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Big Business Insights: What to consider when moving staff from one group pension fund to another
Big Business Insights
Everyone at the helm of a business, whether a large corporate or a small or medium-sized enterprise, wants to take the right decisions for their businesses to grow and their people to thrive. Join Old Mutual Corporate’s Malusi Ndlovu as he talks to different experts to answer some of the questions you may have and help you to take informed decisions.
S1 EP5: What to consider when moving staff from one group pension fund to another
When an employer decides to move their entire workforce to another group retirement fund, HR and fund trustees have to consider all the stakeholders. Leanne van Wyk, an expert on pension-fund regulations and Director of ICTS Legal Services, explains what the law says, which steps to follow and what rights employees – the fund members – have.
Malusi Ndlovu 00:04
Welcome to Big Business Insights, the Old Mutual Corporate podcast where we discuss issues that concern all businesses, from startups to established corporate enterprises. Each episode focuses on one topic to bring you insights and answers to help you make the best informed decisions for your business, your employees, and yourself.
Malusi Ndlovu 00:26
I'm Malusi Ndlovu, and today's topic is something that has been on the minds of many of us in the retirement fund industry, as well as HR managers. That is the rights of employers, trustee boards, and employees who are members when it comes to choosing a retirement fund. In other words, who gets to decide to move from one group retirement fund to another? Where does the power to transfer from one fund to another lie? I've invited Leanne Van Wyk, who is the director of ICTS Legal Services to help us delve deeper into this. Hi, Leanne.
Leanne Van Wyk 01:02
Hi Malusi, thank you so much for having me today and giving me an opportunity to talk about my favourite subject.
Malusi Ndlovu 01:08
I'm really looking forward to this. I know that you're a legal experts on these matters and on pension fund regulations. Can you explain to our listeners why this area of law is so close to your heart?
Leanne Van Wyk 01:23
You know, when you're at university, nobody says, right, I'm gonna do retirement funds law, right? You're always gonna do LA Law and appear in courts, etc. But I found myself in the space and I've really loved it. One, because, and Old Mutual and you particularly, Malusi, would know this, is you get the opportunity to affect so many people's lives, you know. All the members of retirement funds out there, hopefully in a positive way. In addition, this area of law is so complex, you know, it touches on so many other areas of the law, like administrative law, constitutional law, labour law, the list goes on. And it is ever changing. So, I'm never bored, and I just love this area of law.
Malusi Ndlovu 02:06
I must say, the complexity is always surprising to me. But let's start with the most basic question. Who decides which fund employees belong to?
Leanne Van Wyk 02:18
And it's not a simple question to answer, Malusi, and you will know that having worked in the industry. You know, we've got this complex ecosystem out there. And I think that today, we're going to try and unpack the different components of that and understand who makes the decision about what and what their roles are. But I think often, it's not simple because the role players stray outside of the lanes, you know, I think that we need to understand what is our role and take the actions that we need to make and let everyone else do what they need to do. I also think that this question becomes complex for the reason that control over a retirement fund is control over its assets. And often that is what people are seeking to control.
Malusi Ndlovu 03:05
And, of course, the assets of the fund, the deferred wages of employees, who are the members, but talking about the member, what is the role of the member? And what are the employers' powers in relation to determining that employees must transfer from one fund to another?
Leanne Van Wyk 03:24
Ja. So, I think let's start perhaps with this interaction between the fund and members, you know, the fund sits at the heart of all of these decisions. And the reason I say that is - and something that you would know - but if you look at a master class in retirement funds, the first thing they teach you is a retirement fund is corporate personality. It's its own legal entity, it's separate to the employer. It's separate to the trade union, as an example. And it is represented by the board. And that board is there to make decisions for the fund. A whole lot of law, common law, statutes, etc, applies when they are making those decisions. But one of the most important aspects of a board is their independence. Then we add the member into the mix, and now we've got the fund, we add the member into the mix. And the common misconception out there, and in fact, I heard this at a conference recently, again from a trustee is that we are there to act on the mandate of members. And my response to that is always no, you don't. You are there to act in the best interests of the fund and the member, but you're not there to act on a mandate. That would be a cop out. No, your powers and your obligations are much more extensive than that and don't include acting on a mandate.
