1. NATIONAL TREASURY Presentation to the Portfolio Committee of Finance on the Pension Funds Second Amendment Bill August 21, 2001

2. Structure of presentation Broad principles Technical issues

3. Broad principles

4. Objectives of the Bill Achieve minimum benefits in future Top up past transfers, conversions and retrenchments (based on same principle) Apportion residual surplus

5. Government’s plan for negotiation process To seek consensus, guided by a set of principles To complete negotiations within 6 weeks Due to the complexity of issues and extent of entrenched views it took longer –Formal NEDLAC process (March 2000-01) –Preceded by bilateral consultations

6. Risk of protracted process Negative market impact Continuing applications to repatriate with FSB Extended negative effect on equity

7. How complexity of issue was addressed Four parallel processes –Broad plenary engagements –Small technical committee of experts (Dirty dozen) –Bilaterals –Meeting of principals

8. History of negotiations In 1998, draft Bill was brought to Parliament Organised labour objected on inadequacy- withdrawn Subsequent discussions –Organised labour –NEDLAC >GOVERNMENT WANTED A SOLUTION BY CONSENSUS

9. Problem R80 billion of actuarial surplus –12/1998: R410 billion of assets in private and underwritten funds –20% surplus based on fair value of assets

10. Problem (cont.) Are we still talking about R80 bn? The answer to this has different implications, depending on which side of the figure it lies >Assets in 12/1999: R445 billion?

11. Problem (cont.) R80 billion of actuarial surplus concentrated in funds with few members current legal position: –Supreme Court of Appeal: no party has a right to it, in law stakeholders should negotiate legislation preferred – Appeal Board: pay residual surplus to employer on liquidation

12. Status quo Surplus is concentrated in funds with few members –surplus sterilised – no economic use –ripe for liquidation If liquidated, surplus goes to employer DENYING ANY SHARE TO FORMER MEMBERS

13. 4 major causes of surplus Transfers / retrenchments Low pension increases and return to members High real returns Conservative approach to funding

14. Low pension increases and interest rates If pensioner assets earn 2% more than is used for pension increases, surplus grows: + 9% after 5 years + 19% after 10 years + 30% after 15 years Many funds gave interest of 4% per annum compound or less while earning 15% or more

16. Lack of representivity and disclosure Most trustees appointed by employer Right to elect at least 50% of board of trustees by members, only effective after 15 December 1998 Little differentiation between employer and fund Insufficient disclosure to members in transfer situation (Lack of knowledge?)

17. Government view: Members, former members and the employer should participate in any use of surplus Rationale: They all contributed

18. Government Principles Equity Risk sharing –No obligation to fund deficit Savings Separate past from future –Address risk sharing issue –Puts obligation on employer to fully fund –Gives right to surplus in future Preserve stability of sector –Safeguard savings health of economy –Do not turn surplus funds into deficit –Manage expectations

19. Labour’s views Recognise need for legislative change Purpose is to provide benefits to members and dependants Employer may not benefit in cash, but Employer may reduce contributions, by taking contribution holidays

20. Labour’s views 1999: –Past transfers inequitable; transfer value = asset share –Inflation proof pensions & improve minima –Top up former members –No payment to employer –Distribute balance of surplus to members on exit 2001 –Past transfers inequitable; transfer value = AL x FV / AV of assets –Inflation proof pensions –Top up former members –No payment to employer

21. Business’ views Recognise need for legislative change Actuarial conservatism caused over- contribution by employer Contribution holiday is a right EMPLOYER “OWNS” THE SURPLUS Past transfers and retrenchments negotiated at arms length –no justification for review Unfair burden on Trustees to undertake reparation of past inequities

22. Business’ views 1999 –No retrospectivity –Contribution holiday is a right –Duty to fund deficit = employer owns surplus –State to use tax on surplus paid to employer for social objectives –Limit going back in time 2001 –No retrospectivity –Contribution holiday is a right –Duty to fund deficit = employer owns surplus –State to use tax on surplus paid to employer for social objectives –Limit going back in time

