Today's Trustee, Victory for Pensioners - September/October 2005 issue

It comes at massive cost to Johannesburg ratepayers. But a contract is a contract, after all, and the beneficiaries will get their entitlements despite resistance from their pension funds’ sponsoring employer. Effectively making perhaps the largest award ever in South Africa, the High Court has spoken.

Brace yourselves, ratepayers of Johannesburg, to dig into your wallets for another R1 billion or so over coming years until the city’s existing pension-fund members and pensioners join the great municipal workforce in the sky. This is a consequence of the Witwatersrand High Court decision by Justice Joffe.

The action brought by the defined-benefit Johannesburg Municipal Pension Fund and the City of Johannesburg Pension Fund, against the City of Johannesburg, was fought on the basis of contract. The court was asked to declare, which it did, that certain agreements between the funds and the city had been validly concluded. Arguments that the city had effectively been conducting the business of a pension-fund organisation – which would have invalidated the agreements as illegal because it is not registered under the Pension Funds Act – were dismissed.

In round numbers, it will cost the city an estimated R1 billion to honour the agreements. The figure represents an annual 13th cheque to employees (which, for some strange reason, had been paid by the city via the pension funds) and the “special bonus” by which employees accrued one extra year of pensionable service for every five years of actual service.

The city must immediately pay the funds some R200 million, inclusive of arrear interest, for the 13th cheques. Over and above this, it will need over time to pay some R900 million as the present value of the special bonuses.

Aside from liquidation of the funds, which is improbable, or agreement by the funds to amend their rules, which is unlikely, there’s no practical way for the city to escape its obligations. It’s tiny consolation to ratepayers that the obligations are finite in the sense that the funds have been closed to new members.

If this matter had a political subtext, of whiteys wanting to ensure that an erstwhile white city council would keep their nests feathered into the era of transformation, it wasn’t apparent from the trial. The funds are now integrated, but even if they weren’t, it’s immaterial. Notwithstanding the race-based remuneration differentials that had prevailed, a ruling against the funds would have hit employees of all hues.

The most argued by the present city council about “improper purpose” was that the agreements brought about an “improper preference” for the interests of employees and pensioners over the interests of the council and ratepayers. For their part, the funds submitted that their 1994 concerns about the coming transition were not illegitimate: “The legal entity which constituted the contributing employer was set to disappear and be replaced by a new entity which would bear the liabilities of other municipalities in a parlous financial position.”

In addition, they said, the 1994 agreement between the city and the funds did not involve the creation of new benefits or lining the pockets of the previously advantaged against the previously disadvantaged: “It involved the contractual entrenchment of the city’s liability to pay for benefits which formed part of the remuneration packages negotiated between the city and its employees, represented by their trades union, years before.”

For fund members and pensioners, of course, the judgment is meat; for city ratepayers, who’ll carry the tab, it’s poison. But neither should start their celebrating or hand wringing, as the case may be, just yet. As TT went to press, the city gave notice that it would apply for leave to appeal and the funds have indicated they will oppose the application.

For over 20 years, the city had funded the 13th cheque and the special benefits. Under the funds’ rules, the city was obliged to pay the funds each year for the cost of providing them. It all went hunky-dory until the Pension Funds Act was changed to stipulate that funds’ liabilities (in this case, for the 13th cheque and special benefits), had to be reflected in their financial statements.

Until 1986, the liability of the funds to pay these benefits was not reflected in the actuarial valuations. This was because the benefits were funded on a pay-as-you-go basis; the city only paid the funds when they actually incurred the costs, not by regular monthly contributions. To have disclosed these amounts as liabilities, as the amended Act required, would have exposed huge deficits in the funds. This is something the city wanted to avoid.

Hang on, said the actuaries, there’s a way out. If the funds changed their rules for the 13th cheques and special benefits to be conditional on receiving the monies from the council, the funds’ financial statements wouldn’t need to reflect these obligations as liabilities. And if the funds simultaneously entered into agreements with the city, for it contractually to continue the 13th cheques and special benefits, then everybody could carry on merrily.

At the behest of the council, not the funds’ trustees, this was duly done. By letter from the council in 1990, and formalised by contract in 1994, the council recognised its obligation to the funds, while the funds amended their rules to say they’d pay the pensioners on condition of receiving the money from the council.

Peter van Niekerk, attorney for the funds, points out: “The parties wished the status quo to remain. The council would continue to pay the costs of the special benefits, and the funds would continue to pay the benefits to members and pensioners as though the rules had not been amended.”

Justice Joffe found that the agreements had been validly concluded. They could be terminated only in the manner prescribed by the rules of the fund, not unilaterally by notice from the city council as the sponsoring employer.

In his judgment, all the city council’s defences were dismissed. Nothing suggested an “improper purpose” in concluding the agreements. The argument that the council had conducted the “business of a pension fund” was invalid, he held, noting that employers are often required to contribute to pension funds, and to classify them as “pension funds” requiring registration would be ludicrous.

HEAVY-HANDED HISTORY

‘Din’ Pretorius was employed by the Greater Johannesburg Metropolitan Council (GJMC) as its legal adviser. He was also a member of the Johannesburg Municipal Pension Fund (JMPF) and was elected by fund members to serve on its management committee.

Six years ago, he launched an application – subsequently withdrawn – which was supported by the fund’s other member-elected trustees and its pensioner-elected trustee, against a host of Johannesburg council officials (in their capacities as JMPF employer-nominated trustees), the GJMC and five other metropolitan councils that were participating employers in the JMPF.

Pretorius wanted an order declaring the JMPF’s employer-nominated trustees had breached their fiduciary duties to the JMPF and directing them “to vote in favour of any resolution which aims to secure the rights” of JMPF members. In his founding affidavit, Pretorius alleged:

From December 1994, employees of the Johannesburg city council were transferred into the service of the Greater Johannesburg Transitional Metropolitan Council (the constitutional predecessor of the participating employers) on terms and conditions, the relevant proclamation stated, “not less favourable than those under which they previously served”;
The participating employers honoured their obligations to pay the 13th cheques and special benefits, in terms of the 1994 agreement (see main article), until end-1998 when payments fell into arrears;
In August 1999, GJMC acting chief executive Mavela Dlamini served notice that the council had cancelled the 1994 agreement with effect from November 1999 and it immediately suspended all further payments. The fund, employees, their trades union and pensioners “held a legitimate expectation that the GJMC would adhere to the contract” and were given no opportunity to make representations before the GJMC decided to terminate the contract on notice;
At the August meeting of the fund’s management committee where the notice was served, the employer trustees knew the GJMC was not authorised to cancel the 1994 agreement. They also knew the cancellation had not been discussed with any party adversely affected or in terms of any other fair procedure. They should also have been aware, taking advice on the exercise of due care and diligence, that the cancellation “in the manner conveyed” was unlawful;
The employer trustees did not take reasonable steps to protect the interests of fund members. Instead, they actively supported the disputed decision. They used their positions as members of the fund’s management committee to promote acquiescence by the fund in cancellation of the agreement and to prevent dissenting members of the committee from performing their duties as trustees over the cancellation;
In addition, the employer trustees had a conflict of interest where they were also directly involved in GJMC decisions. These trustees also refused to accept a proposal by member trustees that the fund instruct lawyers to advise the fund’s management committee how it should respond to the purported cancellation.