue nonbinding decisions, the Mouton Committee argued that a binding decision will have to be a legal decision which deals with factual questions on strict basis of proof on a preponderance of probabilities, while as nonbinding decisions would make it possible for the consideration of equity. 12 As a result, it maintained that a speedy and inexpensive resolution of disputes will 7 Ibid; and Jeram The Pension Funds Adjudicator-A Jurisdictional Nightmare 2006 Industrial Law Journal The Mouton Report of the Committee of Investigation into a Retirement Provision System for South Africa (1992) Ibid at Ibid at Ibid. 12 Ibid. 103

4 not be possible if binding decisions were to be made. 13 On the other hand, the FSB supported the creation of an ombudsman as a special court with the power to issue binding decisions. 14 However, as Murphy has correctly remarked, when the Parliament amended the Pension Funds Act in 1996 to make provision for dispute resolution, it did not implement the Mouton Committee s recommendations entirely. 15 To the contrary, he comments that Parliament established the Adjudicator with the power to make binding decisions but modeled it on the investigative ombudsman concept rather than opting for a more formal administrative tribunal. 16 In Murphy s view, the result is that although the Adjudicator has the same remedial powers of a court of law, it is not a court but an investigative administrative agency. 17 In his seminal article the Pension Funds Adjudicator- A Jurisdictional Nightmare, Professor Jeram has argued that the legislature intended to provide a specialized pension tribunal, which while performing a quasi-judicial function, is not bogged down by the formal procedural requirements that are part of ordinary civil court litigation. 18 Nevertheless, through an amendment to the Pension Funds Act, which came into effect in April 1996, the OPFA was established. In terms of section 30B(2) of the Pension Funds Act, the functions of the OPFA are performed by the Adjudicator, whose function is to dispose of complaints relating to pension funds organizations in a procedurally fair, economical and expeditious manner. 19 A complaint, which is the source of the Adjudicator s jurisdiction, is carefully defined in section 1 of the Pension Funds Act as follows: 13 However, the Mouton Committee qualified its recommendation on non-binding decision and said the viewpoint that a binding decision should not be forced on a party to a dispute in the absence of something akin to a due process of court, does not exclude the possibility that a ruling of the ombudsman could have binding effect where both (or all) parties to the dispute consent thereto, either before the ombudsman starts his investigation or within a stated period (say one month) after his decision. In the case of consent, provision should be made for his decision not only to be binding but also final (i.e. no appeal or other recourse to courts) and to have effect of a civil judgment of a court so that it can be executed where necessary. Ibid at Marx and Hanekom, the Manual of South African Retirement Funds and Other Employee Benefits (LexisNexis, 2007). 15 Murphy, supra note Murphy, supra note Shell and BP South Africa Petroleum Refineries (Pty) Ltd v Murphy NO and Others [2000] 9 BPLR 953 (holding that the Adjudicator is entrusted with judicial functions); Old Mutual Life Assurance Company (SA) Ltd v Pension Funds Adjudicator and Others [2007] 1 BPLR 117 (holding that the Adjudicator performs a judicial function); Beukes v Pepkor Retirement Fund [2007] 3 BPLR 288 (holding that the decision of the Adjudicator are binding on pension funds and others). 18 Jeram, supra note Section 30D of the Pension Funds Act. 104

5 Complaint means a complaint of the complainant relating to the administration of a fund, the investment of its funds or the interpretation and application of its rules and alleging (a) that a decision of the fund or any person purportedly taken in terms of the rules was in excess of the powers of that fund or person, or an improper exercise of its powers; (b) that the complainant has sustained or may sustain prejudice in consequence of the maladministration of the fund by the fund or any person whether by act or omission; (c) that a dispute of fact or law has arisen in relation to the fund between the fund or any person and the complainant. 20 After investigating a complaint as defined, the Adjudicator may make the order which any court of law may make, 21 which shall be deemed to be a civil judgment. 22 Any party who feels aggrieved by a determination of the Adjudicator may apply to an appropriate high court for relief in terms of section 30P of the Pension Funds Act in which occasion the high court may consider the merits of the complaint and may make any order it deems fit. 23 In considering a matter in terms of section 30P, the high court may take further evidence. In its interpretation of section 30P(2), the SCA in Meyer v Iscor Pension Fund 24 has pronounced that this section contemplates an appeal in the wider sense in that it could entail a fresh determination of the merits with or without further evidence. The OPFA began its operations in 1998 after the first Adjudicator, Professor Murphy, was appointed in that year. Since then commentators have remarked that the OPFA has created a forum allowing unrepresented litigants to challenge decisions of the pension fund organisations and employers who participate in them, which they otherwise could not pursue in ordinary courts due to the high cost of legal services in South Africa. 25 Additionally, they correctly maintain that the Adjudicator has played an important role in the development of 20 See, Pienaarv Consol Group Pension Fund PFA/GA/97/98 (unreported) (where an employer failed to file a disability claim with the fund on behalf of the complainant. In a dispute seeking to order the employer to provide evidence to the fund for the consideration of the disability claim the Adjudicator held that the dispute was not a complaint as defined in the Pension Funds Act) Seethal v Metal and Engineering Industries Permanent Disability Scheme and Others PFA/KZN/2719/01 (unreported) (held that a permanent disability scheme does not fall within the definition of a pension fund organization); Stassen v Central Retirement Annuity Fund and Another [2001] 3 BPLR 1792 (Adjudicator held that he did not have jurisdiction to hear a dispute relating to a divorce order where the court order was not served on the fund); and Alais and Another v Telkom Pension Fund and Others [2006] 1 BPLR 67 (PFA) (held that the Adjudicator has no jurisdiction to determine whether or not a reorganization of an employer has taken place even if pension matters are involved) 21 Section 30E of the Pension Funds Act. 22 Section 30O of the Pension Funds Act. 23 Section 30P of the Pension Funds Act. 24 Meyer v Iscor Pension Fund [2003] 3 BPLR 4427 (SCA). 25 Jeram above note 7 at

