Tribunal criticises FSCA for missteps in oversight of retirement fund

The Financial Services Tribunal (FST) has criticised the FSCA for adopting an overly rigid approach to compliance and misconstruing its powers under the Pension Funds Act (PFA).

It made these criticisms in a ruling that orders the FSCA to reconsider its decisions not to approve amendments to the rules of the Municipal Employees Pension Fund (MEPF) and to remove the fund’s board of management.

The FST’s decision, which it handed down last week, dealt with two reconsideration applications brought by the MEPF, which manages the retirement savings of more than 25 000 employees at 117 municipalities.

The FSCA and the fund are engaged in a long-running dispute, which has resulted in ongoing litigation, centred on the Authority’s contention that the MEPF’s board was not properly constituted.

In October last year, the FSCA decided to remove the entire board and replace it with an interim board. One of the fund’s reconsideration applications related to this decision.

The second reconsideration application concerned the FSCA’s decisions not to approve the fund’s applications to amend its rules and change its name and to be granted an exemption from section 7A(1) of the PFA. This section mandates that a board should consist of at least four members, and at least 50% of these members must be elected by the fund’s members.

The MEPF does not have employer-nominated trustees, consisting solely of member trustees, although the employer municipalities are bound by the fund’s rules.

The fund has historically been granted an exemption under section 7B(1)(b) of PFA from the requirement that members must have the right to elect trustees. This exemption has been repeatedly granted since 2015, with the latest valid until May 2022.

The fund applied for a new exemption in May 2022, but the FSCA put the application on hold, seeking evidence that the board was properly constituted.

In December 2022, the High Court in Pretoria (in FSCA v MEPF) held there was no legal basis for imposing a time limit on such exemptions. Consequently, the FSCA’s imposition of a time limit was deemed invalid.

Relying on the judgment, the fund asked the FSCA to confirm its understanding that the exemption remained in place or to extend the exemption. But the Authority did neither, providing what the Tribunal described as a non-committal answer, stating it was reconsidering a new set of conditions.

The fund submitted before the FST that it was entitled to certainty on the matter: the FSCA either recognised the exemption granted and that the exemption endures indefinitely, or the Authority has granted the exemption application

The Tribunal said that, given the clear legal position established by the High Court, the FSCA should have reissued the exemption without a time limit, and its failure to do so created unnecessary legal uncertainty.

Removal of the board

On 30 May 2022, the FSCA issued a notification to the MEPF, identifying several alleged defects in the board election process. The FSCA questioned whether the board of trustees had been properly elected in accordance with the fund’s rules and the PFA. The Authority was particularly concerned with discrepancies in the election of employee representatives and the exclusion of pensioner members from participating in trustee elections.

The FSCA, citing the expiration of the fund’s exemption under section 7B(1)(b)(i) of the PFA on 31 May 2022, determined that the board was improperly constituted. On 4 October 2023, the Authority issued a notice of its intention to replace the board.

The Tribunal said the FSCA’s reliance on the expiration of the exemption was problematic. The High Court’s judgment had already declared that time limits on exemptions under section 7B were invalid. Therefore, the FSCA should have acted in accordance with that judgment, which effectively rendered the expiration of the exemption meaningless.

The Tribunal criticised the FSCA for disregarding the court’s ruling and acting as though the exemption had expired.

The FST said any decision to remove a board must be rational and based on objective legal principles. Since the fund’s rules, which excluded pensioners from elections, had been legally binding and approved by the FSCA at the time of the board’s election, the decision to remove the board based on dissatisfaction with those rules was deemed irrational.

The FSCA’s remedy should have been either to amend the rules through section 26(1) of the PFA or seek a court order, rather than acting unilaterally.

Application to amend the rules

The MEPF applied for the registration for an amendment to its rules, which essentially involved consolidating its existing rules. It also applied for a change of name.

Under section 12(1) of the PFA, a registered retirement fund can amend its rules as long as the amendments are approved by the FSCA and are consistent with the PFA. According to section 12(4), the FSCA must register the amendments if the fund is financially sound and the rules are not inconsistent with the Act.

