In a partial “rags to riches and back to rags” story, lawyers for the Sentrachem Group Pension Fund are demanding back R51 million from 2 900 former members of the fund – mostly pensioners – who were incorrectly paid the money from a surplus more than three years ago.
The claims against the former members range from less than R100 to R4 million. Of the total payout of R51 million, about R45 million was paid to 188 former members, while R6 million went to 2 700 former members.
The demands for the money follow a revision of the initial surplus distribution scheme, which was approved by the Financial Services Board (FSB) in November 2007. The High Court has set aside this surplus apportionment scheme.
The pension fund is about to sue Sanlam, the fund’s administrator, and Alexander Forbes, the fund’s valuator and actuarial consultant, for their alleged roles in the incorrect payments.
The Sentrachem fund’s claim against both service providers is R75 million, less any overpayments that the fund can recover from the former members.
Sazi Lutseke, the chairperson of the Sentrachem Group Pension Fund, says the fund must recover, as far as possible, the amounts overpaid to former members and then adjust its claim against Alexander Forbes and Sanlam by the total amount it recovers. Lutseke says that R6.5 million has already been paid back.
The fund may have some difficulty in recovering all the money, because the former members may have spent it.
The fund is unlikely to take action against former members where there is no reasonable possibility that the money will be recovered or where the costs involved will outweigh the amount recovered, Lutseke says.
Former members may also explain why they may not be able to repay the money, and the fund will entertain any reasonable offer to repay the money over time, he says.
On the basis of calculations by Alexander Forbes and membership records provided by Sanlam, payments started in September 2008.
The surplus distribution and subsequent incorrect payments are a result of the sell-off of major parts of the giant Sentrachem chemical group in the 1990s, as well as transferring most active members to negotiated and company-sponsored provident funds, and outsourcing pensioners in 1998 through the purchase of annuity policies.
The combination of transferring members either to the retirement funds of new employers or to provident funds and the purchasing of annuity policies – without members or pensioners receiving any share of the surplus – resulted in the fund accumulating a surplus of R321 million, which was to be distributed among the fund’s stakeholders.
Attempts by the Sentrachem group to claim the surplus were blocked by amendments to the Pension Funds Act aimed at ensuring a fair distribution of pension surpluses.
One of the reasons the government introduced the surplus apportionment legislation was because of complaints to the Pension Funds Adjudicator by some former Sentrachem fund members and the South African Chemical Workers’ Union about Sentrachem’s attempted attack on the surplus, the payment of exceptional pensions to retiring senior executives and poor annual increases for pensioners.
According to various letters sent to former fund members by Lutseke, there were numerous errors in the original surplus distribution. These include:
* The accumulated savings of fund members who were transferred from the fund in the 1990s were not properly recorded.
In some instances, the records incorrectly reflected that members had transferred to their new funds with no assets or with lesser amounts than they actually transferred. As a result, these former members received too big a top-up to minimum benefit levels as a prior charge against the surplus in an attempt at correcting what was, in fact, the incorrect position of the former members.
* About 700 former members who were reflected as entitled to a share of the surplus were dead and therefore had no entitlement.
* About 3 000 former members who were entitled to a share of the surplus were not recorded in the initial apportionment. A further 4 500 members with an entitlement have since been discovered.
When the mistakes were discovered in 2008, the fund put a freeze on further surplus payments. At that stage, 3 427 former members had been paid a total of R123 million.
The Sentrachem fund successfully applied to the High Court in 2009 to set aside the initial surplus distribution scheme.
The fund then appointed actuary Jeremy Andrew as a consultant to establish the full extent of the problem. Andrew, the former chief actuary of the FSB, played a major role in drafting the surplus distribution legislation and its initial implementation.
Based on legal advice, the fund will not be able to recover interest from the former members who were paid incorrect amounts in 2008. Even if these former members repay the amounts they were overpaid, they will have benefited from the interest earned on the money from 2008 to 2010.
Lutseke says that members and former members who are entitled to a share of the pension surplus will not go short, because any shortfall will in the meantime be made up by Sentrachem from its share of the surplus.
The fund is preparing to serve summonses on both Sanlam and Alexander Forbes, neither of which is prepared to accept responsibility for the mess. The claim of R75 million from both companies includes interest and about R4 million in wasted costs.
Alexander Forbes has blamed the mess on Sanlam, saying the information it provided was “misleading or inaccurate”.
Sanlam alleges that Alexander Forbes did not perform proper checks on the data.