Reports and Publications

REPORT ON THE INVESTIGATION INTO ALLEGATIONS OF UNDERPAYMENT OF BENEFICIARIES OF THE VENDA PENSION FUND

The Speaker, Honourable Members of the National Assembly, the Chairperson and Honourable Members of the National Council of Provinces.

I have the honour to submit a special report in terms of section 8(1) and (2) of the Public Protector Act, 23 of 1994, regarding my investigation of allegations of underpayment of beneficiaries of the Venda Pension Fund.

Report on the Investigation Into Allegations of Underpayment of Beneficiaries of the Venda Pension Fund

The office of the Public Protector was established under Chapter 9 of the Constitution of the Republic of South Africa 108 of 1996. The operational requirements of the office are provided for under the Public Protector Act 23 of 1994, as amended.

The Public Protector is an official who is independent of government and any political party. S/he receives complaints from aggrieved persons against government, government departments, government agencies and government officials. S/he has powers to investigate matters referred to her/him, recommend corrective action and issue reports to Parliament.

The Public Protector is appointed by the State President subsequent to the approval by National Assembly of a candidate nominated by a joint committee of the National Assembly. The Office of the Public Protector was established on
1 October 1995.

The Constitution and the Public Protector Act provide that the Public Protector shall be a South African citizen who is a fit and proper person to hold such office, and who �

1.2.1 Section 182(1) of the Constitution provides as follows:
�The Public Protector has the power, as regulated by national legislation

1.2.2 Section 6(4) of the Public Protector Act provides that the Public Protector shall, in addition to any powers and functions assigned to him or her by any law, be competent to investigate on his or her own initiative or on receipt of a complaint, any maladministration in connection with the affairs of government at any level. S/he also has jurisdiction to investigate any complaint against any person performing a public function or against public entities or any institution in which the State is the majority or controlling shareholder.

Mr T S Makhale, representing the Dabalorivhuwa Patriotic Front lodged a complaint against the Department of Finance of the Republic of South Africa regarding the former Venda Pension Fund.

The background to the complaint, as presented by the complainant, is as follows:

2.1 The Venda Pension Fund was established on 17 August 1979 in terms of the Venda Government Service Pension Act 4, of 1979, passed by the Venda Legislature by virtue of its status of a self-governing state in terms of the National States Constitution Act, 1971. It provided for the establishment, control and administration of a Pension Fund (for permanent employees) and of a Superannuation Fund (for temporary employees and married women) for persons in the service of the Venda Government.

2.2 On 14 February 1992 by way of Proclamation 2 of 1992, the Pension Fund Act was amended by the insertion of a Section 10A. The Section provided that any active member of the Pension Fund, whose pensionable emoluments exceeded the amount determined by the Director-General for the Department of Finance and Economic Affairs from time to time, would have the right to elect that his accrued benefit be transferred, by means of a lump sum payment, from the fund, for his benefit and in his name, to an investment plan providing retirement benefits. It provided further that on payment or transfer of a person�s accrued benefit and interest thereon, such person�s membership of the Pension Fund would be regarded as terminated. �Accrued Benefits� was defined as the amount computed by the Director-General to have been the actuarial interest of the member in the pension fund as on the date the option was elected. Proclamation 2 of 1992 will hereinafter be referred to as �the First Privatisation Scheme�.

2.3 At the time of the First Privatisation Scheme, the Venda Government stated: �The Venda Pension Funds are well funded, but the funds in the Republic of South Africa, into which the Venda funds may be incorporated in future, are not well funded. In order to protect existing rights the Venda Civil Servants are afforded the opportunity to withdraw from the Fund and to �privatise� their accrued benefits by the transfer of the individual member�s accrued benefit into an approved investment in the member�s own name and which investment will then in future provide for the member�s old age�.

2.4 On 8 May 1992 the aforesaid Section 10A was amended in terms of Proclamation 12 of 1992 by the addition of a Sub-section 7, which provided that members having exercised the option to participate in the First Privatisation Scheme would automatically rejoin the Fund as new members with effect from 1 April 1992.

2.5 The First Privatisation Scheme was however unilaterally suspended by the State with effect from 16 July 1992 as a result of mass action by civil servant trade unions. It appears as if the younger members of the fund believed that they were being disadvantaged by the privatisation process. The First Privatisation Scheme was officially suspended on 17 September 1992 in terms of Proclamation 20 of 1992. A Commission of Enquiry was appointed whose findings seemed to suggest that the more senior members were not abusing the fund. A report was tabled dated 31 May 1993. It appears that the fund in fact paid too little to the members who took part in the First Privatisation.

