3. Background Pension Fund Dispute Employers’ surplus Members’ reserves The dispute is not about who owns the surplus, But rather about whether or not it is a surplus The dispute is not about who owns the surplus, But rather about whether or not it is a surplus

4. Background COSATU’s ordinary surplus versus extraordinary surplus COSATU’s ordinary surplus versus extraordinary surplus The dispute is not about who owns the surplus, But rather about whether or not it is a surplus The dispute is not about who owns the surplus, But rather about whether or not it is a surplus

5. Let bygones......be bygones! Let bygones......be bygones! - R80 to R200 billion -

6. Let bygones be bygones! - R80 to R200 billion - FSB estimate excludes impact of company contribution holidays over the past decade.

7. Let bygones … …be bygones! Let bygones … …be bygones! - R80 to R200 billion - “Future pensions under-funded”

8. * Future pensions under- funded Like planting crops …. If the seeds go missing, there’ll be no crop to harvest …. Current pension contributions will impact on the economy of our country over the next few decades …….. Like planting crops …. If the seeds go missing, there’ll be no crop to harvest …. Current pension contributions will impact on the economy of our country over the next few decades ……..

9. Let bygones … … be bygones! Let bygones … … be bygones! - R80 to R200 billion - Overseas-owned companies are dis- investing us of our pension investments

10. Let bygones be bygones! - R80 to R200 billion - Converting pension reserves into company profits is stripping our country of its savings

11. Examples of what has happened over the past 20 years ….

12. Sentrachem Pension Fund February 1992 Surplus R5 million R650 million Pension Fund February 1992 Surplus R5 million R650 million Pension Fund March 1998 Surplus R408 million 6 000 Members transferred & retrenched

13. Sentrachem Pension Fund February 1995 Shortfall on budgeted investment returns of R57 million R650 million Fund February 1995 Shortfall on budgeted investment returns of R57 million R650 million Fund March 1998 Members transferred & retrenched * Surplus of R408 million The Bill will not fix this Fund’s practice

14. Revlon Pension Fund Negotiated mass-transfer --- At the time of the transfer the Pension Fund was under-funded by 30% Negotiated mass-transfer --- At the time of the transfer the Pension Fund was under-funded by 30%

15. Revlon Pension Fund After the conclusion of the negotiation but immediately prior to the transfer, the actuary was instructed to re-value the Fund using a 9% post-retirement interest rate. This had the effect of changing the funding level from being 70% funded to being 94% funded

16. Revlon Pension Fund After the conclusion of the negotiation but immediately prior to the transfer, the actuary was instructed to re-value the Fund using a 9% post-retirement interest rate. This had the effect of changing the funding level from being 70% funded to being 94% funded The Bill will not fix this Fund’s practice

17. Revlon Pension Fund “What effectively has been achieved by amending this basis has been that every member in the pension fund at the time of transfer was given a fair share of the assets which existed at that time”

18. Revlon Pension Fund “What effectively has been achieved by amending this basis has been that every member in the pension fund at the time of transfer was given a fair share of the assets which existed at that time” The Bill will not fix this Fund’s practice

19. IBM Pension Fund ………………………………. Unanimous decision by trustees in favour of granting an inflation-related increase to pensioners.

20. IBM Pension Fund The Fund actuary confirmed that provision had been made for an inflation related increase ………….. Based on investment returns, sufficient funds were available

21. IBM Pension Fund “Company overruled trustees’ decision”

22. IBM Pension Fund “In truth the employer is seeking to get the best deal for itself in the distribution of surplus and is holding out on its position by refusing to pay a special increase beyond the normal practice (Two- thirds of CPI)” The Adjudicator:

23. IBM Pension Fund Actuarial surplus Investment Actuarial Value of Assets Reserve “In truth the employer is seeking to get the best deal for itself in the distribution of surplus and is holding out on its position by refusing to pay a special increase beyond the normal practice (Two-thirds of CPI)” Regulation 15 Murphy surplus Market Value of Assets