6 pension jurisprudence, which was nonexistent before However, as a creature of statute, questions remain around the scope of the jurisdiction of the Adjudicator. 27 As one commentator correctly observed, when analyzing the role of the Adjudicator, it is important not to confuse the jurisdiction with his power and functions. 28 This article focuses its discussion on jurisdictional questions as articulated by the SCA in Mungal. 3 THE STRUCTURAL NATURE OF UNDERWRITTEN FUNDS IN SOUTH AFRICA As pointed out earlier, in order to provide a proper context for recognizing the importance of the Mungal judgment, it is critical for me to briefly examine the structural nature of underwritten funds in South Africa. An underwritten fund is a pension fund organization whose liability to pay pension benefits is underwritten by an insurer and funded by long-term insurance policies. 29 Most underwritten funds are retirement annuity funds but not all underwritten funds are retirement annuity funds. 30 Any person who participates in an underwritten fund, particularly a retirement annuity fund, typically has to submit an application to the insurer who underwrites and administers the fund. According to some commentators, the application to join a retirement annuity fund ensures that the applicant becomes a member of the fund and enables the insurer to issue a policy to the fund. 31 Once the application is accepted, the applicant becomes a member of the fund and enters into a contract (in the form of the rules of the fund) with the fund in which she is required to pay 26 Ibid; Khumalo Jurisprudential Role Played by the Pension Funds Adjudicator in South African Law (paper presented at the Pension Lawyers Association, Cape Town 5 March 2006) at 28, available at ( accessed ) (arguing that the Adjudicator has been at the forefront of introducing constitutional and administrative jurisprudence into South African pension law). 27 Jeram, supra note (arguing that due to the badly drafted mandate of the Adjudicator, the resolution of pension disputes is a jurisdictional nightmare and pension fund members are consistently confronted with a series of points in limine); and Khumalo, supra note (generally agreeing that there are lots of problems surrounding the jurisdiction of the Adjudicator.) 28 Khumalo, supra note See, Regulation 1(a) of the Pension Funds Act, which provides that the assets of the fund shall consist only of claims against one or more insurers. MacKenzie Babies and Bathwater A Comparison of Unit Trust and Underwritten Retirement Annuity Funds 2007 Industrial Law Journal 43-44, 46-48; and Jeram Jurisdiction of the Pension Funds Adjudicator in Respect of Complaints by Underwriting Insurers 2010 Insurance and Tax Journal MacKenzie, supra note ( noting that underwritten funds are not restricted to retirement annuity funds and that many umbrella funds, provident and pension funds also utilize this form of funding). 31 Marx and Hanekom, supra note 14 at

7 pension contributions to the fund. 32 In practice, this payment constitutes a double payment, namely to the fund and insurer that administers and underwrites the fund. 33 Additionally, a separate contract comes into existence in the form of the policy mentioned above, between the fund and insurer. 34 The pension member is not a party to this policy. Under this policy arrangement, the fund is the policyholder and it uses the pension contributions it receives from the member to pay premiums on the policy. In turn, the insurer pays benefits to the fund upon the member s retirement or disability before retirement. 35 What should be manifest from this brief discussion is that an underwritten fund gives rise to two contractual arrangements. The first is the contract between the fund and the pension member, which manifests in the rules of the fund. The second is the insurance policy between the fund and insurer, which in the retirement annuity fund context the two parties to the policy are one in the same. Another important characteristic of underwritten funds is that they have no assets other than the policies issued to them by the insurer to fund its pension liabilities. 36 Additionally, the Pension Funds Act requires that an underwritten fund must be administered by an insurer. 37 In this regard, the insurer plays a dual role in relation to the fund and the member. In its dealings with the fund, the insurer acts in its capacity as the insurer or underwriter against the policies that it issued to the fund. For all intents and purposes this relationship constitutes long-term business in terms of the Long-Term Insurance Act On the contrary, in its dealing with the fund member, the insurer acts in its capacity as the administrator of the fund. This relationship constitutes pension fund business in terms of the Pension Funds Act. 39 When a pension member is unhappy with the benefits provided by the fund, the problem that arises is whether such member should lodge a dispute with the Adjudicator or the 32 Marx and Hanekom, supra note 14 at See, Regulation 1(b) of the Pension Funds Act, which provides that the payment of every benefit in terms of the rules of a pension fund shall be solely by one or more insurers. 34 Ibid 35 Ibid 36 Ibid at See, Regulation 1(d) of the Pension Funds Act, which provides that one insurer shall accept the responsibility to act as administering insurer for the purposes of these Regulations. 38 Marx and Hanekom, supra note 14 at Marx and Hanekom, supra note 14 at

