The Registrar of Pension Funds v British American Tobacco Pension Fund

The British American Tobacco Pension Fund (the Fund) submitted a surplus apportionment scheme to the Registrar of Pension Funds on 1 February 2006, which was approved by the Registrar on 28 November 2006, effective from the surplus apportionment date of 31 March 2002. The scheme allocated surplus to members, former members, pensioners, deferred pensioners and the employer, and specified how it would be used - including cash payments to former members and pensioners, and enhanced benefits for active members. Before the scheme was implemented, the Fund's actuarial valuations as at 31 March 2005 and 31 October 2006 revealed deficits if the surplus allocation was disregarded. The Fund prepared a report as at 30 September 2007 showing that it had used portions of the surplus allocation approved by the Registrar to reduce the deficit, relying on section 15H(1) of the Pension Funds Act 24 of 1956. The Registrar rejected the 30 September 2007 valuation report, asserting that the Fund could not invoke section 15H(1) because section 15D(2), read with sections 15A(2) and 15A(4), required the Fund to use the surplus only as specified in the approved surplus apportionment scheme. The Fund successfully challenged this decision before the High Court, which set aside the Appeal Board's dismissal of the Fund's appeal. The Registrar then appealed to the Supreme Court of Appeal.

• Whether section 15H(1) of the Pension Funds Act permits a pension fund to use credit balances in the member surplus account to reduce a deficit that arises after a surplus apportionment scheme has been approved but before implementation
• Whether section 15D(2), read with sections 15A(2) and 15A(4), precludes the use of surplus allocations for purposes other than those specified in an approved surplus apportionment scheme
• Whether beneficiaries acquire accrued rights to surplus allocations as at the surplus apportionment date, such that those allocations cannot subsequently be used to fund deficits
• The proper interpretation of sections 15A, 15B, 15D and 15H of the Pension Funds Act in relation to surplus apportionment and deficit reduction

The appeal was upheld with costs. The order of the High Court was set aside and replaced with an order dismissing the Fund's application with costs. This had the effect of reinstating the Appeal Board's decision, which had dismissed the Fund's appeal against the Registrar's rejection of the 30 September 2007 actuarial valuation report.

Once a surplus apportionment scheme is approved by the Registrar under section 15B of the Pension Funds Act, beneficiaries acquire accrued rights to their surplus allocations as at the surplus apportionment date by virtue of sections 15A(2) and 15A(4). Where the surplus apportionment scheme specifies how the surplus is to be used for beneficiaries' benefit, section 15D(2) requires that the credit balance in the member surplus account must be used as so specified. As a matter of law, once the member surplus account is credited with surplus allocations and beneficiaries become entitled to them, the account must be simultaneously debited to reflect the liability to beneficiaries. Section 15H(1), which permits credit balances in surplus accounts to be used to reduce deficits, cannot be invoked to override beneficiaries' accrued rights under an approved surplus apportionment scheme where the use of the surplus has been specified. Sections 15D(2) and 15H(1) apply to different points in the life of a pension fund: section 15D(2) concerns implementation of a surplus apportionment scheme as at the surplus apportionment date, while section 15H(1) deals with deficits arising after the scheme is implemented (or in circumstances where surplus has been apportioned without specified uses).

The Court noted that section 15H(1) would apply in circumstances where a surplus apportionment scheme has apportioned surplus to members but has not specified how it is to be used, as in such cases no beneficiary would have an accrued right to the surplus and the credit balance would remain available to reduce deficits. The Court also observed that section 15B(5)(f) contemplates there may be a hiatus or delay between the Fund deciding to award a benefit and the beneficiary being able to receive it, with provision for the surplus to be increased or decreased depending on fund investment performance during this period, but this does not affect the beneficiary's accrued right to the surplus as at the surplus apportionment date. The Court cited with approval the principle from Registrar of Medical Schemes v Genesis Medical Scheme regarding when liabilities arise in the context of regulated financial schemes.

This judgment provides authoritative guidance on the interpretation of key provisions of the Pension Funds Act relating to surplus apportionment and deficit reduction. It establishes important principles regarding: (1) the timing and nature of beneficiaries' rights to surplus allocations under approved surplus apportionment schemes; (2) the limitation on using section 15H(1) to reduce deficits where surplus has been apportioned with specified uses; (3) the accounting treatment of member surplus accounts once beneficiaries acquire accrued rights; (4) the harmonious interpretation of sections 15D(2) and 15H(1) as applying to different stages in a pension fund's life; and (5) the protection of beneficiaries' accrued rights from being retrospectively defeated by subsequent events. The case reinforces the purpose of the surplus apportionment provisions in protecting members' and former members' interests and reasonable benefit expectations. It is significant for pension fund trustees, administrators, actuaries and advisors in understanding their obligations when implementing surplus apportionment schemes and managing deficits.