24. Murphy’s Law Pension Funds Adjudicator, Professor John Murphy, states: “Surplus is simply the difference between the assets and the liabilities” Investment ActuarialValueofAssets R100 m ActuarialValueofAccruedLiability Investment reserve Market Value of Assets required to fund liabilities R120 m 100%funding R20 m Murphy surplus Reflects Common Practice in SA

25. Murphy’s Law “The attempt to separate out the investment reserve from the surplus is sophistry” Murphy’s Law “The attempt to separate out the investment reserve from the surplus is sophistry” Actuarial surplus Investment Actuarial Value of Assets Actuarial Value of Assets Reserve Regulation 15 Market Value of Assets Market Value of Assets Reflects Common Practice in SA “Market Value Surplus”

26. Surplus according to Regulation 15 15 (2) [d] a comparison of the actuarial value of assets with the accrued liabilities, on the bases contemplated in paragraph (b) (iv) and [c] (ii), showing the resultant surplus or deficiency and, in the case of a deficiency, the percentage ratio of assets to liabilities. Investment ActuarialValueofAssets R100 m ActuarialValueofAccruedLiability Investment reserve Market Value of Assets required to fund liabilities R120 m 100%funding R20 m

27. Regulation 15 Not … section 15 of the Pension Funds Act … Regulation 15 Not … section 15 of the Pension Funds Act …

28. Regulation 15 Every Pension Fund must report its statutory valuation in terms of this Regulation… and make good deficiencies in terms of 15 [2] if they exist. Regulation 15 Every Pension Fund must report its statutory valuation in terms of this Regulation… and make good deficiencies in terms of 15 [2] if they exist.

29. “There is no legal definition of a surplus either in the statute, the rules, or the common law. After a textual analysis of the language of the rule (reserve value) I held that actuarial reserve value equates to the applicants actuarial liability” Murphy’s Law of Surplus Investment ActuarialValueofAssets R100 m ActuarialValueofAccruedLiability Investment reserve Market Value of Assets required to fund liabilities R120 m R20 m 100%fundingRegulation15 120%funding

30. R100 billion Overseas Sentrachem Revlon IBM Anglo Independent Procter & Gamble Britain USA France Germany Holland ?

31. R100 billion Overseas Sentrachem Revlon IBM Anglo Independent Procter & Gamble Britain USA France Germany Holland ? The Bill will not fix this practice

32. Nedlac Pension Debate *Savings better in hands of business! Really?

33. Nedlac Pension Debate Savings Members … stays in the Fund Companies … share dividends

34. Surplus means: Actuarial surplus Investment Actuarial Value of Assets Actuarial Value of Assets Reserve Market Value of Assets Market Value of Assets Actuarial surplus Investment Actuarial Value of Assets Actuarial Value of Assets Reserve ? Market Value Surplus ? Market Value Surplus Regulation 15 Surplus Regulation 15 Surplus In the case of transfer values In the case of transfer values In the case of valuation reports In the case of valuation reports

35. “It is correct that many transfers have taken place with members receiving, as a transfer value, the accrued liability……..” Liabilities means Assets! Investment Regulation 15 [2] [c] [I] [cc] ActuarialValueofAccruedLiability R100 m Market Value of Assets required to fund liabilities Regulation 15 [2] [b] [ii] R120 m R20 m Investment Regulation 15 [2] [b] [iii] ActuarialValueofAssets R100 m Investment reserve R20 m The Debt The money backing the debt

36. “It is correct that many transfers have taken place with members receiving, as a transfer value, the accrued liability……..” Liabilities means Assets! Regulation 15 [2] [c] [I] [cc] ActuarialValueofAccruedLiability R100 m Market Value of Assets required to fund liabilities Regulation 15 [2] [b] [ii] R120 m Investment Regulation 15 [2] [b] [iii] ActuarialValueofAssets R100 m Investment reserve R20 m The Debt The money backing the debt

