Tellumat (Pty) Ltd v Appeal Board of the Financial Services Board

The Tellumat Pension Fund (the Fund) was a closed defined benefit pension fund with only pensioner members. A statutory actuarial valuation in December 2006 revealed an actuarial surplus of approximately R242 million (comprising a solvency reserve and actuarial surplus). The board of trustees negotiated and agreed upon a distribution scheme that included: (1) an initial 8% pension increase for all pensioners; (2) apportionment of the surplus equally between the employer (Tellumat) and members after pension enhancement, resulting in approximately 56% to members and 44% to the employer; (3) outsourcing of pensions by purchasing annuities from an insurer; and (4) eventual winding up of the Fund. The scheme offered pensioners three options for annuities with varying pension increases and guarantees. Most pensioners accepted this scheme and made their elections. Mr Roy and a small group of pensioners challenged the apportionment at multiple stages through arbitration and complaints to the Pension Funds Adjudicator, all of which failed. In 2011, the Fund applied to the Registrar of Pension Funds under section 14 of the Pension Funds Act to transfer the annuity policies to individual pensioners. The Registrar approved the transfer. Mr Roy appealed this decision to the Appeal Board of the Financial Services Board, which upheld his appeal and set aside the Registrar's approval. Tellumat then sought judicial review of the Appeal Board's decision.

• Whether the Appeal Board's decision constituted reviewable administrative action under PAJA
• Whether the Appeal Board erred by failing to consider relevant factors, namely that the section 14 transfer was part of an integrated distribution scheme agreed by the trustees in 2007
• Whether the Appeal Board erred in finding that the scheme did not give full recognition to pensioners' rights because some annuity options did not include the guaranteed 3% annual increase
• Whether the Appeal Board erred in applying section 15I of the Pension Funds Act (dealing with surplus on liquidation) when the Fund had not yet been liquidated and the distribution was pursuant to a surplus apportionment under section 15C
• Whether a substitution order under section 8(1)(c)(ii)(aa) of PAJA was appropriate rather than remitting the matter to the Appeal Board

The appeal was upheld. The decision of the Gauteng Division, Pretoria was set aside and altered to read: (a) The decision by the Appeal Board of the Financial Services Board in the appeal by Mr Roy against the Registrar's approval of the section 14 application by Tellumat Pension Fund (reference S14-092-11) is set aside. (b) The Appeal Board's decision is replaced with: "The appeal is dismissed."

The binding legal principles established are: (1) An administrative decision-maker reviewing a pension fund transaction that forms part of a broader distribution scheme commits reviewable error under section 6(2)(e)(iii) of PAJA if it fails to consider the scheme as a whole and the impact of its decision on the agreed apportionment of surplus. (2) Where pension fund rules permit trustees to offer members choices regarding benefit options, and members voluntarily elect options that involve trading certain benefits (such as guaranteed increases) for other benefits (such as higher initial pension enhancements), those members cannot subsequently claim entitlement to the benefits they elected to forego. Their "rights and reasonable benefit expectations" under section 14(1)(c)(i) of the Pension Funds Act are those embodied in the annuity they chose, not provisions they elected not to pursue. (3) Section 15I of the Pension Funds Act, which governs the application of surplus accounts on liquidation of a fund, does not apply to surplus apportionment exercises conducted under section 15C before liquidation has occurred, even if liquidation is contemplated as an eventual consequence of the distribution scheme. (4) A court may make a substitution order under section 8(1)(c)(ii)(aa) of PAJA rather than remitting a matter where there have been substantial delays in implementing a lawful scheme, the scheme has been partially implemented in good faith, and the outcome of a remittal would inevitably be the same as the substituted decision.

The court made several observations that were not strictly necessary for its decision: (1) The court expressed doubt about whether the two requirements in section 14(1)(c) - that a scheme give full recognition to members' rights and reasonable benefit expectations, and that it be reasonable and equitable - are truly distinct requirements. Wallis JA observed that if a scheme gives full recognition to rights and reasonable benefit expectations, it will ordinarily be reasonable and equitable, save in unusual situations. (2) The court noted that the notion of "reasonable benefit expectations" arises in two contexts: surplus allocation (the issue in this case) and practices/promises regarding future benefits. The word "reasonable" is important - the Registrar must assess whether members will receive everything they could reasonably expect, but no more. (3) The court questioned the Appeal Board's statement that it was not bound by the earlier arbitration award regarding the surplus apportionment, expressing "grave doubts" about this position given that Mr Roy and the Fund were parties to that arbitration. (4) The court observed that it was understandable for Tellumat not to have participated in the Appeal Board proceedings initially, given that the Fund and Registrar were defending the decision, but that changed circumstances (division among trustees) gave Tellumat sufficient locus standi for the review. (5) The court noted with apparent sympathy the situation of pensioners wanting "to have your cake and eat it" by electing the option with the highest pension enhancement but then demanding the guaranteed increase they had foregone.

This case is significant in South African pension law for several reasons: (1) It clarifies that decisions of the Appeal Board for the Financial Services Board constitute administrative action reviewable under PAJA, even though they arise from quasi-judicial proceedings. (2) It establishes that surplus apportionment schemes under section 15C of the Pension Funds Act must be viewed holistically, with all elements of a distribution scheme considered together rather than as discrete transactions. (3) It confirms that section 15I (dealing with surplus on liquidation) does not apply to surplus apportionment exercises under section 15C conducted before liquidation, even if liquidation is contemplated as an eventual outcome. (4) It reinforces that pension fund trustees have discretion to offer members choices regarding the form of benefits, and members who voluntarily elect options that trade certain benefits for others cannot later claim entitlement to the foregone benefits. (5) It provides guidance on when substitution orders under PAJA are appropriate rather than remittals, particularly where there have been lengthy delays and the outcome of remittal is inevitable. (6) It demonstrates the importance of finality in pension fund administration, particularly where schemes have been substantially implemented in good faith over many years.