The Constitutional Court has ruled that an amended retirement fund rule cannot be applied to the calculation of a benefit that accrued before the amendment was approved and registered.
The apex court’s decision, which was handed down on Wednesday, overturns a judgment by the Supreme Court of Appeal (SCA) in April 2022. At the time, Rosemary Hunter, who has extensive expertise in retirement fund law, said the appeal court’s “deeply disturbing” and “baffling” decision put at risk the accrued retirement benefits of millions of fund members.
Read: SCA judgment ‘puts fund retirement members’ accrued benefits at risk’
The Institute of Retirement Funds Africa (Irfa), which was admitted as a friend of the court, submitted to the Constitutional Court that the SCA’s judgment “fundamentally changed the established legal and industry position in respect of backdated rule amendments”.
The judgment had material consequences for the entire retirement fund industry, which included funds having to review and clarify their backdated rule amendments, and threatening the stability of some funds, particularly where backdated amendments would result in increased member benefits, Irfa said.
Background to the application
The application was brought by Pandelani Mudau, who was a member of the first respondent, the Municipal Employees Pension Fund (MEPF), while he was an employee of the Vhembe District Municipality (the third respondent). The second respondent was the fund’s administrator, Akani Retirement Fund Administrators (Pty) Ltd.
Mudau became entitled to a withdrawal benefit when he resigned on 31 May 2013.
The MEPF’s rules provided that, on resignation, members were entitled to a withdrawal benefit of three times their contribution, plus interest.
In June 2013, after the fund was warned in an actuarial report that it would not meet its future liabilities, it amended the withdrawal benefit scheme. A member’s withdrawal benefit would be one-and-a-half times his or her contributions, plus interest. The amended rule would apply with retrospective effect from 1 April 2013.
On 22 July 2013, the fund applied to the Registrar of Pension Funds for registration of the amended rule. The rule was registered on 1 April 2014, with retrospective effect from 1 April 2013.
In October 2013, Mudau received a withdrawal benefit of R646 437.42, calculated in terms of the unregistered amended rule.
Mudau resigned before the fund decided to amend the old rule and before it was registered.
Mudau said he was entitled to a withdrawal benefit of R2 140 313.19 in terms of the old rule and complained to the Pension Funds Adjudicator in December 2013.
The Adjudicator found in Mudau’s favour, concluding that the amended rule could not be applied before its approval and registration by the Registrar and that the retrospective rule amendment could not be applied to benefits that had already accrued before its registration by the Registrar. The fund was ordered to pay Mudau what was due to him in terms of the old rule, together with interest.
Dissatisfied with this outcome, the respondents applied to the High Court to review and set aside the Adjudicator’s determination. The High Court dismissed this application with costs.
The matter went on appeal before a Full Court of the High Court, where it was found that the Adjudicator was not obliged to apply the amended rule, which had not been approved and registered. It further found that the amendment could not be approved retrospectively to Mudau’s withdrawal claim because he was no longer a member of the fund when the amendment was approved and registered.
The respondents were granted leave to appeal by the SCA, which found that the rules, read together with the Pension Funds Act (PFA), permitted the MEPF to amend its rules and to determine the effective date of the amended rule. It concluded that the amended rule could apply retrospectively to the inclusion of the claim made by Mudau under the rule approved by the Registrar.
Read: Supreme Court of Appeal upholds amended rule affecting withdrawal benefits
Amended rules cannot be apply before registration
In a unanimous judgment penned by Justice Jody Kollapen, the Constitutional Court found that the matter fell within its jurisdiction on two grounds:
- The Adjudicator’s power constitutes the exercise of public power.
- The determination of the retirement fund withdrawal benefit affected Mudau’s right, in terms of section 27 of the Constitution, to social security. This right was impacted by the interpretation of the PFA.
“It would be in the interests of justice to grant leave to appeal where pension fund members and the industry as a whole will benefit from a determinative finding with regard to both the effect of unregistered rule amendments and, if necessary, the permissible scope and extent of the retrospectivity of pension fund rules,” Justice Kollapen said.
“At the heart of the appeal is whether a fund may apply a rule amendment that is not yet registered in anticipation of its future registration and determine the payment of benefits due on that basis,” he said. “It may not do so.”