37. “It is correct that many transfers have taken place with members receiving, as a transfer value, the accrued liability……..” Liabilities means Assets! Regulation 15 [2] [c] [I] [cc] ActuarialValueofAccruedLiability R100 m Market Value of Assets required to fund liabilities Regulation 15 [2] [b] [ii] R120 m Investment Regulation 15 [2] [b] [iii] ActuarialValueofAssets R100 m Investment reserve R20 m The Debt The money backing the debt

38. “It is correct that many transfers have taken place with members receiving, as a transfer value, the accrued liability……..” Liabilities means Assets! Regulation 15 [2] [c] [I] [cc] ActuarialValueofAccruedLiability R100 m Market Value of Assets required to fund liabilities Regulation 15 [2] [b] [ii] R120 m Regulation 15 [2] [b] [iii] ActuarialValueofAssets R100 m The Debt The money backing the debt

39. “It is correct that many transfers have taken place with members receiving, as a transfer value, the accrued liability……..” Liabilities means Assets! Regulation 15 [2] [c] [I] [cc] ActuarialValueofAccruedLiability R100 m Market Value of Assets Regulation 15 [2] [b] [ii] R120 m R100 m Regulation 15 [2] [b] [iii] ActuarialValueofAssets R100 m The Debt The money backing the debt Implicitly revalued the assets

40. “With the benefit of hindsight it was not fair to have given transferring or retrenched members no share of this provision against a fall in the stock market. Having decided this, it is necessary to legislate in order to give them any share, because ….. Memorandum versus The Bill 30% Investment Reserve 30% Investment Reserve Actuarial Value of Assets R100 million Actuarial Value of Assets R100 million Portion left behind Portion left behind But, the proposed legislation does not fix the past, rather it legitimizes the past

41. “ … secondly, most of the transfers had occurred more than three years ago, and, even though members may now feel that they did not get what was promised in whatever agreement was signed between the union and the employer, they would be unsuccessful in claiming anything through the courts because their claim would have become prescribed….” Memorandum versus The Bill 30% Investment Reserve 30% Investment Reserve Actuarial Value of Assets R100 million Actuarial Value of Assets R100 million Portion left behind Portion left behind

42. Draft Minimum Value Market Value of Assets required to fund liabilities 100%funding R100 m R130 m R70 m ActuarialValueofAccruedLiability Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [b] [Iii] Draft Regulation 33 Draft Regulation 33 Draft Bill & Supporting Regulation ExampleNovember2000

43. Draft Minimum Value Market Value of Assets required to fund liabilities 100%funding R100 m R130 m ActuarialValueofAccruedLiability Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [b] [Iii] Draft Regulation 33 Draft Regulation 33 Draft Bill & Supporting Regulation COSATU’s

44. Draft Minimum Value Market Value of Assets required to fund liabilities R100 m R130 m ActuarialValueofAccruedLiability Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [b] [Iii] Draft Regulation 33 Draft Regulation 33 Draft Bill & Supporting Regulation COSATU’s The problem with this proposal is that if it is considered to be new legislation and is applied retrospectively, then Business South Africa will oppose it in court - they have little option but to do so, and the delays will give companies an additional few years to strip out the so- called surpluses …...

45. Draft Minimum Value Market Value of Assets required to fund liabilities R100 m R130 m ActuarialValueofAccruedLiability Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [b] [Iii] Draft Regulation 33 Draft Regulation 33 Draft Bill & Supporting Regulation NACTU If the transfer of full value of the assets reserved to fund a benefit was negotiated and agreed, then that is what must be paid…. if not then, then now ….. If the actuary signed a Section 14 transfer certificate stating that all the same assumptions were used as were used in the last statutory valuation, and then changed the assumptions relating to the assets, then it’s time to put it right ….

46. Transfer Certificate In reality, the actuary changed the assumptions relating to the valuation of the assets, changing the valuation bases to some 40%less than what it was, and did not report this in his statement to the FSB. Now the Bill proposes that if this 40% was used for a company contribution holiday, it should not be paid to members …. In addition, the Bill will now prevent any member from claiming this lost 40% ….. “The transfer amount in respect of each member ….. …. using the same valuation bases as was used for the most recent actuarial valuation ….”

