Canada: SCA Judgment On Retrospective Rule Amendments Upsets The Retirement Funds Apple Cart

In a deeply disturbing judgment in Municipal Employees' Pension Fund & another v Pandelani Midas Mudau & another¹ handed down by the Supreme Court of Appeal (SCA) on 8 April 2022, the court reversed rulings in at least two previous judgments of the same court on the main issue before it - without even mentioning those judgments. It also placed at risk the accrued retirement fund benefits of millions of members and former members of retirement funds subject to regulation and supervision in terms of the Pension Funds Act, 1956 (the PFA).

In particular the court held that the rules of a retirement fund may be amended to reduce the amounts of benefits that have already accrued by the time that the amendment is approved and registered by the Financial Sector Conduct Authority (FSCA).

This flies in the face of conventional legal principles.

Background

Pandelani Mudau had been employed by the Vhembe District Municipality and, in terms of his employment contract, had belonged to the Municipal Employees Pension Fund (MEPF). However, in May 2013, Mudau was promoted to a new position and thereupon ceased to be eligible for membership of the fund in terms of its rules. In the circumstances he accrued a right to a benefit payable by the MEPF in terms of the registered rules of the fund.

Those rules were binding both on the MEPF and on Mudau in terms of section 13 of the PFA.

The registered rules of the MEPF said that, on the 'early withdrawal' of a member, they would be paid a benefit in an amount equal to three times the aggregate value of the contributions to the MEPF that had been paid to it by (or, presumably, on behalf of, the member).

The board of the MEPF had, however, decided that, to ensure that the fund would remain financially sound in the long term,² it would amend the 'early withdrawal' rule with effect from 1 April 2013 to provide for the payment of benefit in an amount equal to only one and a half times the aggregate value of the member's accumulated contributions.

But, as section 12(1) of the PFA made clear, that amendment would not be valid unless and until it had been approved and registered by the then registrar of pension funds (the functions of whom have been fulfilled by the FSCA since April 2018).

Nonetheless, when calculating the amount of Mudau's benefit, the MEPF's administrator, did not apply the formula in the then current registered rules. Instead it calculated his benefit as if the proposed amendment to the rules had been approved and registered in terms of section 12(4) of the PFA.

Interpretation Act ignored

In so acting the MEPF and its administrator disregarded section 12(1) of the Interpretation Act, 1957, which said:

As the registered rules of a retirement fund subject to regulation and supervision in terms of the PFA are given statutory force in terms of section 13 of the PFA, whether or not the members have agreed to their terms, those rules are a form of 'law' as defined in the Interpretation Act, that is, 'any law, proclamation, ordinance, Act of Parliament or other enactment having the force of law.'

In its 2008 judgment in Chagi & others v Special Investigating Unit³ the Constitutional Court described the purpose of section 12(2) of the Interpretation Act as follows⁴:

Prior SCA authority trampled

The MEPF and its administrator also disregarded, or gave little weight to, the well-known judgments of the SCA-

• in Tek Corporation Provident Fund & others v Lorentz⁷ - 'It may seem odd to speak of powers being beyond the reach of the trustees and the employer when the rules empower them to amend the rules but the contradiction is more apparent than real. First, their substantive powers at any given moment are circumscribed by the rules as they are at that moment. The fact that power to change rules exists is irrelevant when assessing whether or not the particular exercise of power in question was intra or ultra vires'; and

• in Mostert NO v Old Mutual Life Assurance Company (SA)⁸ in which the court said⁹ - '. Registration [of the required rule amendments] was an essential prerequisite for any change in the status of the Fund. Old Mutual's reliance upon a so-called practice in the Registrar's office which allowed rule changes to take effect before registration is misplaced . [T]here is simply no basis in law for subjugating the provisions of the Act and regulations to such practice. It is one thing to give amended rules retrospective effect after registration; it is something entirely different to seek to give them binding effect before registration.'

Understandably, Mudau was aggrieved by the application of a proposed amendment to the rules to the calculation of his benefit. So he lodged a complaint about the matter with the pension funds adjudicator, Ms Muvhango Lukhaimane, in terms of section 30A of the PFA.

FSCA approval of the rule amendment

In the meantime the MEPF applied to the then registrar of pension funds for his approval and registration of the proposed rule amendment in terms of section 12(4) of the PFA. That section says-

The then registrar approved and registered the amendment on 1 April 2014. In accordance with the resolution of the board of the MEPF, the amendment was made with retrospective effect to 1 April 2013.

By the time that the adjudicator considered Mudau's complaint, the registrar had approved and registered the MEPF's rule amendment. Nonetheless the adjudicator found (correctly in our view) that the amended rules could not be applied to the calculation of a benefit that had accrued to a member before the amendment had been approved and registered, even if the amendment was intended to be retrospective to a date before then.

High Court (single bench) finding that rule not retroactively applicable

Acting in terms of section 30P of the PFA, the MEPF then appealed to the High Court against the adjudicator's ruling.