23. Areas of potential compromise Minimum benefits in future (in order to satisfy members’ reasonable expectations) Top up past transfer, conversion and retrenchment values, and current levels of pensions (redress past inequities)

24. Once problem of past inequity addressed Allow the members and employer to participate in apportionment Members: benefit improvement or credit surplus account Employer: credit surplus account

25. Principles embodied in Bill and Regulation: Future Fair minimum benefits Apportion surplus in rules or by trustee decision Time to renegotiate benefit levels if minimum will cost too much Make the employer responsible for funding any deficit

26. Principles embodied in Bill and Regulation: Past Review financial history: –significant transfers, conversions, retrenchments – members affected and terms offered –source of surplus Increase benefits as prior charge on surplus: –significant transfers, conversions and retrenchments –pensions and deferred pensions Apportion remaining surplus equitably between the members, former members and the employer

27. Retrospectivity limited Existing surplus Plus Surplus used improperly –Higher benefits for executives –Pensions in lieu of post retirement medical subsidy –Past service benefits to transfers into fund >No impact on past contribution holidays

28. Retrospectivity limited (2) Within realistic and credible limits –Consider significant transfers –Reasonability in identifying beneficiaries –Consideration of availability of records >20 years

29. Member and employer surplus accounts Member Benefit improvements Subsidy of expenses / contributions Employer: contribution holidays, selective benefit improvement including post retirement medical subsidies, transfer between funds, payment in cash on liquidation or to avoid retrenchments following negotiation in terms of section 189 of LRA

30. What will this achieve? Correct past “unfair” benefits Share surplus between stakeholders Give rights to apportioned surplus Avoids shock to national savings levels Achieves equity and risk sharing

31. Technical Issues

32. Features of the Bill and Regulation Definitions Section 14A introduces minimum benefits (determined in terms of section 15K) Section 14 is amended to refer to the minimum benefits Sections 15A to 15J apportion surplus Section 15L introduces a specialist tribunal to apportion surplus

33. “Minimum individual reserve” DB: fair value equivalent of the present value of the member’s accrued deferred pension assumptions to be prescribed by Registrar Technical committee reasonable increases before retirement DC: member’s individual account value plus a proportionate share of reserves excluding employer surplus

34. “Minimum pension increase” Lower of –rate of increase supported by accumulated pensioner reserve, taking account of board’s intention with regard to future increases –Consumer Price Index from date of retirement

35. “Minimum contribution accumulation” own contributions plus interest rate reasonable in relation to the nett investment return earned by the fund (allowing smoothing) plus vested employer’s contributions

36. Changes to Section 14 Service prior to the date of transfer Reference to minimum benefits

37. Section 14A “minimum individual reserve” if –retrenched, transferred, or converted after surplus apportionment date + 12 months –liquidated after commencement date “minimum pension increase” on surplus apportionment date and every 3 years thereafter “minimum contribution accumulation” from scheme anniversary after commencement date

38. Section 15A Surplus belongs to the fund Members and employer get rights after apportionment Employer can only use surplus apportioned to the employer surplus account –Contribution holiday between commencement date and surplus apportionment date

39. 15B: Surplus apportionment scheme Effective date = “surplus apportionment date” 15 months thereafter to submit Board of the fund determines –who participates, –how much to retain in reserve, –amounts to go to the stakeholders and –how amounts to be used for members and former members will be applied AFTER TAKING ACCOUNT OF THE FINANCIAL HISTORY OF THE FUND IN THE MANNER PRESCRIBED BY REGULATION

40. Surplus apportionment date Ongoing fund: –statutory actuarial valuation coincident with, or next following, the commencement date spreads exercise over three years + 15 months minimise cost as valuation is required advance date if board wants to apportion earlier ALL FUNDS WITH SURPLUS WILL BE SUBJECT TO ACTUARIAL VALUATION (existing exemptions will be removed) Liquidation: –effective date of liquidation