Malusi Ndlovu 04:50
And once you sit there, you're no longer a representative of your constituency.
Leanne Van Wyk 04:54
Exactly.
Malusi Ndlovu 04:55
You're there as a member of the board.
Leanne Van Wyk 04:56
And that's right. And we often see that with for example, pensioner members of boards where they think that they are there to represent pensioners and they're not, they're there to represent the fund and its members. So there - you know, there have been quite a lot of cases around this. And the reason for that is that we are not always focused on the rules of a fund. And the rules of the fund are just so important. That is its constitution, that is the way that it must be managed. And members are only entitled to what's in the rules. And often those rules will reserve powers for the employer, which allow it to take certain decisions. And we'll talk about that when we talk about employers. I mentioned cases, perhaps one Malusi, that would be interesting is a 2022 case, and decided by the full bench of the High Court. So, three judges of the High Court, and there involved the termination of an administrator. So, the fund terminated one administrator, appointed another administrator. And there was this concern by certain of the board members around the decision making in relation to this. So, this included, in fact, a lot of allegations around fraud and corruption by the chairperson and by the principal officer as an example. And it ended up finding its way into the court. So, the court had to have a look at the powers of a board, and the sorts of things it has to take into account when making a decision. And of course, these are exactly the same things that a board is going to take into account when it makes a decision to transfer, right.
Malusi Ndlovu 06:37
Yes.
Leanne Van Wyk 06:38
Okay. So, one of the things it said is that the public has an interest in the lawful administration of pension funds. And when they talk about administration here, they're talking about administration by the trustee boards themselves, and pension fund trustees must administer money and trust on behalf of members of the fund. And funds are carefully regulated and controlled by statute and the regulator. So here, you can see the court pulling out this very important trust component, members must be able to trust the boards of the funds. And that's why they've got this extensive legislation that applies to them when they are making decisions. So, the sorts of thing the court said is, they looked at administrative law, they looked at common law, like cases, they looked at the Pension Funds Act. And they said that when you're making these decisions, you've got to act intra vires. Now, that is just a very fancy Latin term for "within your powers". And those powers can be sourced in law and the rules, and why I keep emphasizing the rules, is it's going to become very important for HR managers and employers. And we'll see that as we unroll our discussion today. The other thing was, you've got to act for a rational purpose, you've got to act independently, you've got to act in terms of your fiduciary duties, etc. And the ones that I want to reiterate today from that court case, are to avoid your conflicts of interest, to be independent. And of course, you are bound by the rules. And this is where I want to say those rules will often give the employer the powers to transfer between funds. So, it will actually reserve that power for employers.
Malusi Ndlovu 08:26
And that's very important, because while the fund is a separate legal entity, as you've outlined, and it's got its own rules, and so on. It is a vehicle that's used by the employer to provide certain benefits for its employees. So, who decides what benefits the employees are entitled to?
Leanne Van Wyk 08:47
Ja, and that's such a great question. And I'll tell you why because it goes to the heart of the contractual arrangements. So, as we've been talking, we've been adding to the parties in this web and in this ecosystem, if I can put it that way. So, we've started with the fund, we added in members and employers, and then we added in the employer now. So, when we look at the employer, we know that board members and members are bound by the rules of the fund. So, whatever the rules say members are entitled to, that's what they're entitled to. But then we add the employer into the mix. And suddenly it's a bit more complex, because as you say, employers have promised members certain benefits. Now that promise can be found in the employment contract. So, it's very important that our employment contracts align with the rules of the fund. Because if the employer promises something in an employment contract, and that is not fulfilled through the fund, employer still has that promise to members or its employees and must fulfill it. So, you know, very important that we have alignments in relation to what the rules promise, what employers promise in terms of the employment agreement. And then perhaps just to mention, so there's no fiduciary relationship between an employee and employer - that's a relationship of good faith, as you know. And often we find that employees or members are appointed or elected onto a board. Now, there they find themselves on the board, and often, the question that is asked is, well, am I here to represent members? What is my role here, as a member elected trustee? And there we must remember that it is, of course, to be independent, but employer appointed trustees equally must remember this. They're not there to take instruction from the employer. They're not there to follow the employer's mandate, they're not there to be the employer's voice on the fund. They're there just as any other trustee to be independent.