8 Ombudsman for Long-Term Insurance. 40 This was one of the questions that confronted the SCA in Mungal THE MUNGAL CASE 4.1 The facts of the case In this case, Mr Mungal, who was a member of the Protektor Preservation Provident Fund ( the Protektor Preservation Fund ) and Mr Freeman, who was a member of the South African Retirement Annuity Fund (SARAF), lodged separate complaints with the Adjudicator against Old Mutual. Since the complaints dealt with identical questions, the Adjudicator dealt with them together. After considering the complaints, the Adjudicator issued determinations, which required Old Mutual to pay certain sums of money to the complainants. Old Mutual was aggrieved by the determination, and in terms of section 30P of the Pension Funds Act, it appealed to the high court to have the determinations set aside. The two appeals were heard together by the Durban high court in which it ruled that the Adjudicator had no jurisdiction to determine the dispute and set aside the Adjudicator s determination. It reasoned that the fact that the policies in question were issued out to a pension fund organization constituted a minor and inconsequential feature of the dispute and that a dispute relating to these policies did not amount to a complaint within the meaning of the Pension Funds Act. The complainants appealed to the SCA. To put the ruling into context, the SCA began by explaining the types of pension fund organizations that were involved in this case. It explained that the Protektor Preservation Fund and SARAF were designed to accommodate employees to whom a benefit has become payable in consequence of termination of their participation of another pension fund organization. 42 Both funds in this case were underwritten, which means that their only assets were claims under long-term insurance policies. 43 It noted that when a person joins a preservation fund the money that is paid into such fund is used to pay the premiums on an insurance policy taken out by the preservation fund for the benefit of the pension member. 40 For a discussion of this issue see, MacKenzie Retirement Annuity Funds Strangling the Golden Goose, or an Opportunity for Reform? 2005 Industrial Law Journal 1166; Ngalwana Chaos or clarity? Pension Funds Adjudicator replies 2006 De Rebus See, Adonis v Hortors Group Provident Fund and Others [2004] 5 BPLR 5658 holding that the Adjudicator has no jurisdiction over insurance companies and in respect of insurance policies. 42 Marx and Hanekom, supra note 14 at (discussing the different kinds of pension funds including underwritten funds) 43 Mungal v Old Mutual Life Assurance Co SA Ltd; Freeman v Old Mutual Life Assurance Co SA Ltd, supra note 1 at para

9 Usually the parties to the policy are the fund, insurer and the pension member becomes the life assured. 44 Any benefits that accrue under the policy are paid by the insurer to the fund and the moneys are then available to pay to the member s benefits in terms of the rules. 45 In this case, the policies that were taken out when Mr Mungal and Freeman joined their respective funds were both issued by Old Mutual. Under these policy arrangements, Mr Mungal, for example, was the life assured under the policy with the Protektor Preservation Fund. Upon the policy maturing, Old Mutual was obliged to pay the proceeds thereof to the Protektor Preservation Fund, which it would use to pay Mr Mungal the benefits due to him under the rules. The rules of the Protektor Preservation Fund provided for the payment of benefits in three circumstances, namely, upon the member reaching retirement age; upon the death of the member; and upon the member withdrawing from the fund. Withdrawals from the Protektor Preservation Fund were governed by rule 6, read together with paragraph (A) of the definition of accumulated credit in rule 1 and rule 8(4) which dealt with the policy options chosen by Mr Mungal. These rule provisions provided that the cash value of the policy at the date of surrender will be the appropriate surrender value which will depend on the value as at the date of the underlying investment portfolio. In other words, the withdrawal benefit was the value of the investment on the date of withdrawal. Upon a member s withdrawal, the surrender value of the policy taken out in respect of that member is paid out by Old Mutual to the Protektor Preservation Fund. Clause 5 of Part 3 of the policy contained the following provision relating to the determination of the surrender value: The amount of surrender value will be determined by Old Mutual at the time of surrender, and will take into account disinvestment costs, recovery of un-recouped expenses, any debts against the policy and legal limits enforced. According to Old Mutual, the determination of the surrender value under the above rule, includes an account of the appropriate market adjuster. The complainants disputed this interpretation of the rule. 44 Ibid. 45 Ibid. 109

