A legal challenge before the Constitutional Court aims to stop pension funds making retrospective changes in their terms that can affect payout rates.

Business Day says the central issue revolves around provisions of the Pension Funds Act and pension fund rules in general, and whether, after a pension fund amends its rules, a fund can act according to these changes despite not registering the new rules.

The applicant’s legal team, in arguments heard early this month, also raised concern about whether a retrospective amendment of a rule affects accrued benefits. Pandelani Mudau says his rights were infringed when a retrospective decision by his fund minimised his retirement benefits.

Mudau is a former employee of the Vhembe District Municipality, where he worked for more than a decade. He was thus a member of the Municipal Employees Pension Fund. 

He resigned on 31 May 2013, and became entitled to withdrawal benefits from the fund in terms of its then rules. The initial rules indicated that on resignation he would be entitled to three times his contribution plus interest.

But in June 2013, after the fund was warned in an actuarial report that it would not meet its future liabilities, it amended the withdrawal benefit scheme.

Instead of three times, the benefit would be one-and-a-half. The amended rule was to apply retrospectively from 1 April, almost two months before Mudau’s resignation. The Institute of Retirement Funds Africa (Irfa) says the determination of this case could lead to a ‘radical change in the established legal position’ in which funds operate, and ‘threaten the stability’ of many funds.

The Constitutional Court’s decision could have a wide effect, given the central concern regarding the administration of pension funds. 

The case was in the SCA in April last year when the appeal court ruled unanimously in the fund’s favour. The SCA held that the Act and rules read together permit the fund to amend its rules and to determine a date of application.

The SCA held that retrospective application of the rule is allowed, and thus dismissed Mudau’s application to benefit from the earlier rule, notes Business Day. Mudau appealed to the Constitutional Court, saying this is a constitutional issue, as it is about correct interpretation of legislation, which is linked to constitutional rights.

The fund argued that no constitutional issues are raised and it would not be in the public interest to allow the appeal from the SCA. Mudau argues that while funds can amend rules and do so retrospectively, such amended rules cannot reduce or remove benefits already accrued in terms of an earlier rule.

The fund responded that the Pensions Fund Act allows for rule amendments to take effect at any date the fund determines.

There is also an implicit authorisation that allows for the adoption of retroactive amendments. Irfa, admitted as a friend of the court, argued that though retrospective amendments are common practice, there has been an understanding that these should not affect vested rights.

It said that the outcome of the case could have enormous consequences for the stability of the retirement fund industry.

Full Business Day report