Malusi Ndlovu 10:59
So, that independence requirement is there for all the trustees, regardless of how you got to the board. Once you're in the room, you are there as a trustee bound by the same rules, bound by the same standards of conduct and expectations.
Leanne Van Wyk 11:15
Ja, and I love that metaphor that you've put of "once you're in the room". And I remember an old manager of mine, when I was very young, saying to me, "when you're a trustee, you enter a room and you take one hat off, and you put another hat on. So, as you got into that room, you're wearing your trustee hat".
Malusi Ndlovu 11:36
So, now we're in the room, we are trustees, we're wearing the right hats, and there are reserved matters that only the employer can make a decision on at the same time.
Leanne Van Wyk 11:49
Yes.
Malusi Ndlovu 11:49
Let's zoom in on that a little bit. Where does the power to transfer members from one fund to another fund lie?
Leanne Van Wyk 11:59
Usually, you will find that power set out in the rules of the fund as well as in your contract of employment. And this is very important for HR managers to look at. What do our rules, say of the funds and what do our contracts say? Because you want them to both say, it is the employer's right to choose the fun, alright. It is the employer's right to nominate or name the fund in which they will participate for their particular employees. And in fact, we've had a few cases on this, Malusi, that perhaps will be useful to mention now. So, the first one is a 2018 case. And this particular case was a labour court case. And in this case, when the employer decided to participate in an umbrella fund, the unions alleged that that was actually a unilateral change to the terms and conditions of employment. This is despite the fact that the employment contracts for every employee specifically provided for that employer to nominate or name the fund, that it was going to participate in. So, the court looked at this, and it confirmed the fact that because the contracts of employment already allowed for the employer to say, well, this is the fund I'm going to participate in, that it would not be a unilateral change to the terms and conditions of employment. In fact, they were just doing what the contract allowed.
Malusi Ndlovu 13:37
Yes, yes.
Leanne Van Wyk 13:38
So, that was very important. And in fact, in that case, even though the wording talked about participating in a fund established for the benefit of employees, the court actually interpreted that to include participating in an umbrella fund as well, which is quite interesting. So, there was that case, then there was a 2020 case, which was a High Court case. And in this case, and we're going to come back to this case, I suspect, Malusi, in our conversations, because there's just so much to learn from it. But in this case, the court recognized that it was the sole prerogative of the employer to determine and vary which fund the members belonged to. And this time, not because of what was in contracts of employment, but because of what was in the rules of the fund.
Malusi Ndlovu 14:25
Okay, so this was a different reference point for the courts, but coming to the same conclusion?
Leanne Van Wyk 14:30
Exactly. Ja. So, it's very important that HR managers look at both: what do our rules say and what do our contracts say? Because the courts are always going to come back to what are you contractually bound by? Or what are you bound by because of the rules?
Malusi Ndlovu 14:44
Yes, yes. Now, I'm not a lawyer. But I do know that our constitution provides for the rights of freedom of association. So, if a member wants to participate in a different retirement fund or wants to stay in a retirement fund that the employer wants to transfer them out of. Where does this right to freedom of association come in?
Leanne Van Wyk 15:09
Ja. And I remember, when I was a junior legal advisor, this came up, which is many years ago, Malusi, I must tell you. So, when this case came up, I remember that it had already been argued within legal circles, you know, is the fact that employers require members to belong to a particular fund. Is the employer limiting the members right to freedom of association, as protected by the constitution? And, of course, in terms of all constitutional rights, no constitutional right is absolute and unlimited. There are always limits to it. And, in fact, this was dealt with in the case of South African Municipal Workers Union National Provident Fund, and it was a Supreme Court of Appeal case. And in fact, that High Court case you mentioned before actually looked at this at the same time, and, of course, agreed with what the Supreme Court of Appeal had said, because it's a higher court, right. So, the Supreme Court of Appeal said in this case, that the compulsory membership of a pension fund only holds implications for the members themselves, and thus does not constitute a limitation on the right to freedom of association. And that 2022 High Court case then said that, when the fund tried to argue that this was a limitation of its rights of members, right to freedom of association, that that was irrelevant. It was not relevant when you're talking about a transfer from one fund to another fund.
