TRANSNET PENSION FUND AMENDMENT BILL, 2006

1
TRANSNET PENSION FUND AMENDMENT BILL,
2006 Select Committee on Labour and Public
Enterprises, Cape Town 13 February 2007
2
Table of Contents

• Background
• Rationale for Amendment Bill
• Purpose of Bill
• Proposals to limit impact
• Principles behind the Amendments
• Achieved Result
• Amendments in Bill
• Conclusion

3
Background

• Previous Transnet Funds
• Railways and Harbours Pension Fund for Black
  employees and
• Railways and Harbours Superannuation Fund
• These were merged into the Transnet Pension Fund
  established i.t.o Transnet Pension Fund Act, 1990
  (Act) as a defined benefit fund (the employer
  guarantees the employees pension amount on
  retirement)
• all Transnet employees obliged to be members of
  the Transnet Pension Fund
• Act amended in 2000 to establish two new funds
• Transnet Second Defined Benefit Fund for Transnet
  pensioners, also a defined benefit fund which has
  been closed from 2000
• Transnet Retirement Fund, a defined contribution
  fund (pensions amount on retirement depends on
  employees contributions and is not guaranteed)
  for all new Transnet employees from 2000

4
Background (cont.)

• Most Transnet employees voluntarily transferred
  from Transnet Pension Fund to the Transnet
  Retirement Fund (effective 1 Nov 2000)
• The Transnet Pension Fund is an existing fund and
  its members consist of all those members who are
  not pensioners and who did not transfer to the
  Transnet Retirement Fund
• The Transnet Pension Fund has been closed to new
  members since 2000, and now has approx. 10 000
  members, including pensioners who retired after
  the establishment of the Transnet Second Defined
  Benefit Fund

5
Introduction

• The Transnet funds have some benefits under the
  Income Tax Act as paragraph (a) funds because
  they are established by statute
• Thus when a member leaves employment the portion
  of her/his lump sum benefits attributable to
  membership prior to 1 March 1998 may not be
  taxable
• Transnets restructuring includes the disposal of
  its non-core assets, including the transfer of
  its shares in SAA to Govt and the transfer of
  some of its business units (eg Metrorail) to
  other public entities (such as SARCC) or private
  sector entities (transfer of internal audit to
  Ernst Young)

6
Impact of Transnet Restructuring

• Termination of TPF membership for employees in
  Transnet businesses transferring to other public
  entities or the private sector
• Transferring employees to join pension funds of
  new employers
• If the new employers pension fund is not a
  paragraph a fund established by statute (i.a.w
  Income Tax Act definition), employees tax benefit
  for membership obtained prior 1 March 1998 vests
  on exit

7
Proposals to limit impact

• In April 2006 Transnet, DPE and Labour agreed
• to allow certain SOE employees continued
  membership in the Transnet Retirement Fund
  (TRF)
• to restructure the Transnet Pension Fund (TPF)
  into a multi-employer fund to allow continued
  membership of specific employees
• This preserves the tax treatment of the benefits
  of existing fund members and ensures that no
  member is worse off than the status quo
• Transnet Pension Fund Act amendments
  (Amendments) are required to accommodate this
  agreement
• The draft Amendments have been approved by
  Transnet, the trustees of the three Transnet
  pension funds and Cabinet
• The draft Amendments are published in Government
  Gazette No. 29181, 1 September 2006

8
Principles of the Amendments

• The Transnet pension fund -
• remains a closed defined benefit fund and is
  restructured into a multi-employer fund
• will have stand-alone sub-funds and appropriate
  new governance structures
• The Transnet Retirement Fund
• remains a defined contribution fund
• Allows existing members to retain their fund
  membership even after transfer of the business to
  a new SOE employer
• Transnet Second Defined Benefit Fund
• remains a closed defined benefit fund and is
  unchanged

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Principles of the Amendments (TPF)