41. Regulation: How far back? Significant transfers / conversions / retrenchments in last 20 years –10% of members, minimum of 50 Limit if data not available provided reasonable steps taken to obtain data May not exclude existing employees

42. Regulation: How much? Top up former members to lower of –minimum benefit –accrued liability x FV / AV of assets as a prior charge Top up pensions to minimum Function of size and financial history –simple formula for small funds

43. Regulation: What if the fund is then in deficit? Add “surplus used improperly” to the existing surplus Deficit after top up = debt owed by employer OTHERWISE ONLY APPORTION EXISTING SURPLUS

44. Why do this through regulation? Every fund has –different sources of surplus –different past uses of surplus –different amounts paid to past transfers, conversions and retrenchments Data availability will differ Methods may have to be adjusted if they prove impracticable REGULATION IS MORE FLEXIBLE

45. Recognise preference for legislation BUT UK forced to reconsider MFR –Hard-coded –Insufficient ongoing consultation Circumstances will change – need flexibility

46. Process 75% of the board must approve stakeholders cannot veto valuator opinion Stakeholders: –informed / right to object / board to resolve Registrar –independent actuary –approve if reasonable and equitable –specialist tribunal

47. Apportionment of future surplus Board of the fund decides or Rules of the fund determine

48. Utilisation for members and former members Improve benefits Reduce current contributions due Meet expenses which would otherwise reduce benefits for members

49. Utilisation for the employer Contribution holiday Pay pensions in lieu of post retirement medical subsidies Pay expenses Selective benefit improvement Transfer to employer surplus account in another fund Pay in cash to employer on –Liquidation –To avoid significant retrenchments

50. Existing employer reserve accounts Transfer to employer surplus account if Registrar is satisfied that contents were negotiated between stakeholders in a manner consistent with the principles behind sections 15B and 15C Treat any balance remaining as surplus to be apportioned

51. Rights to surplus accounts on exit Board of fund must consider whether members should share in member surplus account, investment reserve account and contingency reserve accounts on exit –proportionate share as default Members have no right to share in employer surplus account on exit

52. Funding of deficits Use surplus accounts proportionately to fund deficit

53. Liquidation Use reserve accounts and surplus accounts to satisfy members’ reasonable expectations as prior charge Distribute any remaining balance in member surplus account, investment reserve account and contingency reserve accounts amongst members Pay balance in employer surplus account to employer

54. Use of employer surplus to prevent job losses If negotiations in terms of section 189 of LRA have confirmed the need to retrench if additional capital is not obtained –Disclose to members –2/3 of members must approve –Apply to Registrar

55. Objections Once apportioned, money will be spent Resolve objections to scheme before approval –Board –Registrar –Specialist tribunal = panel of experts –Appeal Board –Exclude Pension Funds Adjudicator

56. Specialist tribunal Replaces board Panel: lawyer, actuary + another Access information Hear parties Make a determination Record to be retained and to be available to public

57. 30(3): Deficit to be a debt if employer liquidated Previously, employer could walk away If employer is to get rights to surplus, then employer must have an obligation to fund deficit

59. Additional information

60. Typical Transfer BeforeTransferAfter Fair value of assets1156451 Actuarial value of assets 1006444 Liabilities806416 Surplus (AV)20028 Funding level (AV)125%100%275% Surplus (FV)350 Funding level (FV)144%100%319%

61. 30/9/1998 (after crash) No.FV assetsSurplusAve F/L <100%3109(21)84% 100-110%4314810703105% 110-120%10198792645115% >120%22311449235142% Total786594212562124%

62. Effect on funding level of 2% higher real return 139%35 132%30 126%25 120%20 114%15 109%10 104%5 Ratio of fair value of assets to accrued liability Period from entry