In its judgment in Municipal Employees' Pension Fund & another v Mudau & another¹¹

High Court (full bench) confirmation of the lower court's finding

Not satisfied with these findings, the MEPF appealed to a full bench of the High Court.

In their 2020 judgment Municipal Employees' Pension Fund & another v Mudau¹²two of the three judges agreed with the lower court.

A third did not.

Referring to a 2003 case involving an 'anti-dumping' duty that was imposed with effect from a date before provision for it had been published,¹³ the third judge said that, provided that the governing legislation allowed for enactments with retrospective effect, it did not matter whether such an enactment was regarded as 'retrospective' or 'retroactive'; once it had been enacted it was applicable to transactions that had occurred before then. But the judgment in the 2003 did not address the question how the disputed proclamation should be interpreted taking section 12(2)(c) of the Interpretation Act into account.

The dissenting judge also said - without regard for section 12(2)(e) of the Interpretation Act - that, as the rule amendment had been approved and registered by the time that the adjudicator made her determination, she should have treated it as binding. But she had not treated it as non-binding. She had simply treated it is inapplicable to the calculation of Mudau's benefit.

Still, the fact that there was a dissenting judgment may have been the reason why the MEPF was granted leave to appeal to the SCA. Without it, the law on the non-applicability of retrospective rule amendments to benefits that accrued before the amendments were approved and registered appeared to have been settled law. And with good reason, given the provisions of the Interpretation Act and the SCA judgments referred to above.

Apple cart upset by the Supreme Court of Appeal

In a baffling, and, as mentioned, deeply disturbing, judgment handed down on 8 April 2022, a unanimous SCA bench held in this case that:

• section 12 of the PFA empowers a fund, subject to the approval of the registrar (or, now, the FSCA) to amend its rules and to determine the date on which the amendment will become effective;

• if by the amendment of its rules the fund intends to interfere with rights retrospectively, this intention must be given effect to;¹⁴ and

• as, in this case, the MEPF had decided that the amendment would have retrospective effect from 1 April 2013, its application to the calculation of Mudau's benefit had not been invalid.

The MEPF's appeal was accordingly successful and Mudau was ordered to pay its costs.

Why the SCA judgment is flawed

But the court started its analysis at the wrong point - the intention of the fund when it adopted the rule amendment.

The court should have started with an analysis of what section 12(4) allows and does not allow in regard to the effective date of a rule amendment.

The sub-section simply says that the fund can determine the date from which an amendment will be effective. It does not explicitly state that the amendment may be made either-

• retrospective in effect in that it is prospective in effect but imposes new consequences in relation to events that occurred before the amendment was approved; or
• retroactive in that it changes the rights and obligations of members and the fund from what they were before the amendment was approved, and thus can have adverse impact on rights accrued by members and beneficiaries in terms of the pre-amendment rules.¹⁵

In the circumstances, the court was not entitled to assume that section 12(4) was intended to authorise retrospective, and even retroactive, amendments. Instead, time-honoured legal principles required it to find that the section does not permit any interference with rights accrued in terms of the pre-existing law or rules.¹⁶

By doing the opposite the SCA implicitly endorsed past conduct by the MEPF which was not authorised by the then registered rules of the fund (that is, calculating and paying a benefit on a basis other than that provided for in its registered rules) which was, as the SCA in Mostert NO (supra) reminded us, therefore unlawful and invalid.

Implications of SCA rulings for the retirement funding industry

If the judgment of the Supreme Court of Appeal is not overturned, the rights of members and beneficiaries of retirement funds subject to regulation and supervision in terms of the PFA will become wholly uncertain.

For example-

• When engaged in financial planning, a fund member may take into account the fact that, if she dies before retirement, then, in terms of the registered rules of her retirement fund, the fund will pay a lump sum benefit equal to three times their pensionable remuneration plus their accumulated retirement savings in the fund. That lump sum can then be shared amongst the deceased member's beneficiaries in proportions the board of the fund considers fair and consistent with the social security purposes of section 37C of the PFA. According to the SCA judgment, however, the board of the fund would be entitled to procure an amendment to the rules with retrospective effect from a date before the member died to reduce or even eliminate the amount of the lump sum benefit payable on their death, even if, by the time the rule amendment has been registered, the board has already allocated shares in the lump sum benefit amongst the deceased member's beneficiaries;
• A member of a fund who accrued a right to a benefit in terms of the rules of the fund when they were dismissed from employment but only claims the benefit several years later may find that, by an amendment made to its rules after the member was dismissed, the fund sought to delegate to an 'unclaimed benefit fund' its liability for the payment of the benefit.

If the member had not agreed that the first fund's liability for the payment of the benefit could be shifted to the unclaimed benefit fund, can they still claim the full benefit from the first fund?

But for this judgment of the SCA, the answer should be clearly 'yes'.