Malusi Ndlovu 16:43
Strong wording, indeed.
Leanne Van Wyk 16:44
Ja, indeed.
Malusi Ndlovu 16:45
We'll come back to the member just now. I want to introduce another stakeholder which is often there in the workplace. Unions.
Leanne Van Wyk 16:54
Yes.
Malusi Ndlovu 16:55
What influence do unions have over the board of a fund, and very specifically, in particular relation to a transfer from one fund to another?
Leanne Van Wyk 17:07
Ja, and this is so interesting, Malusi. And there's been a lot of case law around it. And it was debated often before the cases came around. Perhaps before we get into cases, just to mention a few basics. So firstly, the fund trustees are not bound by any of the decisions of a trade union. Okay. So, unless the rules give the trade unions a specific power...
Malusi Ndlovu 17:32
Sure.
Leanne Van Wyk 17:33
They are not bound by those decisions. So, the union has no direct powers of the board's decisions. Unless, of course, as we said, the rules give them that specific power.
Malusi Ndlovu 17:43
Can I just interrupt there? I'm assuming that when you make that point, it excludes union sponsored funds, where there may be reserved rights for the union and so on? Is that correct?
Leanne Van Wyk 17:57
Yes. So, it would exclude union sponsored funds. And in certain circumstances, it would also exclude collective bargaining council funds or statutory funds, you know, where there is a statutory power that the trade union has with respect to that fund. So here, we're talking about our normal commercial umbrella funds, or our standalone funds set up by an employer.
Malusi Ndlovu 18:21
Yes, yes.
Leanne Van Wyk 18:21
But that is a good point. Then perhaps just to note that, where you have an employee that is - or a member who is elected onto a board, and they are also a trade union official, or trade union member, or a trade union employee, as an example, the same rules apply. You have to take your union hat off as you go into the room, and you are then there to represent the fund. So, you cannot act on the instructions of a trade union, you have to maintain your independence. And that is a legal requirement, you have to do that by law. If you're not doing that, then you're not complying with your legal duties.
Malusi Ndlovu 19:07
I can see how that line can be quite difficult to draw, because part of what a trade union does is to negotiate benefits on behalf of the employees. And if the fund is a vehicle to provide those benefits. It's easy to then assume that there's influence over there as well. But thank you for clarifying that.
Leanne Van Wyk 19:32
There's been some useful cases in this regard. And I thought I might mention them because sometimes they're quite interesting. And this was a High Court case in 2008. So, it was an old case. As I said, this came up when I was a very junior legal adviser. So, this case was seminal in that it changed and clarified the thinking around trade union involvement with respect to funds. This particular case was in relation to the recognition of the independence of trustees, so in this case, the member trustee concerned was actually also a union employee, okay. And what the court said, and it was very clear, it said it accepts that there's nothing unlawful or improper about the union expressing its views about what it thinks trustees should do or trying to persuade trustees to do certain things. However, it said, it is my view unlawful for the union to seek to compel member trustee to take mandates, which they are then required to implement for the union. It went on to say that it is also unlawful for the union to threatened to take disciplinary steps against those trade union employees if they didn't then follow the union mandate. So, this was quite an important case. And it sort of clarified the fact that union employees who became member trustees had to maintain that independence and couldn't simply take a trade union mandate and implement it.
Malusi Ndlovu 21:02
Sure.
Leanne Van Wyk 21:03
Then, there was that other 2022 case, the High Court case that we were talking about earlier, the full bench High Court case. And that case was about trying to block the transfer from one fund to another fund. In this case, this blocking of the transfer was completely contrary to the rules of the fund, where the rules of the fund allowed the employer to make the choice in relation to transfer. So, in this case, the member trustees of the fund were allied to the union view, if I can put it that way. And the court saw through this, so the court specifically said it saw through this, and it said that although the employee member trustees claimed they were independent of the union, the objections that they raised were exactly the same as those that were raised by the union, as had been seen in a previous case. And the fund had quite evidently done nothing to protect the interests of those members who actually did want to transfer.