2.6 A new Proclamation was then published, amending the First Privatisation Scheme. This was by way of Section 2 of Proclamation 9 of 1993 which substituted a new Section 10A(1) for the existing Section 10A(1). In terms of the new Section 10A(1) all active members of the Pension Fund were given the right to elect that his or her actuarial share of the fund be transferred, by means of a lump sum payment for his or her benefit and in his or her name to any investment plan or be paid to him or her free of tax. �Actuarial share of the fund� was defined as the value of each member�s share of the pension fund and stabilisation account as at 31 March 1992. Section 7 of the Proclamation provided that payment of benefits would be made in accordance with a revised actuarial formula which would be based on parameters which were consistent with a valuation to be performed by an independent actuary and which would be published in the Government Gazette on the day it was received from the independent actuary.

2.7 On 23 February 1994 the Venda Government issued Proclamation 1 of 1994 with the intention of amending Proclamation 9 of 1993 to empower the Councillor of any department to place on leave without pay any active member who failed to repay an overpayment and to deprive the courts of jurisdiction in respect of such action against such member. This Proclamation also empowered the Councillor to publish by notice in the Gazette a revised formula. A revised formula was indeed published on the same date as Proclamation 1 of 1994 as Government Notice 3 of 1994.

2.8 On 27 April 1994 Venda was re-incorporated into the Republic of South Africa. As a result of such re-incorporation, the liabilities of the government of Venda became the liabilities of the government of the Republic of South Africa.

2.9 On 6 June 1994 the Venda Supreme Court declared both Proclamation 1 of 1994 and Government Notice 3 of 1994 (�the revised formula�) to be of no force and effect.

2.10 During June 1994 a further round of payment were effected to all members who had elected to privatise. These payments amounted to approximately 8% of the accrued pension benefits calculated by the actuaries of the Pension Fund. This left most members who had elected to privatise with approximately 83% of their accrued benefits (75% funding level plus 8%), instead of the approximately 91% received initially.

2.11 The amounts paid to members during 1992 in respect of the First Privatisation Scheme were calculated on the basis that members were only entitled to 91% of the present value of the benefits which they expected to become entitled to in respect of their period of service, i.e. 91% of their accrued benefits or actuarial interest. That was done because the funding level of the Pension Fund was considered to be relevant and because the funding level of the fund was assumed to be 91%. Some of the members nevertheless received more and some less than the amounts they were entitled to on the aforesaid basis due to the fact that wrong data was used in the calculations.

2.12 In the matter of Dali and others versus Government of the Republic of South Africa and another (2000) 3 A11 SA 206 (A), the Government contended in the Court a quo that a member�s actuarial interest in terms of Proclamation 2 of 1992 had to be calculated by reference to the funding level of the Pension Fund. The judge a quo held that the funding level was irrelevant and that members were, in terms of the first Privatisation Scheme, entitled to 100% of their accrued benefits. It was noted on appeal that it was not contested that the funding level of the Pension Fund was irrelevant, and the Appeal Court confirmed that members were entitled to 100 % of their accrued benefits. A Court stated that �a member�s interest in the fund at a given time was the present value of the benefits which he or she expected to become entitled to in respect of his or her service. A member�s actuarial interest could not have been anything other than his or her aforesaid interest in the fund determined according to actuarial principles. That is in my view the grammatical meaning of the words �actuarial interest in the Pension Fund� and there is no indication to be found in Proclamation 2 of 1992 that the legislature had a different meaning in mind ��. It follows that a member�s accrued benefit or actuarial interest in the fund was not dependent upon the funding level of the fund�.

2.13 The complainant argued that if it were not for the privatisation, the members of the Venda Pension Fund would have been entitled today to their full defined pensions. It is contented that there did not exist, any sufficient reason to deny individuals their right to a full pension just because they were during 1992 lured into accepting the privatisation scheme of the then Venda Government, which amounts to a partial advance payment of the members� pension entitlement. This is all the more so as a result of the fact that the process was, from the beginning, defective and it was in fact never properly conducted. It has clearly been proved in the Dali matter that the members of the then Venda Pension Fund accepted the privatisation scheme under circumstances where it could rightly be said that they were misled by the State. A person can only held bound to an election where he or she was fully informed of the advantages and disadvantages of such election. A person cannot be taken to have abandoned rights if he or she was not aware of the extent of the rights when he or she is alleged to have abandoned the same.

