Vrystaatse Munisipale Pensioenfonds v The Minister of Finance and Others

The Fund is a closed pension fund registered on 31 March 1963 whose members are primarily employees and former employees of Local Authorities in the Free State. On 29 November 2013, the Fund deposited a Statutory Actuarial Valuation Report reflecting the valuation of the Fund as at 30 June 2011 with the Registrar of Pension Funds. The report indicated that in terms of Rule 45(2), a contingency reserve account in respect of surplus allocations to former members of the Fund reverted to the fund two years after the approval of the surplus scheme by the Registrar. The two-year period expired in October 2008 and an amount of R86.5 million reverted to the fund. On 28 January 2014 the Registrar's office wrote to the Fund stating that it had 'pended' the Valuation Report and questioned whether the Fund had acted ultra vires its rules. The Fund established a contingency reserve account for 2114 former members for whom calculations could be performed but could not be traced or who did not substantiate their claims. By October 2008, the amount standing to the credit of the contingency reserve account reverted to the Fund in accordance with Rule 45(2). From early 2015, the Registrar objected that contrary to regulation 35(4), the Fund was releasing the surplus allocated to former members. On 18 May 2015 the Registrar directed the Fund to reverse the decision to revert the R83.357 million and implement regulation 35(4). The Fund challenged the validity of regulation 35(4) in the High Court.

• Whether regulation 35(4) of the Pension Fund regulations exceeds the Minister's powers under the Pension Funds Act 24 of 1956
• Whether the regulation is ultra vires and inconsistent with the provisions of the PFA
• Whether the Minister arrogated power at odds with the Act and offended against the principle of legality
• Whether the regulation impermissibly fetters the board's discretion to determine how actuarial surplus is to be applied for the benefit of former members
• Whether the long delay in bringing the application should preclude the challenge or whether it constitutes a collateral challenge
• The interpretation of sections 15B(4) and 15B(5)(e) of the PFA regarding contingency reserve accounts

The appeal was upheld with no order as to costs. The order of the court below was set aside and substituted with: 'Regulation 35(4) of the Pension Fund regulations is declared invalid and unenforceable in that it exceeds the Minister's powers under the provisions of the Pension Funds Act 24 of 1956.'

The binding principle established in this case is that regulation 35(4) of the Pension Fund regulations is invalid and unenforceable because it exceeds the Minister's powers under the Pension Funds Act 24 of 1956. The PFA vests in the board of a pension fund the power to determine how actuarial surplus shall be applied for the benefit of former members, including the establishment of contingency reserve accounts. Section 15B(5)(e) of the PFA grants the board discretion to determine how the allocated portion of actuarial surplus shall be applied for the benefit of existing and former members, including the crediting of any portion to members' surplus accounts or members' individual accounts. This discretion is not limited to the establishment of a contingency reserve account only in relation to unquantifiable members. The board's decisions are within its remit and can be interrogated by the regulator against the provisions of the PFA, but regulation 35(4) intrudes upon the board's wide discretion by compelling the board to place the entire allocation in a contingency reserve account and freezing it in perpetuity. By purporting to compel boards to establish contingency reserve accounts in a specific manner and prohibiting the release of funds except in limited circumstances, the Minister acted beyond the regulation-making powers set by the PFA and contrary to the principle of legality.

The court made several non-binding observations: (1) That pension funds in which no contingency reserve account has been established, but where other arrangements have been made to accommodate potential claims, will occasion no loss of regulatory oversight, as the FSCA has adequate tools at its disposal to ensure compliance. (2) That the fears expressed by the court below regarding prejudice to other funds and the need for retrospective reallocations if the regulation were set aside were unfounded. (3) That strict adherence to regulation 35(4) would, for the most part, result in the sterilization of that part of the surplus well in excess of what would be required to meet future claims, preventing further allocations to benefit former members and frustrating the purpose of the surplus legislation. (4) That the Fund's rule on reversion and extinguishing of claims was not the correct approach, and that the engagement between the Fund and the regulator should be about whether it is necessary to make provision for claims eventuating and if so, its sufficiency. (5) The court acknowledged that this was one of three related appeals heard on the same day, all concerning the validity of regulation 35(4), and that the analysis of the law and conclusions would essentially be the same across all three cases.

This case is significant in South African pension law as it clarifies the division of powers between the Minister of Finance, the Financial Sector Conduct Authority (FSCA), and pension fund boards in relation to the apportionment of actuarial surpluses. The judgment confirms that the board of a pension fund, not the Minister or the regulator, has the discretion to determine how actuarial surplus shall be applied for the benefit of former members, including the establishment and management of contingency reserve accounts. The case reinforces the principle of legality in administrative law, confirming that regulations must be consistent with and within the scope of powers granted by the enabling legislation. It also establishes that a Minister cannot, through regulations, arrogate powers to himself that the Act vests in another body or functionary. The judgment is also important in understanding the surplus legislation introduced by the Pension Funds Second Amendment Act 39 of 2001, which was designed to redress past abuses of surpluses by employers and to ensure fairness in the distribution of surpluses. The case emphasizes the remedial nature of this legislation and interprets its provisions in a manner that ensures boards retain the flexibility necessary to manage pension funds in the best interests of members while subject to regulatory oversight.