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The Actuary The magazine of the Institute & Faculty of Actuaries

Surplus payouts

he Actuarial Society of South Africa (ASSA) is overseeing the distribution of surplus in terms of the Pension Funds Second Amendment Act, 2001 (the Act). The objective of the Act is to redress some of the excessive practices of the past. This is a one-off opportunity for retirement funds to top up the benefits of former members to the minimum level set out in the Act. Any such top-up will only be payable if there is a surplus in the fund. Furthermore, where the benefits provided by a fund were historically different for different race groups, the Act does not require funds to top up former black members’ benefits to the level of their white counterparts. This approach reflects the reconciliatory stance of government.

Fighting talk
Nonetheless, the Act does propose to transfer an estimated 6080bn rand of surplus to formerly disadvantaged members and pensioners. This was never going to happen without a fight. The weak point in the legislation is that the Act leaves it up to the actuary of a fund to determine the surplus and certify the contingency reserves set up by the trustees. It is here that ASSA has exerted its influence.
To put this into context, remember that in 2001 South Africa was just emerging from the worst possible time: the siege economy of the apartheid era. The actuarial assumptions reflected this and were conservative. This approach had served defined benefit pension funds well during the apartheid years, as indicated by the quantum of surplus. However, after the first few surplus valuations were completed and approved by the Financial Services Board (FSB), ASSA decided that new methods of setting the assumptions and contingency reserves were needed. An ASSA subcommittee approached the FSB with a new methodology that would enable actuaries to strengthen their assumptions and contingency reserves. The chief actuary at the FSB conceded and the scene was set for a reduction in surplus.
Justification for the new approach is literally difficult to find:
– The ASSA subcommittee kept no minutes.
– The FSB has placed a gag order on its chief actuary so he is unable to justify or debate the issue.
– It is unclear if the ASSA Council even debated the issue requests for minutes have been dismissed.
– The FSB will not confirm or deny the existence of any reports to the registrar of pension funds or the minister of finance that justifies the new approach.
– ASSA is vehemently opposed to informing stakeholders about the reduction in surplus owing to a change in assumptions and contingency reserves.
– ASSA issued a press statement covering the surplus distribution (see www.assa.org.za under ‘resource centre’). In my opinion, this statement is misleading it lists all factors that would lead to a reduction in surplus, but fails to mention that the outlook for inflation has improved significantly. Furthermore it implies that funds are invested only in interest-bearing stocks and does not discuss the expected return on equity. No mention is made of the change in methodology introduced by the actuarial profession or that this will lead to a reduction in surplus.
Perhaps the most cynical aspect of the surplus distribution is the FSB guidance that does not allow contingency reserves to put a fund into a deficit. The best way to understand this is that these contingency reserves exist only if former members and pensioners can pay for them out of surplus. For funds where the employer has to pay (by increasing contributions to the fund), these so-called contingencies disappear. In reality, such contingencies simply do not exist and this approach must be seen for what it is: a way of discriminating against former members and pensioners of funds that have a surplus.

When we look back on the surplus distribution exercise a few years from now, what will history tell us? In the period since the surplus distribution valuation retirement funds have generally been earning high investment returns (up to 30%pa) and inflation has been low (around 4%pa). Go figure. After strengthening the assumptions and contingency reserves at the surplus valuation (thereby reducing the payout of surplus to former members and pensioners), it is very likely that surpluses will emerge at the next valuation. These surpluses might be distributed to the active members, pensioners and the employer. Former members will have no rights to this surplus.
After all is said and done, the Act is all about setting right the wrongs of the past, a process that I fully support. Whether ASSA is acting in the ‘public interest’ is open to debate given the political context of the surplus distribution.