10 The SCA observed that Old Mutual was also the administrator of the funds in this case, 46 and that while the funds were under the control of boards of management as required by section 7 of the Pension Funds Act, the responsibility for their administration was assigned by the Board to Old Mutual under a contract. This contract required Old Mutual to perform all the functions that generally attach to the administration of such funds. 47 Old Mutual objected to the Adjudicator s jurisdiction to make orders against it arguing that the complaints by Mr Mungal and Mr Freeman did not fall within the definition of a complaint in the Pension Funds Act. Further, it argued that if there was a complaint against Old Mutual it ought to have been directed to the Ombudsman for Long-Term Insurance. 48 While Old Mutual did not raise this jurisdictional objection when the matter came before the Adjudicator, the SCA in Mungal entertained the objection and made some important pronouncements concerning the scope of the Adjudicator s jurisdiction. I turn to examine these pronouncements. 4.2 The SCA ruling and reasoning The SCA found that the complaints in this case were conveyed to the Adjudicator in letters written by Mr Mungal and Mr Freeman. 49 It noted that these letters were not framed in the language of the definition of a complaint in the Pension Funds Act, but emphasized that the form in which a complaint is made to the Adjudicator is not critical. 50 In the SCA s view, chapter VA of the Pension Funds Act clearly contemplates complaints being made by lay persons who are not expected to have studied the definition with legal expertise and to have framed their complaints accordingly. 51 What is more important according to the SCA is not the form in which the complaint is expressed but rather the substance of the complaint. 52 It observed that if various elements of the definition are inherent in the complaint that would bring any complaint with the terms of the definition notwithstanding that such complaint has been expressed in those terms Ibid para Ibid para The Ombudsman for Long-Term Insurance is accredited under the Financial Services Ombud Schemes Act Mungal v Old Mutual Life Assurance Co SA Ltd; Freeman v Old Mutual Life Assurance Co SA Ltd, supra note 1 para Ibid. 51 Ibid. 52 Ibid. 53 Ibid. 110

11 In the context of this case, the complaints were that Old Mutual refused to pay moneys that were said to be due to the respective funds under the policies. 54 On the other hand, the SCA observed that these complaints could have as well been couched as complaints that Old Mutual refuses to claim the moneys on behalf of the funds. 55 It noted that since the corollary of Old Mutual s refusal in its capacity as the insurer, to acknowledge the validity of the claims, is a refusal (as the administrator) to perform its duty to take steps to recover the claims, the rights of members of the fund under the rules to be paid pension benefits will be thwarted (for as long as money s due to the fund are not claimed) because the members have no independent rights against the insurer under the policies. 56 With regard to the jurisdictional question, the SCA s view was that the complaints against Old Mutual are capable of being construed as complaints relating to the administration of the fund in terms of the definition of a complaint in the Pension Funds Act because complainants will be prejudiced if the moneys are due but not recovered. Further, it noted that the refusal of Old Mutual to acknowledge the validity of the claims and to take the necessary measures to pursue them is capable of constituting maladministration of the fund 57 as understood in the definition of a complaint in the Pension Funds Act. Finally, the SCA pronounced that the disputes in this case were certainly in relation to the fund and are between the complainants and the administrator of the fund as much as between them and the insurer. 58 It noted that while these allegations were never made in the letters that were addressed to the Adjudicator, they (the allegations) were inherent in the nature of the complaints Ibid at para Ibid. 56 Ibid. 57 See also, Spearman v Salt Rock Hotel Pension Fund & Others [2001] 9 BPLR 2526; Khambule v CNA Ltd (now CNA (Pty) Ltd (1) [2001] 9 BPLR 2472 (where the trustees, who had the responsibility to consider and approve housing loans, had delegated this responsibility to an independent consultant, with adverse consequences. It was shown that the consultant had not acted in the members best interests in the granting of the housing loans and that the trustees acted ultra vires by their omission to take reasonable steps to protect the members interests); Shell Southern Africa Pension Fund & Another v Sligo & Others [1999] 11BPLR 235 (a dispute regarding an instruction by an employer to the Board of a pension fund not to exercise its discretion in favor of a pension member was not deemed not to constitute a complaint) 58 Mungal v Old Mutual Life Assurance Co SA Ltd; Freeman v Old Mutual Life Assurance Co SA Ltd, supra note 1 at para Ibid. 111

12 Based on the above reasoning, the SCA remarked that the order made by the Adjudicator ought to have been directed at compelling Old Mutual as the administrator of the funds in this case, to acknowledge that the claims were valid and to press for their recovery. The SCA also remarked that where the insurer is not also the administrator there might be no purpose served by considering complaints of this nature in the future if the insurer is not willing to submit to the conclusions reached by the Adjudicator. But where the insurer is also the administrator those conclusions could hardly be ignored especially if they were to be confirmed by a court in proceedings under section 30P of the Pension Funds Act. However, the SCA emphasized that these are matters that relate to whether an order is capable of being made that will be effective in resolving a complaint, and not whether the Adjudicator has jurisdiction to consider such complaint. Based on this reasoning, the SCA dismissed Old Mutual s objection to the Adjudicator s jurisdiction to hear the matter. 5 THE SIGNIFICANCE OF THE MUNGAL JUDGMENT The SCA decision in Mungal should be welcomed because it offers clarity on an issue that had remained unclear following the Adjudicator and High Court decisions in Old Mutual Life Assurance Co SA Ltd v The Pension Funds Adjudicator and Others; In re Old Mutual. 60 Given the nature of the South African pension funds sector, the SCA decision has implications for numerous financial products that are governed by different legislation but intimately linked to pension fund business. One of the financial products that is likely to be affected by the SCA decision is the re-insurance policies that are entered between pension fund organizations and insurers for the benefit of pension members. These policies have become a common practice in South African the pension funds sector where pension fund organizations re-insure their risk benefits (mostly death or disability) with insurers to guard against the risk of insolvency of the fund if a series of claims are paid out in a short space of time. Professor Jeram explains that under these policy arrangements, insurers require that they be notified within a specific time period after the happening of an event giving rise to a claim. 61 This allows the insurer to consider the claim within a reasonable period of time 60 Old Mutual Life Assurance Co SA Ltd v The Pension Funds Adjudicator and Others; In re Old Mutual [2008] 2 BPLR 97 (D); Mungal and Another v Old Mutual [2010] 2 All SA 139 (SCA); 2010 (6) SA 98 (SCA); Mungal v Protektor Preservation Provident Fund and Another [2006] 2 BPLR 149 (PFA) and Freeman v South African Retirement Annuity Fund and Another case no. PFA/KZN/2799/05/KM (2006)(unreported). 61 Jeram Participating Employers under Scrutiny in Disability Claims 2008 Industrial Law Journal at (discussing the practice by funds to re-insure disability benefits and the jurisdictional problems associated with it). 112

