Constitutional Court: Mudau v Municipal Employees’ Pension Fund

Constitutional Court: Mudau v Municipal Employees’ Pension Fund

Rules must be Registered before they are applied!

On 2 August 2023, the Constitutional Court handed down judgment in the matter of Mudau v Municipal Employees Pension Fund and others [1]. In a unanimous decision penned by Justice Kollapen, the Constitutional Court set aside a decision of the Supreme Court of Appeal (SCA) and confirmed that a rule amendment with a backdated effective date may not apply before it is registered by the Financial Sector Conduct Authority (FSCA) (or the Registrar of Pension Funds as it was then).

The industry has widely welcomed this eminently sensible judgment.

Background

The original Municipal Employees Pension Fund (Fund) rules provided that a member who joined the Fund after June 1998 would upon resignation be entitled to a withdrawal benefit calculated as follows: the member’s contributions, plus interest, multiplied by three (the original rule).

Having been warned by its actuaries that the rule provided for unsustainably high returns, which could operate to the financial detriment of the Fund, the Fund resolved on 21 June 2013 to amend the rule, with effect from 1 April 2013, by providing for the following reduced withdrawal benefits: member’s contribution, plus interest, multiplied by 1,5 (the amended rule).

By backdating the amendment, the Fund sought to avoid the danger that many members may resign if they were aware of the impending reduction of withdrawal benefits. The Fund applied for the registration of the new rule on 22 July 2013, and the Registrar of Pension Funds (Registrar) approved and registered it on 1 April 2014, with an effective date of 1 April 2013.

Mr. Mudau became a member of the Fund in 2003 and resigned from his employment with effect from 31 May 2013. The Fund paid his benefit in accordance with the amended rule (1.5 times contributions) which was lower than he would have got under the original rule. The member approached the Adjudicator’s office, complaining that his benefits should have been calculated in terms of the original rule, since, in terms of the Pension Funds Act, the proposed amendment would only take effect after it was registered.

The Adjudicator upheld the complaint, determining that the amended rule could not be applied to Mr. Mudau’s withdrawal benefits since it had not yet been registered by the Registrar when the benefits became due, and furthermore, that the amended rule could not be applied to benefits which accrued before the amendment was registered.

Timeline of Events

The High Court

The Fund approached the High Court to review the Adjudicator’s determination, which was dismissed. The Fund then unsuccessfully appealed to the full bench of the High Court for a review of this decision. The full bench of the High Court found that the Adjudicator was not obliged to apply the unregistered amended rule which had not been approved and registered by the Registrar when Mr. Mudau resigned and was paid his resignation benefit. It further found that the amendment could not be applied retrospectively in relation to Mr. Mudau, as he was no longer a member of the Fund when the Fund resolved to amend the rule and at the time the amended rule was registered.

The Supreme Court of Appeal

The Fund then appealed the matter to the Supreme Court of Appeal (SCA). The SCA found that the Adjudicator had erred.

The SCA was of the view that although there is a strong presumption in our law against legislation operating retroactively if the wording of the statute is unambiguous and the intention of the legislature (or pension fund) is clearly to interfere with vested rights retroactively, the provisions of the retroactive instrument must be given effect to. If the amended rule explicitly states that it operates retroactively, and thus reduces pension benefits due to members with effect from 1 April 2013, then it must be applied in this manner.

The SCA concluded that the amended rule reduced all withdrawal benefits that had accrued to the Fund’s members after 1 April 2013, even at the time when the rule had not yet been registered by the Registrar.

This judgment caused a great deal of consternation in the industry with widespread concern about the negative impact it could have on members’ benefits.

The Fund was ordered to conduct a proper investigation of Ms. Mashiane’s financial circumstances and to reconsider its allocation of the death benefit.

The Constitutional Court

Constitutional issues

Mr. Mudau then approached the Constitutional Court (CC), which upheld the following constitutional arguments –

    • His right to equality and to be treated the same as other members of pension funds, who are paid their benefits in terms of the registered rules, has been limited through the application of the unregistered amended rule to the computation of his benefits.
    • His right to social security has been limited as his pension benefits, a vehicle for social security benefits, have been affected.
    • His right to property has been limited as he has been arbitrarily deprived of his property — his accrued pension benefit.

The CC saw two main issues:

  1. Whether a pension fund may process a member’s claim for a withdrawal benefit in terms of a rule amendment that has yet to be registered by the Registrar; and
  2. Whether a rule amendment may retrospectively or retroactively impact an accrued or vested pension fund benefit.

A fund may not apply an unregistered rule

The CC unequivocally stated that:

“At the heart of this appeal, is whether a fund may apply a rule amendment that is not yet registered in anticipation of its future registration and determine the payment of benefits due on that basis. It may not do so.”

It is the registered rule that is binding on the fund

When the withdrawal benefit accrued and was paid, only the original rule was in existence as the registration of the amended rule has not yet been done by the Registrar. The original rule is the only rule that was in existence at the time. There was no other registered rule in place.

Rules can have a retrospective effect

The CC agreed with the SCA finding in Mostert NO. v Old Mutual Life Assurance Co (SA) Ltd [2] where the SCA held that although amended rules may have a retrospective effect after registration, they do not have a binding effect before registration.

An unregistered rule cannot have binding effect on a fund and its members

There can be no amendment to a rule until it has been registered. Purporting to rely on a rule not yet registered was simply not open to the fund and breached its fiduciary duty to Mr Mudau. The fund acted outside of the provisions of the Pension Funds Act.

The unregistered amended rule did not apply to the Adjudicator proceedings

The retrospective rule amendment did not have the effect of interfering with the state of the law when Mr. Mudau lodged his complaint with the Adjudicator. Adjudicator proceedings are legal proceedings. The Adjudicator must deal with the law as of the date that the complaint is lodged (the legal proceedings are instituted). The date the complaint is lodged is fixed to the date of the law applicable to the dispute. Only the registered original rule was before the Adjudicator not the unregistered amended rule.

The powers of the High Court are confined to the complaint made to the Adjudicator

    • The High Court considers the merits of the Adjudicator case afresh;
    • Identification of the complaint and the law applicable are determined with reference to the proceedings before the Adjudicator on the merits of the complaint; and
    • Additional evidence on the merits may be placed in front of the High Court.
The CC ordered the fund to make good the difference between what the Fund had paid Mr. Mudau in terms of the amended rule and the original rule plus interest at the prescribed legal rate.

A Sensible Judgement

Following the judgment of the SCA in the Mudau case, the position was that a fund could amend its rules to determine the effective date of the amended rule and apply the amendment before registration by the Registrar (or now the FSCA). This led to the members being in the invidious situation where a rule amendment, with a backdated effective date, could negatively impact the amount of the benefit to which they were entitled in terms of existing rules.

Fortunately, the CC has now clarified that this is not the case – where members leave a fund, they are entitled to the benefits in terms of the registered rule at the time of leaving the fund.

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