As of the date of the FST hearing in September, the FSCA had not yet made a decision regarding the fund’s application for rule amendment or the name change.

In June 2023, the FSCA indicated that the applications “remain active”, but they were not being considered because of concerns about the board’s composition. The FSCA stated it would finalise the applications only after addressing the issues surrounding the board’s validity.

The MEPF argued that the FSCA’s failure to grant the amendment and exemption applications was ultra vires.

The fund claimed that nothing in the PFA or the Financial Sector Regulation Act gave the FSCA the authority to withhold consideration of the application because of concerns about the board’s composition. According to the fund, the FSCA had other remedies to deal with board composition issues and should not use them as a reason to delay the approval of the amendment application.

The FSCA argued it had not exercised any discretion in this case but sought to determine whether the application was valid. A valid application could only be made by a properly constituted board. If the FSCA believed the board was not properly constituted, it could not approve the applications.

Under section 12(6) of the PFA, the FSCA is entitled to request further information to verify the validity of an application. In this case, it used this provision to raise issues about the board’s composition, which it believed needed to be resolved before approving the amendment.

The Tribunal rejected the fund’s argument that the FSCA was obliged to accept the application for the sake of legal certainty, even if the board was not properly constituted.

The Tribunal emphasised that the FSCA could not retroactively legitimise the actions of a potentially invalid board.

Composition of the board

The Tribunal said the FSCA failed to assess whether the non-compliance with the rules materially affected the result of the election – this should have been a key consideration.

It emphasised that the strict wording of election rules should not be applied rigidly. Drawing on a precedent from Garment Workers Union v De Vries, the FST said the rules governing lay societies, such as the MEPF, should be interpreted with a practical, common-sense approach. This would avoid penalising minor errors or omissions that do not materially affect the outcome of an election.

The Tribunal warned against a “fault-finding spirit” that could destabilise administrative acts by focusing on trivial details.

The FSCA claimed the fund failed to ensure that employee elections were conducted at each local authority.

The fund countered that, per the rules, it was not responsible for overseeing the internal election process at each municipality. The fund’s role was limited to receiving election results from the municipal managers, which it had done.

The FSCA objected to the lack of pensioner representation on the board, arguing that pensioners should have been allowed to participate in trustee elections.

However, the Tribunal pointed out that the fund’s rules did not provide for such participation, likely for logistical reasons, and the FSCA’s stance on this was inconsistent.

The FSCA also raised concerns about the appointment of three office-bearers, arguing it was not in accordance with the rules. However, the Tribunal concluded this did not invalidate the election of a quorum of the board.

The Tribunal found that the FSCA misconstrued its powers under section 26(1) and 26(4). Instead of focusing on these sections, the FSCA incorrectly applied section 26(2), which empowers the Authority to appoint people to a board where a fund does not have a properly constituted board.

Section 26(1) allows the FSCA to step in and take remedial action when a fund is unable to govern itself effectively or if the board of trustees is dysfunctional or improperly constituted.

Section 26(4) empowers the Authority to remove a trustee from office if it believes the trustee is no longer fit and proper.

The Tribunal said the FSCA’s handling of the board composition issue was flawed. The Authority should have adopted a more pragmatic approach, focusing on whether any non-compliance materially affected the election results.

Antagonism must end

The Tribunal said the time had come for the antagonistic attitudes that have characterised interactions between the board and the FSCA to end, and the parties should co-operate.

It acknowledged that although the FSCA faces an administrative burden, the many delays in addressing matters related to the fund were unjustified.

The FST also criticised the fund’s dismissive attitude towards the FSCA’s bona fide queries. It said the fund’s principal officer must ensure that the lay board members fully understand their obligations under the PFA and the fund’s rules and ensure that elections at the municipality level were properly conducted, with accurate records kept and submitted to the board and its chair.

The Tribunal set aside the FSCA’s decisions and remitted them to the Authority for reconsideration.

Click here to download the decision.