He said the issue was dealt with “decisively and unambiguously” in Mostert N.O. v Old Mutual Life Assurance Co (SA) Ltd (2001), where the SCA held that, although amended rules may have retrospective effect after registration, they do not have binding effect before registration. The conclusion that arises from Mostert is that a retirement fund may not apply a rule without its first being registered by the Registrar.
On this basis, the court held that Mudau’s withdrawal benefit claim had to be dealt with in terms of the rule in existence when his employment terminated on 31 May 2013, because the amended rule was registered in April 2014.
It held that the SCA would not have arrived at any other conclusion if it had embarked on a similar enquiry as the Adjudicator and the majority of the Full Court.
Proceedings before the Adjudicator are legal proceedings
In addition, the Constitutional Court found that the appeal had to succeed because of the principle that legal proceedings should be determined in accordance with the law applicable at the time the proceedings are instituted, unless a contrary intention is indicated.
It rejected the respondents’ argument that the principle could not apply because a complaint before the Adjudicator does not constitute legal proceedings.
Justice Kollapen said that, cumulatively, the provisions of sections 30L, 30F, 30O and 30P of the PFA are sufficient to characterise proceedings before the Adjudicator as legal proceedings.
The court held that Mudau’s lodgement of the claim would have constituted the commencement of legal proceedings, and the date of lodgement fixed the date of the law applicable to the determination of the dispute.
The old rule was the only relevant rule to consider for the purposes of the complaint proceedings before the Adjudicator. Accordingly, the Adjudicator was required to apply the old rule in place in December 2013, when Mudau lodged his complaint, and not the unregistered amended rule, which was only registered in April 2014.
The court rejected the respondents’ argument, relying on section 30P of the PFA, that because the High Court is entitled to consider the merits of the complaint afresh, it had to apply the amended rule (the rule in force by the time of the High Court proceedings).
The identification of the complaint and the law applicable to it are determined with reference to the proceedings before the Adjudicator, even though in section 30P proceedings additional evidence may be placed before the High Court on the merits of that complaint. To hold otherwise would mean that the Adjudicator, the High Court, and any subsequent court might have to apply different rules that would have been in existence from time to time to deal with the same complaint, Justice Kollapen said.
The issue of retrospectivity did not arise
The court’s judgment stated that the respondents sought to distance themselves from the argument that they had applied an unregistered rule and instead asserted that the rule amendment that was unregistered at the time of the finalisation of Mudau’s claim was ultimately registered and then applied retroactively.
Justice Kollapen said this was an unsustainable proposition both in fact and in law.
He said the issue of retroactivity did not arise, because the answer to the first proposition (that a rule amendment cannot be applied before it is registered) effectively puts paid to any argument on retroactivity. Simply put, when the rule was amended in April 2014, a claim by Madau did not exist to which the rule amendment could be retroactively applied.
What the fund was required to do in October 2013 was to finalise Madau’s claim based on the rule then in existence. Following that, and only upon the rule amendment becoming valid in April 2014, could the fund then apply the rule, as well as attempt to enforce its retroactive effect, Justice Kollapen said.
“Whether retroactivity could be used to unsettle vested or accrued benefits is a matter which may require consideration in the future, but this is not the case for that determination.”
A review was not necessary
Further, the court rejected the respondents’ argument that Mudau should have sought to have the amended rule reviewed. Mudau never had an issue with the amended rule or its retrospective effect.
Mudau consistently argued that the unregistered amended rule could not be applied before it was registered. It would, therefore, not have been necessary for Mudau to seek to review and set aside the amended rule because that was not central to the basis on which he sought the relief that he did from the Adjudicator, the court found.
Costs order
The Constitutional Court upheld Mudau’s appeal and set aside the SCA’s order.
It ordered Akani Retirement Fund Administrators to pay Mudau R1 493 875.77 (the balance between R2 140 313.19 and R646 437.42), together with interest at the prescribed rate calculated from 16 October 2013 until the date of payment, less any deductions permitted in terms of the PFA.
The MEPF and Akani were ordered to pay Mudau’s costs, including the costs of two counsel.
The court said Mudau’s counsel, who had taken the case pro bono, had represented him “with aplomb and commendable ability. This act of public service is recognised and acknowledged as an important contribution to advancing the objective of access to justice for all.”
Section 92(1) of the Legal Practice Act provides that even when legal services are rendered for free, when costs become payable to a litigant, the award of costs that the court makes in favour of that litigant is deemed to have been ceded to the legal practitioner, the court said.
