Throughout the 1990s a fierce debate raged in South Africa as to who owned the surplus in a pension fund, and what should be done about its utilisation. In 2001 the ownership and process of distributing surplus was written into pension fund law. While the passing of this legislation ended one phase of the debate, it started a new phase of even fiercer debate as industry players grappled with the practical application of the legislation.
The surplus legislation came into effect on 7 December 2001 and required every fund to undertake a surplus investigation at the next actuarial valuation date. The surplus at this ‘surplus apportionment date’ had to be calculated as the value of assets less liabilities, less contingency reserves.
Considerable controversy arose regarding the method and basis that the actuary would use to value the assets and liabilities, as well as the contingency reserves that could be established. If the actuary was too conservative in these valuation calculations, then there would be little or no surplus to distribute in terms of the legislation. The financial services regulator has now published guidelines regarding the appropriate valuation method, basis and contingency reserves that may be used for surplus calculations.
One of the most contentious portions of the legislation deals with ‘improper uses’, defined to include executive benefit improvements, medical cost-related enhancements, and the granting of unfunded past service benefits. The value of these improper uses must be added to the surplus calculated at the surplus apportionment date. If the amount allocated to the employer in the surplus apportionment exercise is less than the value of improper uses, then the difference represents a debt owed by employer to the fund.
If the fund has a surplus at the surplus apportionment date, pensioners and former members of the fund must be brought up to a minimum level of benefit. Former members are defined to include everyone who left the fund after 1 January 1980. This long backdating of the definition has brought significant problems in the reconstruction of exited member records.
After allocation of minimum benefit top-ups to pensioners and former members, any balance of surplus must be apportioned between active members, pensioners, former members and the employer on an equitable basis that takes account of the financial history of the fund. Any allocation to the employer may be offset against the improper uses value owed to the fund by the employer.
Surplus work is now proceeding in earnest after long delays prior to the issuing of subordinate legislation and guidance. No doubt there will continue to be many discussions and debates before the dust finally settles on surplus issues in South Africa.
Janina Slawski, principal consultant Alexander Forbes Financial Services, South Africa. Alexander Forbes,, is an international provider of financial and risk services with primary operations based in South Africa and the UK. Alexander Forbes Financial Services, South Africa, is a member of the Multinational Group of Actuaries and Consultants (MGAC),