13 immediately after the event. 62 These time periods are normally captured in the fund rules, and the failure by a pension fund organization to submit a claim within the specified period may result in a claim being rejected on this basis alone notwithstanding its merits. 63 In most re-insurance policies entered into between a pension fund organization and an insurer, the latter often gets the final say on whether or not a member is entitled to benefits. In the event that the insurer repudiates a claim pursuant to the re-insurance policy, the problem that arises is that such repudiation may immediately translate into a pension fund s repudiation of the fund member s claim under the rules. 64 This is a precursor to a bigger problem, which is that the fund member is unable to seek a remedy against the insurer before any court or tribunal because of the lack of privity of contract between the fund member and the insurer. Furthermore, the pension fund has a defence, which is difficult to overcome, against the fund member, which is that they (the pension fund) submitted the member s application to the insurer in accordance with the rules of the fund. 65 The insurer also has a potential defence against such action by advancing that the Adjudicator has no jurisdiction to hear the dispute because it is not a complaint within the meaning of the Pension Funds Act. 66 This problem was intimated by the SCA in Mungal when it examined the effects of a refusal by Old Mutual (as the administrator and insurer) to acknowledge the validity of a claim and noted that the rights of a pension member is hindered because the member has no independent legal rights against the insurer under the policy. 62 Ibid at Ibid. 64 For a discussion of this problem in the South African context, see, Van der Linde v Telkom Retirement Fund [2004] 11 BPLR 6257; Mhango When Should a Pension Fund Require a Member to Undergo Medical Treatment As a Condition for Receiving Permanent Disability Benefits? A Critical Review of the Pension Fund Adjudicator s Determinations 2007 Industrial Law Journal 1472 (discussing the Van der Linde v Terlkom Retirement Fund and the problems of re-insurance agreements). See also, Determination Number D06/07\136 on TPD decisions and trustees' fiduciary duties by the Superannuation Complaints Tribunal (describing this practice and the problems associated with it as undesirable in Australia), Quarterly Bulletin, Issue No 48, 1 April June 2007at Available at ( accessed ). 65 See, Van der Linde v Telkom Retirement Fund [2004] 11 BPLR 6257 (PFA); Pienaar v Consol Group Pension Fund and Other PFA/GA/97/98 (unreported( where a dispute concerning the failure of the employer to submit a disability claim with the fund on a member s behalf was deemed not to constitute a complaint); and Seethal v Metal and Engineering Industries Permanent Disability Scheme PFA/KZN/2719/01 (unreported)(held that a dispute concerning the repudiation of a permanent disability claim by a permanent disability scheme was not a complaint within the meaning of the Pension Funds Act because the permanent disability scheme was not a pension fund organization). 66 See, Hildebrand v Telkom Retirement Fund & Others [2005] 5 BPLR 405; De Wet v Cargo Carriers Retirement Fund and Another [2004] 5 BPLR 5682; and Leoschut v National Health Laboratory Services Retirement Fund, PFA/WE/6720/2005/NVC (2007)(unreported). 113