It is a principle of the common law of obligations that, ordinarily, a debtor (in this case, the first fund) cannot delegate its liabilities to its creditor (the member) to a third party (the second fund) unless the creditor both-

• consents to the delegation;¹⁷ and
• specifically agrees that the third party will be its debtor in place of the original one, failing which both the third party and the original debtor will be contractually to the creditor.¹⁸

It cannot be inferred from the fact that, in terms of section 13 of the PFA, a member is bound by the rules of their fund, as amended from time to time, for so long as they are a member of it that, even once the member has accrued a right to a benefit, the fund may by rule amendment authorise itself to delegate to a third party such as an unclaimed benefit fund the liability for the payment of unpaid benefits for which the first fund has become liable in terms of its rules and thereby extinguish the first fund's liability for them. Consent to novation by delegation is not easily to be inferred from the facts. The evidence must necessarily indicate that such consent has been tacitly given. Such consent also cannot be regarded as implied in law unless the existence of such consent is a necessary consequence of the express terms of the agreement or other instrument.¹⁹

But the SCA judgment in MEPF v Mudau suggests that these legal principles have no place in the relationship between a retirement fund and its member.

Given the importance to their members and to the country of the social security benefits provided by retirement funds, and the tax incentives provided by the State to promote savings in such funds as part of the measures adopted by it in compliance with its social security obligations in terms of section 27 of the Constitution, this judgment of the SCA should not be left unchallenged.

Conclusion

This is a case that calls for an appeal to the Constitutional Court and its interpretation of section 12(4) of the PFA in a manner which is consistent with-

• section 37A of the PFA which says:
  'Save to the extent permitted by this Act, the Income Tax Act, 1962 (Act No. 58 of 1962), and the Maintenance Act, 1998, no benefit provided for in the rules of a registered fund²⁰ (including an annuity purchased or to be purchased by the said fund from an insurer for a member), or right to such benefit, or right in respect of contributions made by or on behalf of a member, shall, notwithstanding anything to the contrary contained in the rules of such a fund, be capable of being reduced, transferred or otherwise ceded...'
• section 12(2)(c) of the Interpretation Act; and
• the Constitution including, in particular, the supremacy of the rule of law enshrined in section 1 of the Constitution.

Footnotes

1. Municipal Employees' Pension Fund & another v Pandelani Midas Mudau & another [2022] ZASCA 46.

2. Municipal Employees' Pension Fund & another v Mudau & another [2020] ZAGPPHC 538, majority judgment at paras 3-4 read with minority judgment at para 4.

3. [2008] ZACC 22; 2009 (2) SA 1 (CC); 2009 (3) BCLR 227 (CC); 2009 (1) SACR 339 (CC).

4. At para 31.

5. Mudau's position was not one in which he merely had a spes or a hope of acquiring a right to a benefit determined in terms of the pre-amendment rules. On the contrary, he had accrued a right to a benefit determined on that basis. In the circumstances the judgments of the SCA in Gunn & another NNO v Barclays Bank DCO 1962 (3) SA 678 (A), Chairman, Board on Tariffs and Trade v Volkswagen of South Africa (Pty) Ltd & another 2001 (2) SA 372 (SCA) and Edcon Pension Fund v Financial Services Board of Appeal & another 2008 (5) SA 511 (SCA) are not relevant to his case.

6. 1999(4) SA 884 (SCA).

7. At p 898.

8. 2001 (4) SA 159 (SCA).

9. At para 60.

10. [2017] ZAGPPHC 157 at paras 43 to 46.

11. Municipal Employees' Pension Fund & another v Mudau & another [2017] ZAGPPHC 157 at paras 44-45.

12. [2020] ZAGPPHC 538 at para 14.

13. Progress Office Machines CC v SARS & others 2003 (2) SA 13 SCA.

14. In reaching this conclusion the court relied on the judgment of the same court in National Tertiary Retirement Fund v Registrar of Pension Fund [2009] ZASCA 41. However, that judgment concerned the amendment of a fund's rules relating to the basis on which retirement benefits that accrued after the approval of the amendment would be calculated, not those which had accrued before then.

15. National Director of Public Prosecutions of South Africa v Carolus & others [1999] ZASCA 101; [2000] 1 All SA 302 (A) at para 34.

16. National Director of Public Prosecutions of South Africa v Carolus & others ibid at para 60.

17. Van Achterberg v. Walters, 1950 (3) S.A. 734 (T) at p 745.

18. Williams v. Kirk1932 CPD at p 159.

19. Trust Bank of Africa Ltd. v. Dhooma, [1970] 3 All SA 366 (N) at p 369.

20. The term 'benefit' is defined in s 1 of the PFA as follows:

'"benefit", in relation to a fund, means any amount payable to a member or beneficiary in terms of the rules of that fund.'

A benefit is only payable to a member or a beneficiary once they have accrued a right to it in terms of the then registered rules of the fund.

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