On 2 August 2023, the Constitutional Court handed down judgment in the matter of Mudau v Municipal Employees Pension Fund and others . 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.
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.
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.
Mr. Mudau then approached the Constitutional Court (CC), which upheld the following constitutional arguments –
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.”
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.
The CC agreed with the SCA finding in Mostert NO. v Old Mutual Life Assurance Co (SA) Ltd  where the SCA held that although amended rules may have a retrospective effect after registration, they do not have a binding effect before registration.
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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