Malusi Ndlovu 22:03
Yes, yes.
Leanne Van Wyk 22:04
And so importantly here, and this is something that trustees need to be aware of, is that the court said here, I'm gonna give you a few days to tell me why I shouldn't find against you in your personal capacity.
Malusi Ndlovu 22:17
That's very strong.
Leanne Van Wyk 22:19
Very strong, ja.
Malusi Ndlovu 22:21
Okay, so we've established the rights and responsibilities, who can make what decision in relation to a transfer. Let's talk about the transfer process itself, which is very well laid out in Section 14 of the Pension Funds Act. What are the minimum requirements that need to be met in order for a transfer of membership from one fund to another to happen, once the right decision maker has made that decision?
Leanne Van Wyk 22:49
Ja, so if we think about this perhaps with our HR hat on at the moment, instead of our fund hat because, you know, funds have got a lot more responsibilities in relation to Section 14 than perhaps the employer does. But Section 14, as you say, and we talk about Section 14 of the Pension Funds Act here, does state that an application has to be made to the FSCA before a transfer from one fund can take place and before those assets can move. So, that application is set out in what is called a conduct standard. So, the FSCA issues conduct standards and what is important about these conduct standards is that they are law. So, they're a form of subordinate legislation, which means we have to comply with them.
Malusi Ndlovu 23:32
Just because they are not in the legislation doesn't mean they're opinions, they are law themselves.
Leanne Van Wyk 23:36
Yes, that's right, Malusi. So, for example, they actually go off to parliament and parliament approves them before they're published by the FSCA. So, we do have a conduct standard about Section 14 transfers. And it's not extremely different to the old directive that used to be in place, but there are some differences. And perhaps to note this, is that when a Section 14 is happening, the conduct standard requires communication out to members. So, this communication has to be done by the funds that are, you know, transferring. But what is important from an HR point of view is that very clearly, we need to align any communication from the employer with communication from the funds. We don't want them to be saying different things.
Malusi Ndlovu 23:36
Yes, yes, yes.
Leanne Van Wyk 23:49
And now of course, that communication must give members enough information to be able to understand what the changes will be. It usually involves a comparison of benefits. And importantly, they have to understand enough to say, "I object to this transfer". And that perhaps is something we should understand. So, where a member says, "I object to this transfer", the board of the fund has to give all members 30 days to lodge an objection. And they can do it within that 30 days. And then where an objection hasn't been resolved, and the member's still not happy, then those objections got off with the application to the FSCA.
Malusi Ndlovu 25:14
Okay.
Leanne Van Wyk 25:15
So, the FSCA then looks at those and makes a decision about a number of things.
Malusi Ndlovu 25:20
And this is the Financial Sector Conduct Authority, the regulator of the industry, yes?
Leanne Van Wyk 25:26
Now, when it gets to the Financial Sector Conduct Authority, or the FSCA, the FSCA has a discretion to allow that transfer or not. But it is, again, a limited discretion. So it's - Section 14 of the act tells them what to look for, basically. You've got to look at whether it's reasonable and equitable. You need to look at reasonable benefit expectations in terms of the rules, you know, are they going to be losing out on benefits, etc. And there's lots of case law around that. But I think the point I want to make here is that, even if there are objections, this transfer can still go forward.
Malusi Ndlovu 26:05
Oh, really?
Leanne Van Wyk 26:05
Yes. And the courts have looked at this and said, it is only reasonable that that is the case. Otherwise, you could have one member objecting, and the whole transfer comes grinding to a halt.
Malusi Ndlovu 26:17
Yes, of course, of course.
Leanne Van Wyk 26:19
Ja.
Malusi Ndlovu 26:19
I see now why you said this is complex, because the employer's got the reserved rights. They make the decision. However, once that gets kicked off, there are obligations on the trustees themselves in terms of communication.
Leanne Van Wyk 26:33
Yes.
Malusi Ndlovu 26:33
And at the same time, the members can lodge objections. Do you have examples of when objections have been actually upheld by the FSCA? And what grounds they gave for upholding those objections?