• TPF still one legal entity
• Now an independent multi-employer fund
• Renamed the Transport Pension Fund
• SOE employers (to whom Transnet businesses have
  been disposed of) may join as a Principal
  Employers
• One Sub-Fund per Principal Employer
• Sub-Funds automatically consist of active members
• Sale agreements determine allocation of Pensioner
  and Dependant Pensioner members to Sub-Funds
• The relevant liabilities, assets, rights and
  obligations allocated to the Sub-Fund are
  determined by the Trustees, the fund valuator and
  actuary/ies
• Sub-Funds have clearly defined ring-fenced
  liabilities and assets
• Each Principal Employer alone only guarantees its
  own Sub-Fund

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Principles of the Amendments

• Principle of separation of sub-funds (with
  ability to work together)
• Two sets of rules
• general rules control governance, allocation of
  costs and statutory matters
• special rules control service, contributions and
  benefits
• Two levels of trustees
• sub-fund boards manage all aspects of the
  sub-funds as determined by the special rules
  (incl. investment policy and administration of
  benefits and assets)
• Board of Trustees (Board) duty to control the
  governance of the fund as a whole and to allocate
  costs where necessary

11
Illustration old TPF Structure
Board of Trustees
Executive Committee
Audit / Risk Committee
Investment Committee
Fund Administration
Strategic Asset Management
12
Illustration new TPF Structure
Board of Trustees
Sub Fund Committee
Sub Fund Committee
Executive Committee
Audit / Risk Committee
Investment Committee
Executive Committee
Audit / Risk Committee
Investment Committee
Fund Administration
Strategic Asset Management
Fund Administration
Strategic Asset Management
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Principles of the Amendments (TRF)

• TRF to remain in principle a Transnet fund
• Not a multi-employer independent fund
• However, SOE employers (to whom Transnet
  businesses have been disposed of) may also join
  as participating employers
• effectively allowing existing employees of these
  SOE employers to remain members of the TRF
• No new SOE employees to join TRF

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Achieved result

• The benefits and tax treatment available to fund
  members is maintained
• On disposal, new employer will guarantee the
  defined benefit exposure of employees opting to
  remain in the TPF

15
Portfolio Committee Revisions

• Revisions aimed at simplifying the Bill, ensure
  constitutionality of the Bill and consistency
  with other legislation
• Committee Report states that Committee believes
  it was not appropriate for it to decide on
  whether or not new SOE employees should join the
  TRF
• SATAWU and SARWHU (representing the majority of
  Transnet workers) agreed that new SOE employees
  should not be included in the TRF and that this
  exclusion can be set out in the Bill
• UTATU and AUSA still held their views, but
  decided not the pursue the matter further during
  this legislative process.

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The Amendments

• To amend the Transnet Pension Funds Act, 1990,
  with effect from 11 November 2005 (to align with
  TRF and TPF rule amendments)
• DEFINITIONS
• to amend definitions for consistency and to
  insert new definitions as required
• SECTION 2 (Disestablishment of old funds,
  establishment of TPF)
• deletion of old section
• replace with a purpose clause to assist in
  interpretation and understanding of the Act
• SECTION 3 (Obligations payable from revenue)
• allowing for proportionate allocation of this
  obligation between employers, with Ministerial
  oversight in case of dispute

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The Amendments

• SECTION 4 (Rights and obligations of members and
  beneficiaries)
• deletion of old section
• new wording to provide for transfer of rights and
  obligation at the establishment of the TPF in
  1990
• SECTION 4A (Division of TPF into Sub-Funds)
• On commencement of Amendment Act, TPF will be
  divided into sub-funds
• establishes sub-funds from date of introduction
  of new Principal Employer
• Sets out procedure for assignment of active
  members to sub-funds
• assignment of Pensioners and Dependant Pensioners
  by way of agreement between Seller and Purchaser
• Establishes sub-fund boards and minimum
  requirements for the special rules which shall
  govern the sub-funds as well as powers and duties
  of the sub-fund boards
• transfer of liabilities, assets, rights and
  obligations determined by Board and actuary/ies
• provide for transfers between sub-funds