3.1 The main issues raised by the complainants relate to events that led to the so-called privatisation of the Venda Pension Fund and the alleged underpayment of members. These events occurred during the period from 1992 to 1994. Ordinarily the Public Protector would not have power to investigate events that took place prior to 1 October 1995. But in order to understand the full background to the complaint herein, events that have a bearing on this matter have been considered notwithstanding that they occurred before 1 October 1995.

3.2 In terms of the Public Protector Act, the Public Protector is competent to endeavour, in his sole discretion, to resolve any dispute of rectify any omission by mediation, conciliation or negotiation. In the present matter the Public Protector decided to endeavour to resolve the dispute by way of mediation.

3.3 The parties, being the Dabalorivhuwa Pension Fund and the Department of Treasury, Pensions Administration, were brought together with a view to clarifying the issues and to explore possible solutions. A few of these meetings were held at which information was shared between the two parties. These meetings were chaired by the office of the Public Protector.

3.4 Whilst this process was going on, the Department of Treasury, Pensions Administration, reported that it had obtained legal advice to the effect that the possible claims by the complainant against the department had prescribed. The Department was therefore not prepared to continue with the negotiations in this matter. It then became incumbent on the Public Protector to establish the propriety or otherwise of the Department�s reliance on prescription as a defence. On the face of it, as the complainants� claims allegedly arose in the period around 1992, it did appear that these claims might have prescribed.

3.5 The complainant was therefore given an opportunity to persuade the Public Protector otherwise.

3.6 Complainant submitted further motivation to support the view that prescription had not taken place. Copies of correspondence between complainant and the Department of Treasury were also submitted. These showed clearly that the complainants had never laid this matter to rest. They had all the time been trying to get the Department of Treasury to reconsider their grievances surrounding this matter. The Department itself is not fee of blame. At times they delayed to respond to complainant�s queries and at other times they did not respond at all. This is unacceptable.

3.7 My view regarding prescription is therefore that, even though, technically, prescription might have taken place, for the purposes of this report, the Department of Treasury should not be allowed to get away with their failure to attend to complainants� grievances with diligence by hiding behind a legal technicality.

3.8 In view of the above, although the process of mediation failed, I propose to deal hereunder with the facts that have come to my notice before, during and after that process.

4.1 As the government was busy paying out pensions in terms of the amendment introduced by Proclamation No.2 of 1992 mentioned above, the younger members of the civil service trade unions believed that they were being disadvantaged by the privatisation process. They therefore engaged in mass protest action against the government.

4.2 Subsequently the government entered into an agreement with the Coalition Committee, composed of trade unions within the public sector and whose members were also members of the Venda Government Pension and Superannuation Funds, to suspend all payments of benefits from these funds pending an investigation of the matter. As a result of this agreement the government on 17 September 1992 issued Proclamation 20 of 1992, the Suspension of Venda Government Pension Fund Scheme Proclamation, 1992.

2. It shall be the function of the Committee to investigate all matters as to the implementation of the provisions of Section 10A of the Venda Government Service Pensions Act, 1979 (Act No.1 of 1979 as amended) at all relevant times before the commencement of this Proclamation.

3. The Chairman of the Council of National Unity shall as soon as it is practicable, but not later than 7 days after the promulgation of this proclamation, make regulations in relation to:

4.4 The Regulations referred to in section 1(3) of the proclamation were published on 18 September 1992 and provided, inter alia, as follows:

The Committee shall investigate and report on all acts and instances relevant to the subject matter, and, without any limitations to pay particular attention to the following agreed terms of reference;

4.5 It is important to note here that the proclamation made provision for the representation of the trade unions in the Crisis Committee. When the Committee was formed it consisted of eight members from the Coalition Committee (public sector trade unions), eight members appointed by the government and a neutral Chairperson.

4.6 Because the crisis Committee�s terms of reference involved investigation of a number of different and often unrelated matters, a number of sub-committees was established and each was assigned a task of a particular matter. One of these sub-committees was the Actuarial Sub-committee.

4.7 To assist the Committee in performing its task regarding actuarial matters an independent firm of actuaries was appointed to determine the liquidity of the funds.

4.8 After examining the results of the evaluations performed by the independent actuaries, the Actuarial Sub-committee reported as follows:

The assets and liabilities of the Pension and Superannuation Fund are set out below. The funds have been combined because separate accounts have not been kept properly, so distinguishing between the two is not possible.

