Municipal Employees Pension Fund v SAMWU National Provident Fund

124 employees of Ntabankulu Municipality were members of the South African Municipal Workers' Union National Provident Fund (the Fund) by virtue of their employment with the Municipality, a participating employer. The employees, with the consent of the Municipality, purported to join the Municipal Employees Pension Fund (MEPF) effective 1 September 2013 while still employed by the Municipality. The Municipality ceased making pension contributions to the Fund. The Fund instituted proceedings in the Eastern Cape High Court (Mthatha) seeking to compel the Municipality to pay arrear contributions and to furnish prescribed information under section 13A(2) of the Pension Funds Act. The Municipality contended it did not owe contributions because the employees had elected to leave the Fund and had transferred to the MEPF. The MEPF and its administrators (Akani) intervened, seeking declarations that rule 3.2.1 of the Fund was unconstitutional and contrary to public policy, and that it infringed employees' rights to freedom of association (section 18 of the Constitution) and the MEPF's right to freedom of trade (section 22 of the Constitution). They also sought to review and set aside rule 3.2.1 as unlawful, irrational and unreasonable. The court a quo (Hartle J) granted the Fund's relief, holding that rule 3.2.1 prohibited employees from terminating membership while in service of the Municipality, dismissed the constitutional challenge, and found MEPF lacked standing to assert employees' constitutional rights.

• Whether rule 3.2.1 of the Fund prohibits elective in-service cessation of membership while employees remain in service with the Municipality
• Whether section 13A(5) of the Pension Funds Act permits voluntary individual withdrawal from a fund and transfer of benefits regardless of the fund's rules
• Whether section 14 of the Pension Funds Act and rule 11.11 of the Fund provide for individual voluntary withdrawals and transfers
• Whether rule 3.2 infringes employees' constitutional right to freedom of association under section 18 of the Constitution
• Whether rule 3.2 infringes the MEPF's right to freedom of trade under section 22 of the Constitution
• Whether the MEPF and Akani had standing to assert constitutional rights on behalf of the employees
• Whether rules 3.2.1 and 3.2.2 should be reviewed and set aside as unlawful, irrational and unreasonable

The appeal was dismissed with costs including costs of two counsel. Paragraph 2 of the order granted on 14 August 2018 was amended to correctly direct only the first respondent (Municipality) rather than all respondents to pay arrear pension contributions to the Fund pertaining to the employees listed in annexure 'SAM3' withheld since September 2013.

The binding legal principles established are: (1) Pension fund rules prohibiting elective in-service cessation of membership are valid and enforceable where membership is required throughout employment with the participating employer. (2) Section 13A(5) of the Pension Funds Act requires that a person must have ceased to be a member of the first fund in accordance with that fund's rules before being entitled to demand transfer of benefits to another fund. Section 13A(5) does not override or displace fund rules governing cessation of membership. (3) Section 14 of the Pension Funds Act and corresponding fund rules dealing with transfers apply to amalgamations and transfers of business (involving transfer of groups of members and assets/liabilities), not to individual voluntary withdrawals and transfers of individual benefits. (4) Compulsory membership of a pension fund that holds only financial implications for members does not constitute a limitation on the constitutional right to freedom of association under section 18 of the Constitution, particularly where: (a) employees have initial choice of which fund to join at commencement of employment; (b) employees retain the right to join additional retirement funds during membership; and (c) the compulsory membership serves the legitimate purpose of ensuring fund viability and protecting pension benefits. (5) Fund rules requiring continuous membership during employment comply with Income Tax Act requirements for provident fund tax approval, which require that 'membership of the fund throughout the period of employment shall be a condition of employment.' (6) Trustees of pension funds are bound by fund rules and may only act within powers conferred by those rules, as established in Tek Corporation and affirmed in Sasol Limited.

The court made several non-binding observations: (1) Regarding standing, while the court upheld the finding that MEPF and Akani lacked standing to assert employees' freedom of association rights, it nevertheless addressed the constitutional merits following the approach in S v Jordan that courts should express opinions on alternative grounds to avoid unnecessary remittals. (2) The court noted that MEPF's joinder of employees occurred seven months after its own intervention and only pursuant to a non-joinder objection, suggesting MEPF was primarily protecting its own interests rather than employees' interests. No mandates or resolutions were obtained from employees and they filed no affidavits associating themselves with the relief. (3) The court observed that section 22 (freedom of trade) protects individual citizens rather than juristic bodies, citing City of Cape Town v AD Outpost, though this may be controversial. (4) The court noted that MEPF's own rules (rule 24) contain similar restrictions on cessation of membership, observing that having such restrictions is 'part and parcel of engaging in trade and competition in this sector' and MEPF cannot claim its right to trade is infringed when it imposes the same restrictions. (5) The court noted several procedural obstacles raised by the Fund (principle of subsidiarity, the 'collateral challenge' being impermissible, unreasonable delay, lack of standing for review) but did not definitively decide them, instead assuming without deciding that they should not be upheld in the interests of justice to allow determination of the constitutional merits. (6) The court indicated it would have been 'incomprehensible' for the Fund not to rely on its approved provident fund status under the Income Tax Act given the significant tax benefits this confers on employers and members, including exemption from normal tax under section 10(1)(d) and exclusion of lump sum awards from gross income. (7) The court noted that Regulation 28 to the PFA requires funds to have asset-liability matching and invest in long-term, often illiquid investments suitable for the fund's member profile, which necessitates membership stability.

This case establishes important principles regarding the interpretation of pension fund rules and the interplay between fund rules and statutory transfer provisions under the Pension Funds Act. It confirms that pension fund rules can validly prohibit elective in-service cessation of membership, and that such prohibitions serve legitimate purposes of ensuring fund viability and protecting pension benefits. The judgment clarifies that section 13A(5) of the Pension Funds Act does not override fund rules but rather requires cessation of membership in accordance with fund rules before transfer of benefits can occur. It distinguishes between individual member transfers (governed by section 13A(5) and fund rules) and business transfers/amalgamations (governed by section 14). The case is significant for its analysis of freedom of association in the pension fund context, holding that compulsory membership with only financial implications does not infringe constitutional rights, particularly where members have initial choice and can join additional funds. It also clarifies that juristic persons like pension funds cannot claim freedom of trade rights under section 22. The judgment reinforces the principle established in Tek Corporation and Sasol Limited that trustees are bound by fund rules and may only act within powers conferred by those rules. The decision has significant implications for the retirement fund industry, particularly for municipal pension funds, confirming that fund rules requiring continuous membership during employment are valid and enforceable.