14 The question is how can the law ensure that pension members in the above situations are protected? My submission is that one means of ensuring protection is to enforce the preexisting common law fiduciary duties that require pension funds to act in the best interest of beneficiaries. Case law in South Africa and Australia has demonstrated that pension fund organizations owe pre-existing common law fiduciary duties to act in the best interest of members and beneficiaries at all times, and as a result, cannot enter into a contractual obligation that would disadvantage pension members or their beneficiaries. 67 In the context of Mungal, this principle entails that pension fund organizations (and administrators) are obliged to act in the best interest of beneficiaries when contracting with insurers by securing their best interests. 68 Contracting away their power to decide whether or not a fund member is entitled to benefits is not consistent with the common law duty of the trustees because it does not exhibit the best interest of the fund or beneficiaries. The South African case that demonstrates the above pension predicament is Van der Linde v Telkom Retirement Fund 69. In this case, the pension fund re-insured its pension disability benefits with Sanlam Life Insurance Company (Sanlam Life) to provide disability benefits to its members. However, the disability benefit payable was subject to a limitation clause set out in fund rule 9.3(1), which concerned re-insurance of the liability, and provided as follows: The trustees may, after consultation with the actuary, re-insure the benefits with an insurer. The said benefits shall be subject to the conditions imposed by the insurer concerned and each member shall only be entitled to the said benefits to the extent that he is accepted by the said insurer for such benefits provided that the trustees may, in their absolute discretion and after consultation with the actuary, make provision for payment out of the reserve account of part of any benefit which has been reduced or for payment of the whole benefit, where the said insurer has refused to admit a claim in respect of any benefit. 70 Under the above fund rule, the member s eligibility for a disability benefit was dependent upon the acceptance of the claim by Sanlam Life, and the value thereof only to the extent that Sanlam Life was prepared to admit. However, the rules provided the board with discretion to make payment out of the reserve account of any part of a benefit which had been reduced, or to make payment of the whole benefit where the insurer had refused to admit a claim. When 67 See, Robinson v Randfontein Estates Gold Mining Company Ltd 1921 AD 168 (discussing the common law fiduciary duties of trustees). 68 This applies when contracting with service providers such as administrators. See, Rhode v University of the Western Cape Provident Fund (1) [2001] 10 BPLR Van der Linde v Telkom Retirement Fund [2004] 11 BPLR Van der Linde v Telkom Retirement Fund at para

15 Sanlam Life repudiated the disability claim in the case, the pension fund refused to pay out benefits in terms of the fund rules on the same grounds that were submitted by Sanlam Life for its refusal. The Adjudicator dismissed the pension fund s stance on two grounds. Firstly, the Adjudicator noted that rule 9.3(1) was unacceptable to the extent that it made eligibility of disability benefits dependent on acceptance by Sanlam Life because it went against the grain of the fiduciary duties of the board of trustees of the fund. In a wellarticulated dictum, the Adjudicator stated that: There is an alarming trend in the pension industry of retirement funds in their rules making the eligibility of a member for a disability benefit dependent upon an insurance company accepting a disability claim from the fund under a re-insurance policy, so that in the event of the insurance company repudiating the fund s application presumably on behalf of a member, that immediately translates into the fund s repudiation of the member s application under the pension fund rules. This is a matter of concern because its effect is that the trustees of the fund piggy-back on a reinsurance policy they have concluded with the insurer, thereby shirking their fiduciary responsibilities towards their members. This kind of arrangement is outlawed both by the Long-Term Insurance Act 52 of 1998, and the Short-term Insurance Act 53 of 1998, and that if this practice is not acceptable in long-term and short-term insurance agreements, it must be especially unacceptable in pension fund rules. The rule is, however, not being challenged in this case. It is nevertheless my view that arrangements of this kind ought not to be allowed in pension fund rules 71 Secondly, the Adjudicator noted that the pension fund board had discretion to pay benefits pursuant to rule 9.3(1), which gave the trustees two distinct sets of discretionary powers. The first was the discretion to decide independently whether a member is permanently disabled for purposes of rule 1.5. The second was the discretion to make payment, in whole or in part, of any benefit where Sanlam Life has either refused to admit a claim or to pay the claim in its entirety. The Adjudicator ruled that in exercising this discretion, the board must look at all relevant factors. The Adjudicator found that the fund had not investigated the merits of the claim independently but had blindly relied on Sanlam Life s investigation of the matter, and had determined its position solely with reference to Sanlam Life s reasoning. Further, that in relying on Sanlam Life s investigation in the face of other conflicting expert opinions, the 71 Van der Linde v Telkom Retirement Fund at para 41. See also, Jeram, supra note 61 at (discussing the practice by funds to re-insure disability benefits and the jurisdictional problems associated with it); and Mhango, supra note 64 (discussing the Van der Linde v Terlkom Retirement Fund and the problems of re-insurance agreements. 115

16 fund had failed to exercise its discretion properly. Consequently, the fund was ordered to reconsider its decision by taking into consideration all relevant facts. Similarly, the Superannuation Complaints Tribunal, established under the Australian Superannuation (Resolution of Complaints) Act 1993, was presented with a case similar to Van der Linde v Telkom Retirement Fund. In that case, Determination Number D06/07\ the complainant complained about the decision to reject her claim for total and permanent disablement. The trustees of the pension fund took the view that it had no role to play in the matter because of a deed provision, which stated as follows: The question as to whether the participant or member's circumstances constitute temporary disablement in respect of an insured benefit shall be decided by the insurance company underwriting the insured benefit; and the question as to whether the participant's or member's circumstances constitute total and permanent disablement in respect of an insured benefit shall be decided by the life insurance company underwriting the insured benefit with the consent of the trustee. 73 The Tribunal s view was that the fiduciary duties of the trustee to its members, including the complainant, is that the above provision in a trust deed is highly undesirable, and in any event, such a provision does not absolve the trustees from making an independent decision on the merits of a claim by a member that he or she is totally and permanently disabled. The Tribunal found that the trustee made no formal decision, kept no formal minutes of having dealt with the matter at a proper level or in any way tried to resolve the matter. Therefore, on the substantive issue of the decision to reject the total and permanent disablement benefit claim, the Tribunal concluded that the decisions were unfair and unreasonable and substituted its own decision that the complainant was entitled to both benefits with interest. The above cases demonstrate that pension funds have pre-existing common law fiduciary duties to act in the best interest of pension members and beneficiaries, and the scope of these duties prevents them from entering into contractual obligations or adopting or enforcing fund rules that may prevent pension funds from determining benefit entitlements under the fund rules. Hence, the SCA ruling in Mungal bolsters the need for the Adjudicator to follow the pronouncement in the above case law in circumstances where members have no independent 72 See, Determination Number D06/07\136 on TPD decisions and trustees' fiduciary duties by the Superannuation Complaints Tribunal (describing this practice and the problems associated with it as undesirable in Australia), Quarterly Bulletin, Issue No 48, 1 April June 2007at Available at (last accessed on ). 73 Ibid. 116