	R 000�s	Appendix:
ASSETS	828 349	IV
Less uncertain assets:
Unexplained suspense accounts	5 751	I
Overpayments on first privatisation	10 000	I
USABLE ASSETS	812 598
LIABILITIES	964 863	V
Plus additional reserves:
For possible missing members	85 269	I
For incorrect data	115 515	I
REQUIRED FUND	1 165 646

FUNDING LEVEL	70%

The inadequacy of the data is such that further reserves might, in fact, eventually be necessary. If, however, the privatisation payout is based on the funding level above, the absolute size of the deficit for which the fund (and government) is responsible will be significantly reduced. Reducing the funding level further would inequitably penalise those withdrawing. Any amounts in the additional reserves that are not required for purposes mentioned should be left in the fund for the protection of the remaining members � particularly the pensioners.

The privatisation formula has been based on the actuarial valuation summarized above, and in Appendices II and V. it has been greatly simplified by the changes to the actuarial assumptions.

The changes have also had an age damping effect as recommended by the Venda Pension Fund Crisis Committee. The effect of this age dampening, and the additional reserves that have had to be set up, has been, therefore, to produce lower values, for older people particularly, than those produced for the earlier privatisation exercise.

The return on the assets has been some 15% over the period since April 1992. It would be imprudent to take all of the investment yield into account because of the possibility of a fall in market values during the period during which payouts might be made. The investment managers tell me that they are in a position to hedge some or all of their equity holdings in order to ensure that the market value does not decline over the period of payout. It is recommended that they be asked to hedge or immediately begin the sale of R200 million of the share portfolios. If they can hedge 50% of this amount immediately, then the subcommittee can recommend that 7% of the 15% be added to the 70 % funding level to bring it to 75%.

F is the factor set out in appendix VI for the member�s age, sex, retirement date and fund. The factor allows for the value of the members� annuity and gratuity, for the interest that could be earned before retirement, for the underfunding and for the interest earned by the assets between April 1992 and June 1993.

4.9 In order to implement and to legalise the new formula the Venda Government issued Proclamation 9 of 1993. Relevant sections of this proclamation are the following:

4.10 Subsection (1) of S10A of the Venda Government Service Pensions Act was replaced by the following sub-section (1):

�Notwithstanding anything to the contrary contained in this proclamation or any other law, any active member of the pension fund or superannuation fund shall have the right to elect that his or her actuarial share of the fund be, by means of a lump sum payment from the pension fund or superannuation fund, as the case may be, transferred for his or her benefit in his/her name to any investment plan of any nature whatsoever or paid to him or her by cheque free of tax�.

Notwithstanding anything to the contrary contained in any law only the Supreme Court shall have jurisdiction in terms of this proclamation.

4.13 The government later went ahead and paid benefits to the employees. Benefits paid were calculated at 75% plus a further 8%. Beneficiaries therefore received approximately 83% of their accrued benefits. The calculation of these payments followed the formula recommended by the Crisis Committee.

4.14 The complainant�s contention was that no legislation existed authorising these payments. Complainant�s contention finds support in the fact that both Proclamation 1 of 1994 and Government Notice 3 of 1994 which purported to publish the formula as required by Proclamation 9 of 1993 were declared to be invalid and of no force and effect by the Venda Supreme Court on 6 June 1994. This decision was taken in the case of Mulaudzi v Chairman, Implementation Committee 1995(1) SA 513. The court�s reason for declaring these pieces of legislation invalid was the fact that the Council of National Unity had failed to follow the procedure prescribed in s 17(4)(a)(ii) of the Transitional Executive Council Act 151 of 1993 (RSA). This procedure required that the Subcouncil on Finance be informed and its approval be obtained for any proposed amendment to or deviation from the laws governing the retirement of members of the public service.

4.15 The court therefore did not reject the formula itself but only the proclamation purporting to publish the said formula.

5.1 The first privatisation, as already mentioned, took place in terms of Proclamation 2 of 1992. Problems relating to the interpretation of this proclamation have received the attention of the Supreme Court of Appeal in Dali and others v Government of RSA and another. The court found that with regard to the group of pension fund�s members who privatised in terms of the First Privatisation Scheme the funding level of the pension fund was irrelevant and members were entitled to 100% of their actuarial interest and to judgment in an amount calculated on that basis. An order was granted in favour of appellants to be paid accordingly.

