Pension fund ordered to recalculate retiree’s benefits after R2.53m shortfall

The Office of the Pension Funds Adjudicator (PFA) has ordered a pension fund to recalculate the capital required to secure a retiree’s guaranteed pension after finding that the lump sum provided left a roughly R2.53 million shortfall.

Decision and order

Deputy Pension Funds Adjudicator Naheem Essop directed the ZF of South Africa Pension and Group Life Assurance Fund to set aside its earlier calculation of the complainant’s retirement benefit and, within 30 days, determine the capital amount needed to secure the defined pension set out in the fund’s rules.

How the dispute arose

The complainant worked for ZF Services South Africa (Pty) Ltd from April 1995 until his retirement in October 2023. Under the fund’s rules his annual pension was calculated at just over R1.3 million equivalent to more than R112,000 per month based on pensionable service and final salary.

Rather than pay the pension directly, the fund provided a capitalised lump sum of R14 million so the retiree could purchase an annuity from a registered insurer. When the retiree obtained a quotation from Sanlam, he found the R14 million would buy a monthly pension of about R91,200, well below the R112,300 monthly pension implied by the fund’s formula. Sanlam advised a lump sum of about R17 million would be needed to secure the guaranteed pension, creating a shortfall of around R2.53 million.

Positions of the parties and expert findings

The complainant argued the fund’s rules guaranteed a defined benefit pension and that transferring the obligation to an insurer did not relieve the fund of providing the promised benefit. He contended the fund had effectively applied risk factors twice: in capitalising the pension and then in the insurer’s annuity pricing.

The fund said its lump sum was an actuarial reserve value calculated using accepted assumptions on mortality, investment returns and pension increases. It also said the complainant’s benefit had been enhanced through a surplus distribution, increasing its value to more than R18.3 million by September 2024. The fund acknowledged its rules could have been drafted more clearly about securing pensions through actuarial reserve values.

An independent actuary appointed by the adjudicator found the complainant’s pension had been correctly calculated under the fund’s rules and described the fund’s capitalisation factor as reasonable. The actuary attributed the gap between the fund’s lump sum and Sanlam’s quotation mainly to insurer pricing, commissions, product features and market conditions, but also noted the complainant’s interpretation of the rules was arguable.

Adjudicator’s reasoning

The deputy adjudicator said the decisive question was whether the fund’s actuarial approach complied with the precise wording of the rules. He found the rules did not expressly allow replacing a guaranteed pension with whatever pension an actuarially determined lump sum could buy on the market. He emphasised that in a defined benefit fund, members are entitled to the benefits set out in the rules and should not bear the risk that actuarial assumptions or market conditions will reduce those benefits.

The adjudicator also noted the rules provide mechanisms for the employer to make additional contributions if needed to maintain financial soundness and that there was no evidence to suggest honouring the complainant’s pension would threaten the fund’s solvency. On that basis the PFA upheld the complaint and ordered the recalculation.

What the order requires

• The fund must set aside its prior determination of the capitalised value.
• The fund must recalculate the capital required to secure the complainant’s defined pension of just over R1.3 million per year.
• The recalculation must be completed within 30 days of the adjudicator’s order.

Reporting based on a ruling by Deputy Pension Funds Adjudicator Naheem Essop and related findings and submissions as recorded by the PFA.