17 legal rights against the insurer under the policies 74 similar to life or disability policies commonly sold by insurers to pension fund organizations. Further to this, in an obiter directed at the type of orders the Adjudicator ought to issue in these matters, the SCA reasoned that since Old Mutual was also the administrator of the fund, its refusal to acknowledge the validity of the claims by the complainants and to take necessary steps to pursue them was capable of constituting maladministration of the fund in terms of the definition of a complaint in the Pension Funds Act; 75 and that the dispute in these cases were certainly in relation to the fund, namely between the complainants and the administrator of the fund, thereby bringing them within the definition of a complaint in the Pension Funds Act. 76 The allusion from the SCA is that the Adjudicator s order ought to have been made against Old Mutual as administrator of the fund to acknowledge that the claims by the complainants were valid and press for their recovery. What is significant about the clarity that emerges from the SCA ruling is that it is possible for a complainant, like the complainants in Mungal, to establish jurisdiction of the Adjudicator under the Pension Funds Act by alleging that the actions of an insurer, who happens to be the administrator of the fund in question and who repudiates claims by members of the fund, amount to maladministration because such an allegation relates to the fund and qualifies as a complaint under the Pension Funds Act. While this is a significant ruling, it is relevant to the extent that a complainant is able to invoke such allegations before the Adjudicator when lodging a complaint. Otherwise, like the complainants in Mungal, failure to allege maladministration by an administrator of a fund, for purposes of demonstrating subject matter jurisdiction under the Pension Funds Act, may lead to dismissal for want of jurisdiction. Therefore, it is important for future complainants to allege maladministration on the part of the administrator in order for a dispute to be properly before the Adjudicator. Another important aspect of the Mungal ruling is that the SCA acknowledged that most complainants, who lodge complaints with the Adjudicator, are lay persons and may not have studied the definition of a complaint so as to frame their complaints accordingly. It is an important development for the SCA in Mungal to pronounce that what is important in any 74 Mungal v Old Mutual Life Assurance Co SA Ltd; Freeman v Old Mutual Life Assurance Co SA Ltd, supra note 1 at para Ibid at para Ibid at para

18 complaint is its substance and not the form. According to the SCA if the various elements of the definition are inherent in the complaint that seems to sufficiently bring it within the terms of the definition notwithstanding that they have not been expressed in those terms. 77 What this means is that the Adjudicator will have to focus on the substance of a complaint and determine whether or not the elements of the definition are inherent in the complaint. If they are, then jurisdiction is deemed to be established. Further, the Adjudicator will have to endeavour to interpret the substance of a complaint (where the elements of the definition are inherent in the complaint) and align it with the Pension Funds Act for purposes of establishing jurisdiction. 78 Put differently, the Adjudicator may not dismiss a complaint for lack of jurisdiction on the basis that a complaint was not drafted properly to convey the elements of the definition of the complaint in the Pension Funds Act. 6 HOW THE MUNGAL RULING PROMOTES THE ADJUDICATOR S INTERPRETIVE PRACTICE The SCA ruling confirms the interpretive practice of the Adjudicator and some high courts concerning the Adjudicator s jurisdiction. The Adjudicator has broadly construed the elements of a complaint as defined in the Pension Funds Act. 79 In Sekele v Orion Money Purchase Pension Fund and Anotherr, 80 the Adjudicator explained the above phenomenon as follows: The complaint was not drafted by an attorney or person with legal training/ background. However, as I have held on numerous previous occasions, the purpose of this office is not only to determine and dispose of complaints lodged in terms of section 30A(3) but also to investigate complaints. Where our investigation reveals any form of maladministration or unlawfulness, which has not been pleaded by the parties, it will nevertheless be further investigated and form part of the ruling where necessary. Whenever our investigation reveals a related issue not initially raised or accurately formulated by the parties, all interested persons shall be afforded an opportunity to submit further submissions and evidence in respect of this new issue Ibid at para a See, also Central Retirement Annuity Fund v Adjudicator of Pension Fund and Others [2005] 8 BPLR 655 at 660 (suggesting a focus on the substance of a complaint to determine compliance with the definition in the Act, and rejecting a formalistic reading of a complaint). 79 See, Sekele v Orion Money Purchase Pension Fund and Another (2) [2001] 6 BPLR 2148; Seloane and Others v Ledeen Provident Fund [2002] 2 BPLR 3107; and IBM South Africa Pension Fund v IBM South Africa (Pty) Ltd [2004] 9 BPLR Sekele v Orion Money Purchase Pension Fund and Another (2) [2001] 6 BPLR Sekele v Orion Money Purchase Pension Fund and Another (2) [2001] 6 BPLR