18
The Amendments

• SECTION 4A (division of TPF) cont.
• Sets out powers and duties of TPF Board of
  Trustees, including allocating to each sub-fund
  benefits, costs, losses or liabilities incurred
  by the TPF and attributable to each sub-fund
• Provides for general rules for the governance and
  management of the TPF including the allocation
  of costs, administration, valuation and audits of
  the TPF
• deleted initial approval and publication of rules
  as this requirements has been met
• General Rules may be amended by the trustees with
  the approval of all Principal Employers or
  majority of Principal Employers and the Minister
  of Public Enterprises
• Special Rules may be amended by the sub-fund
  board with the approval of the applicable
  Principal employer
• If in the opinion of the TPF valuator an
  amendment may affect either to the general or the
  special rules may affect the financial condition
  of the TPF or any sub-fund, the Ministers of
  Public Enterprises and Finance must approval the
  amendment
• Both general rules and special rules are binding

19
The Amendments

• SECTION 4A (Division Of TPF) cont.
• If the sub-fund assets are insufficient to pay
  for benefits due to members, pensioners etc., the
  Principal Employer is liable to the TPF for
  payment of such benefits
• Limits employers liability to the TPF to
  liabilities attributable to members etc. assigned
  to that employers sub-fund

20
The Amendments

• SECTION 6 (Actuarial evaluation)
• to provide trustee appointed valuators at
  intervals of not more than 3 years
• to provide for the valuation of each Sub-Fund of
  the TPF as if it were a separate entity
• expands application of reporting requirements
• Moves guarantee clause to Section 5(12) and
  Section 12
• SECTION 7 (Benefits not assignable)
• includes deduction from benefits of amounts to be
  deducted in terms of the Maintenance Act
• SECTION 8 (How pension are affected by
  insolvency)
• expands concept of pension to a benefit
  including an annuity
• clarify exclusion of benefit from insolvent estate

21
The Amendments

• SECTION 9 (Recovery of debts)
• no material changes (at requested of TPF)
• SECTION 10 (Application of benefits iro housing
  debts)
• to allow for deductions of amounts owing to third
  parties (Not just employer) who provide housing
  finance backed by fund guarantees
• necessary to facilitate non-core disposal
• SECTION 11-12
• no material changes
• SECTION 13 (Registration of Pension Funds Act)

22
The Amendments

• SECTION 14 (Employees of Employer group)
• to reflect that TPF is only for persons who were
  members of the fund as at effective date, and
  who will become employed by an SOE following the
  disposal by Transnet of non-core assets and
  businesses to the SOE, which new employer, or
  which holding company of the new employer has
  become approved as a new Principal Employer
• to reflect that after the commencement of the
  Amendment Act, the TRF is only for Transnet
  employees

23
The Amendments

• SECTION 14A (Power to establish Pension Funds)
• no material changes
• SECTION 14B (Establishment of TSDBF)
• TSDBF Rules may only be amended by TSDBF Board of
  Trustees and approved by Transnet
• If an amendment is likely to affect the financial
  condition of the TSDBF, it must be approved by
  the Ministers of Public Enterprises and Finance
• Minister of Public Enterprises may publish a
  notice in the Government Gazette and determine
  which of the persons currently receiving a
  pension from Transnet must receive such pension
  from TSDBF and the pension cannot be less
  favourable than at present
• SECTION 15A (Power to make regulations)
• to give the Minister the power to make
  regulations in terms of the Act, and provide for
  matters related or incidental to such matters

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Conclusion

• The Amendments form part of Transnets
  restructuring, and
• protect benefits of existing TPF members affected
  by the restructuring by legitimising the
  continued membership of the fund by SOE employees