5.2 According to complainant there were originally in excess 700 members in the group that privatised during the First Privatisation Scheme. Of this group only those who participated in the lawsuit benefited directly from the courts decision.

5.3 The court has however given direction on how Proclamation 2 of 1992 should be interpreted.

5.4 It is therefore recommended that the interpretation applied by the court in Dali�s case be applied to the rest of the members who privatised in terms of the first privatisation scheme. It is recommended that the Department of Treasury, Pensions Administration, revisit these cases and adjust their benefits accordingly.

5.5 The group that privatised under the second privatisation scheme did so in terms of Proclamation 9 of 1993. This proclamation was issued following the recommendations of the Venda Pension Fund Crisis Committee. Relevant provisions of this proclamation were set out above.

5.6 Proclamation 9 of 1993 provided that payments of benefits �made in accordance with the revised actuarial formula which shall be based on parameters that are consistent with the valuation to be performed by an independent actuary�.

5.7 For the purposes of this report it must first be considered first whether the government did in fact pay benefits in accordance with the revised formula as required by section 7(1) of the Venda Government Service Pension Act. The answer to this question is, according to the evidence at our disposal, affirmative.

5.8 Section 7(2) required that the said formula be �published in the Government Gazette on the date it is received from the independent actuary�. It is common cause that the formula was not published on the date it was received. An attempt to publish it later was set aside by the Venda Supreme court because the government had not followed proper procedure before publishing it.

5.9 The next enquiry then is whether or not failure to publish the formula resulted in the beneficiaries being improperly prejudiced.

5.11 It is therefore my conclusion that the non-publication of the revised formula did not affect the amount of benefits received by members. It also did not affect the validity of section 7(1) of Proclamation 9 of 1993. Members were therefore not improperly prejudiced by the failure of government to publish the revised formula in the Government Gazette.

5.12 A further argument submitted by the complainants related to the funding level of their pension fund for the purpose of calculating their benefits. The complainants argued correctly that in respect of the members who privatised in terms of the second privatisation scheme the funding level of the fund was relevant. The court in Dali and others v Government of the RSA and another 2000 (3) A11 SA 206 (A) at 215b also seemed to support this submission when it stated:

5.13 The complainant argued further that the funding level of their pension fund was 140%. In support of this assertion they submitted a copy of an inter-office memorandum allegedly coming from Fund Mator Systems. This memorandum was dated 31 January 1996 and purported to summarise the evaluation results as at March 1995. This memorandum therefore falls outside the period used for the purposes of calculating benefits, namely 31 March 1992.

5.14 I am therefore persuaded to accept that the correct funding level as at 31 March 1992 was that which was contained in the report of the Venda Pension Fund Crisis Committee, referred to under 4.8 above.

5.15 Complainants submitted argument to the effect that proclamation 56 of 1995 was unconstitutional. This submission cannot be addressed in this report as the Public Protector has no jurisdiction to determine the constitutionality or otherwise of legislation. In this regard the complainant will have to approach a court of law to determine the validity or otherwise of their assertion.

5.16 In the circumstances, the Public Protector is bound to regard the above-mentioned Proclamation as valid, until a competent authority sets it aside.

6.1 I recommend that the interpretation applied in Dali�s case be applied to all the members who privatised in terms of the First Privatisation Scheme. It was mentioned above that the court decided that members of this group were entitled to 100% of their actuarial interest. The National Treasury (Pensions Administration) is therefore urged to revisit these cases and adjust their benefits accordingly, including those who did not participate in the lawsuit.

6.2 With regard to the group that privatised in terms of the Second Privatisation Scheme I find that they were paid according to the funding level that was applicable to them at the time and no improper prejudice has been established in their case.

6.3 The challenges posed by complainants regarding the constitutionality or otherwise of Proclamation 56 of 1995 should be referred by complainants to a court of law.

Report in Terms of Section 8(1) and (2) of the Public Protector Act, 1994 (ACT 23 OF 1994)

REPORT NO. 18
(SPECIAL REPORT)

Report on the Investigation Into Allegations of Underpayment of Beneficiaries of the Venda Pension Fund

Report in Terms of Section 8(1) and (2) of the Public Protector Act, 1994 (ACT 23 OF 1994)

REPORT NO. 18 (SPECIAL REPORT)

Report on the Investigation Into Allegations of Underpayment of Beneficiaries of the Venda Pension Fund

REPORT NO. 18
(SPECIAL REPORT)