19 Similarly, in Seloane and Others v Ledeen Provident Fund, 82 the complainants brought a complaint relating to the computation of early withdrawal pension benefits payable by the respondent fund. The fund defended the complaint by objecting to the Adjudicator s jurisdiction on the basis that the complaint did not make out one of the four allegations required by the definition of a complaint in the Pension Funds Act. The Adjudicator rejected this contention and reasoned as follows: Section 30D of the Act requires me to dispose of complaints as defined in section 1 of the Act in a procedurally fair, economical and expeditious manner. The definition of a complaint in turn requires it to relate either to the administration of a fund, the investment of its funds or the interpretation and application of its rules and thereafter the said complaint must allege one of four allegations (causes of actions). The definition does not require the complaint to specifically or expressly allege the cause of action, but rather it may be inferred from the facts of the case supporting the legal basis of the claim. Bearing in mind the main object of this office as set out in section 30D and the fact that most litigants including pension funds before the tribunal are not legally represented, it could not have been the intention of the legislature to require unrepresented (legally) Complainants to specifically set out their legal claim as is the case with pleadings in the ordinary courts. 83 Consistent with the above reasoning, in IBM South Africa Pension Fund v IBM South Africa (Pty) Ltd, the Adjudicator rejected an argument that the complaint had not fully set out the complaint as defined and said: I do not believe that a Complainant should be non-suited in a forum such as this for not setting out the entire complaint in the original document, especially if the main thrust of the complaint is (as in this case) clear from all the documents filed in connection with the complaint read together. This forum is not a court of law. It is an office with investigative powers and can thus not be limited in its functions simply to adjudicating on disputes as pleaded by the parties. That would defeat the whole purpose of this office. 84 What is more, prior to the SCA ruling in Mungal, a few high court opinions have confirmed this broad construction of a complaint as defined in the Pension Funds Act. 85 The most 82 Seloane and Others v Ledeen Provident Fund [2002] 2 BPLR 3107, Seloane and Others v Ledeen Provident Fund [2002] 2 BPLR 3107, IBM South Africa Pension Fund v IBM South Africa (Pty) Ltd [2004] 9 BPLR Mine Employees Pension Fund v Murphy BPLR 6204 (pronouncing that the Adjudicator is constrained by the issues as pleaded in the complaint and that the Adjudicator s office does not give him any general power to investigate issues and or formulate issues for investigation mero moto); Otis (South Africa) Pension Fund and Another v Hinton and Another [2005] 1 BPLR 17 (PFA) (explaining that It is apparent from the provisions of the Act that the intention of the legislature was to constitute a complaints forum which would, for all practical purposes, be equivalent to a court of law but which was not bound by the formalities of procedure which might ordinarily have the effect of delaying adjudication and causing the parties to incur substantial expenses for legal representation. The absence of formal procedural requirements does not, however, detract from the nature of the function which the Adjudicator must perform which is, plainly, a judicial function. 119

20 notable opinion is by Judge Davis in Central Retirement Annuity Fund v Adjudicator of Pension Fund and Others. 86 In this case, the complaint became a member of the fund in As a result of pension contributions which he made in terms of his contract with fund he became entitled at his retirement to certain benefits in terms of this contract. After reaching his retirement age, the complainant elected to receive his benefits in full in the form of a life annuity payable on a monthly basis. In making this decision he declined to select the other option open to him, which was to take up to one third of the benefits as a lump sum. The complainant was, however, dissatisfied with the life annuity provided to him. In terms of section 30A of the Pension Funds Act, he dispatched a letter to Adjudicator. Pursuant to this correspondence, the Adjudicator treated the letter as a complaint, investigated it and issued a determination in In his determination, the Adjudicator concluded that the complainant was entitled to the payment of a monthly equivalent of an annual pension of R from the date of his retirement on 1 November Furthermore, the Adjudicator ordered the fund to pay the complainant a monthly equivalent of an annual pension in the amount of R from 1 November 2002 until 1 April 2005 less any amounts that may already have been paid. The fund was also ordered to pay the complainant such pension increases in the amount of R as the management board of the fund may have approved in terms of the rules of the fund from 1 November 2002 until 1 April In addition, the fund was ordered to pay interest on these amounts at the rate of 15.5% per annum from 1 November 2002 until the date of final payment of these amounts. The Adjudicator also ordered the fund to continue paying the complainant a monthly pension from 1 April 2005 until his death, taking into account such pension increases as may have been (or may in the future be) approved by the management board of the fund in terms of the rules on the original pension fund amount to which the complainant was entitled. Following the Adjudicator s ruling, the fund appealed in terms of section 30P of the Pension Funds Act to the high court. One of the arguments raised on appeal by the fund was that the complainant s complaint had been levelled against Sanlam Life (the administrator) and not against fund itself. It argued He is required to give reasons for his determination which, in itself, precludes him from making a determination capriciously or basing it on matters which are not of record before him. ) 86 Central Retirement Annuity Fund v Adjudicator of Pension Fund and Others [2006] 4 All SA