47. The Bill & Supporting Regulation Bill protects Funds from correcting past inequities ….. “…. If there is not sufficient surplus in the fund to allow the top-up, then the top-up must be proportioned down ……”

48. British Definition “Cash equivalent” should be read as reference to “transfer value”. “It is a fundamental requirement, stemming from the legislation, that a cash equivalent should represent the actuarial value of the benefits which would otherwise have been preserved. Such actuarial value should represent the expected cost within the scheme of providing such benefits and should be assessed having regard to market rates of return on equities, gilts or other assets as appropriate.”

49. Market Value of Assets set aside to fund liabilities 100%funding100%funding R100 m R130 m ActuarialValueofAccruedLiabilityActuarialValueofAccruedLiability Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [a] 15 [2] [c] [I] & [ii] Regulation 15 [2] [b] [Iii] BritishTransferValueCashequivalentBritishTransferValueCashequivalent British Transfer Value

50. R120 m Transfer Assets Transfer liability R100 m Transfer of Defined Benefit to Defined Benefit Market Value of Assets set aside to fund liabilities R100 R100 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability Regulation 15 [2] [b] [Iii] Ignore 100%funding Example

51. 100%funding R120 m Transfer Assets Transfer liability R100 m Transfer of Defined Benefit to Defined Benefit Market Value of Assets set aside to fund liabilities R100 R100 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability The Debt The money funding the debt

52. R120 m Transfer Assets Transfer liability R100 m Transfer of Defined Benefit to Defined Benefit Market Value of Assets set aside to fund liabilities R100 R100 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability New Surplus The Debt The money funding the debt R20

53. R120 m Transfer Assets Transfer liability R100 m Transfer of Defined Benefit to Defined Benefit Market Value of Assets set aside to fund liabilities R100 R100 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability Company contribution holiday R20 The Debt The money funding the debt

54. Transfer Assets Transfer liability R100 m Transfer of Defined Benefit to Defined Benefit R100 R100 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability R20 The Debt The money funding the debt Company contribution holiday = Company profits

55. R120 m Assets Assets R100 m Transfer of Defined Benefit to Defined Benefit Market Value of Assets set aside to fund liabilities R83 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability R20 The Debt Shareholders gain Transferred liability R100 R17 83%funding

56. Assets Assets R100 m Transfer of Defined Benefit to Defined Benefit R83 Investment Reserve R20 m Actuarial Value of Assets R100 m Accrued Value of Actuarial Liability Transferred liability R100 R17 83%fundinglevel Using same assumptions - under-funded pension Regulation 15 requires this under- funding to be corrected 100% funding level

57. “ With the benefit of hindsight it was not fair to have given transferring or retrenched members no share of this provision against a fall in the stock market. Having decided this, it is necessary to legislate in order to give them any share, because ….. The Second Amendments Bill But, it doesn’t fix it, Rather, it legalizes it …

58. Increases to Pensions The Bill makes provision for actuaries to use inflation as part of the funding mechanism This means that companies can save money by under-funding pensions with the full knowledge that these pensions will never keep in line with inflation

59. What happens if you approve Bill? You legalize the past inequitable actions.

60. What happens if you approve Bill? *You make in impossible for unions to apply to the courts to get back their lost fortunes.

61. What happens if you approve Bill? *You ensure that overseas investors remain delighted with their South African investments ……………

62. What happens if you not approve Bill? The delays continue until all mass- transfers happened more than seven years ago ……. …… and then all records may be destroyed making it impossible to correct the past inequities …… …….. !!! The delays continue until all mass- transfers happened more than seven years ago ……. …… and then all records may be destroyed making it impossible to correct the past inequities …… …….. !!!

63. What happens if you not approve Bill? In addition, companies continue taking contribution holidays, thus slowly absorbing members’ reserves into company profits ……….