Former employee wins lawsuit against pension fund, securing promised payout

In South Africa, there are two types of pension funds, and most employees are unaware of which type they belong to. This factor determines whether the company or the employee bears the financial risk.

The first type of fund, known as a defined benefit fund, guarantees a specific amount. Its charter specifies an amount, usually a portion of your final salary for each year worked, which must be paid to you monthly for life. If investments perform poorly or pensioners live longer than expected, the fund and employer are obligated to find the missing funds, and your pension will not decrease.

The second type, a defined contribution fund, promises accumulation rather than a payment. You and your employer contribute a fixed portion of your salary to an account in your name. These funds are invested, commissions are deducted, and upon retirement, you receive the amount in the account. No one guarantees this figure; if markets fall in the last year of work, your pension falls with them.

An analogy can be drawn between a company car and a car allowance. With a company car, responsibility for breakdowns lies with the firm, whereas with an allowance, you are responsible for your own vehicle. One option is a promise, the other is simply a payment.

Previously, employers in South Africa predominantly used the first type of funds. In the 1980s and 1990s, most companies switched to the second. The old approach obligated the company to pay pensions for decades, while the new approach terminates the fund's obligations at the time of contribution. According to a study conducted from 1980 to 2006, thousands of local funds changed their system.

Guaranteed pensions today are mainly preserved in public services and some older corporate funds. Then changes occurred: previously there were thousands of small funds belonging to one employer. In 2000, there were 15,587, and by 2023, the regulator, the Financial Sector Conduct Authority, counted about 4,900, only a small fraction of which is active.

Small funds closed down, and their members transferred to large 'umbrella' funds serving multiple employers. This reduces costs and improves administration, which is supported by the regulator. However, there is a problem that is rarely explained: previously, funds had their own trustees—people from your workplace, some elected by employees. In umbrella funds, they are replaced by trustees of the umbrella itself, who decide where your money goes, what commissions you pay, and what protection you receive. You do not choose them and cannot remove them. Usually, they perform well, but sometimes they may not suit you. In any case, they claim that you lose control on the day the employer registers you.

Throughout all these changes, the position of the ordinary member changed the most significantly, yet was the least discussed. Most South Africans could not say which fund they were in or what rules it promised. They find out at age 60 or 65, when they should stop working, and by then, nothing can be done.

A man worked at ZF Services South Africa from April 1995 until his retirement in October 2023. His fund was an old, guaranteed type. The fund's rules stipulated 2.5% of the final salary for the first 20 years of service and 1.5% thereafter—totaling 1,347,595.47 annually, or 112,299.62 per month.

The fund refused to pay this amount and instead provided a lump sum of 14,468,962.88, advising him to purchase monthly income from an insurer. This is called an annuity: you give the money, and the insurer pays you income for life. Sanlam estimated this amount at approximately 91,200 per month, which is about 21,000 less than what the fund's rules promised. To reach the amount of 112,300, the insurer stated that he would need about 17 million. He was short by approximately 2.53 million, and this gap would increase every year throughout his life.

The fund claimed that its calculation complied with standard industry practice and that surplus funds raised its total income to 18.3 million by September 2024. An independent actuary—a specialist who calculates pension values—agreed that this was reasonable but warned that if members could demand any promised pension, funds could run into trouble.

Nevertheless, Deputy Arbitrator of Pension Funds Nahim Essop supported the complaint. A lawyer with sixteen years of experience in the field, who defended the case in the Supreme Court regarding how fund rules should be interpreted, refused to settle the dispute arithmetically and referred to the charter itself. It stated that the pension must be of a specific amount. Nothing allowed the fund to replace this promise with an amount that could be bought with a lump-sum payment.

He ruled that in a guaranteed fund, what you receive is fixed by the rules, and if funds are insufficient, the employer must top up, not the pensioner. The fund's figure was rejected, and the fund was given 30 days to pay the actually required amount.

This decision confirms a long-standing legal position: the fund's charter is its constitution. It obligates the fund, its officials, and its members, and no manager can go beyond its framework.

Simply put: if your fund promised you a pension, it cannot give you a smaller amount and call the difference market reality. This gap is the fund's and the employer's problem, not yours. However, it is worth noting how he succeeded: he obtained an external assessment, compared it with his fund's rules, and refused to let this gap go unnoticed. Most people would simply accept the check and never know.

Before signing anything, it is recommended to check three things long before your last working day: which of the two types of funds you belong to, who your trustees are and whether they still work where you work, and exactly what your rules promise in writing, not what the benefits statement estimates.

Pension funds—pension, provident, preservation, and annuity—are regulated by overlapping laws, fund rules, and tax regulations that frequently change. It is a minefield. Before signing anything upon retirement or agreeing to a transfer, consult a qualified specialist for review and insist on reviewing the rules governing your funds.

Many avoid such a visit due to fear of cost. One must honestly weigh: an hour of a specialist's time versus an error costing 2.53 million that could haunt this person for life. One conversation often separates golden years from a life of want.