Leanne Van Wyk 26:48
Ja, so, I think it's very seldom that the FSCA will get to the stage where it'll say, you know, this specific member has got an objection and we are going to hold up a transfer because of this specific member. I think that what they would be looking for is more objections that are common to more members of the fund, and why those objections are there. But again, the FSCA cannot look at an objection that says, well, we simply don't like the provider, or our union prefers this fund. And we've seen that being rejected by the FSCA as an example. It is more about, are they getting an equitable and reasonable deal out of this transfer? So, that's what they're looking for. They're not looking at, you know, specifics: I'm about to retire as a member. So, I don't want to move. Sure. That's not what they're looking for. They would, I expect, not be influenced by that type of issue. They are looking for more macro issues, if I can put it that way.
Malusi Ndlovu 27:53
Of course, of course. And you mentioned that's one of the tests that the FSCA applies, is reasonable benefit expectations, and equity, especially in the comparison of benefits. I imagine in our defined contribution world, that comparison of benefits becomes quite tricky, because what you put in is what you get out as a member. So, how does that comparison work? What is the litmus test for saying that the benefits are equitable from one fund to another?
Leanne Van Wyk 28:23
And I think that what we need to clarify here is, what we're not talking about here is the transaction. For example, there's been a purchase and sale of a company, and employees are going cross as a going concern or something like that. That's not what we're talking about. Because there there's a whole different test in terms of Section 1 and 7 of the Labour Relations Act. So, that's not what we're talking about. Here, we are talking about an employer that there's no transaction, there is simply moving funds, right. And there, you would have to go back to what was promised by the employer in terms of contracts of employment. So, if the employer has simply said, you will be required to be a member of the fund that we participate in. That is the promise. You know, it's not promising a defined benefit, it's not promising a defined contribution benefit. It's just saying you must belong, and it will probably set out something about contributions.
Malusi Ndlovu 29:21
Sure, sure, sure. You know, they say that lawyers like conflict and they encourage conflict, I imagine if you are an HR manager sitting at home and listening to this, you may be thinking, geez, this sounds like a very complex thing, lots of stakeholders to manage, etc. But I assume that the way for these things to happen is usually with consultation of stakeholders, despite what the law says and the reserved rights and who can make those decisions, just to make the process simpler and easier.
Leanne Van Wyk 29:56
And that is so true, Malusi, and not all lawyers like conflict. It can be lucrative, but they're not, you know, not everyone is wired that way! But perhaps just to say that it's so important for stakeholders to come together.
Malusi Ndlovu 30:12
Yes.
Leanne Van Wyk 30:12
You know, and to understand how this is going to affect members and employees at the end of the day. And that should be everyone's goal, you know, how are we going to get through this smoothly with the least negative impact on members, and that requires people to start early. So that allows, you know, queries and communication and objections and applications to take place in good course. Involve experts, that's what I always say, so for example, don't try and do your own comparison of benefits.
Malusi Ndlovu 30:44
Yes.
Leanne Van Wyk 30:45
You know what I mean? And speak to your consultants as well, and understand the process and why I say that, is HR managers are not there to understand everything about retirement benefits. It's a specialized area. It's a specialized area of law as well. So, when this sort of thing happens and you're moving funds, it often requires some sort of training in relation to HR so they understand it, and then you need to bring your experts in to smooth the process and make sure you are doing what you need to do.
Malusi Ndlovu 31:16
Thank you very much, Leanne, for your insights.
Leanne Van Wyk 31:18
Thank you so much, Malusi, for allowing me the opportunity to talk about my favourite subject today. Thank you.
Malusi Ndlovu 31:25
And thank you for listening to today's episode.
Malusi Ndlovu 31:30
Follow the Old Mutual Corporate Big Business Insights Podcast and toggle on notifications to be alerted when a new episode is live. With more expert discussions aimed at making running your business just a little bit easier. To find out more about Old Mutual Corporate, visit oldmutual.co.za/corporate. Old Mutual. Do great things every day.
Malusi Ndlovu 31:53
Old Mutual Life Assurance Company South Africa Limited is a licensed FSP and life insurer.