Municipal Workers' Retirement Fund v Financial Sector Conduct Authority and Another (1094/2018) [2020] ZAGPPHC 68 (3 March 2020)

IN THE HIGH COURT OF SOUTH

AFRICA

(GAUTENG DIVISION, PRETORIA)

Case number: 1094/2018

Date: 3/3/2020

In the matter between:

MUNICIPAL WORKERS' RETIREMENT FUND

Applicant

and

THE

FINANCIAL SECTOR CONDUCT AUTHORITY

First Respondent

THE

FINANCIAL SERVICES BOARD

Second Respondent

JUDGMENT

BASSON J

Background and relief sought

[1] The applicant in this matter is the Municipal Workers' Retirement Fund ("the fund"), a pension fund duly registered and established in terms of the Pension Funds Act ("the PFA").[1] The first respondent is the Financial Sector Conduct Authority ("the first respondent"). The Conduct Authority has since been replaced by the Registrar of Pensions Funds ("Registrar").[2] The second respondent is The Financial Services Board - the regulatory agency responsible for the non-banking financial services

industry in South Africa.

[2] This is an application for a declaratory wherein the applicant seeks relief on two alternative bases:

(i) firstly, that the applicant's board of trustees as presently constituted complies with section 7A(1) of the PFA;

(ii) in the alternative, and in the event the court finds that the fund does not comply with section 7A(1) of the PFA and that the fund requires an exemption in terms of section 78(1)(b)(i) of the PFA, an order declaring that it is ultra vires in terms of section 78(1)(b)(i) of the PPFA for the first respondent to grant exemption to the fund from the necessity to comply with the provisions of section 7A(1) of the PFA, for a finite period of time, and that any extension granted must be of indefinite duration;

(iii) a new third prayer was inserted by an amendment: in the further alternative to prayer one, and in addition to prayer two, reviewing

and correcting the decision of the first respondent to grant the exemption to the fund of 31 July 2017 from the necessity to comply

with the provisions of section 7A(1) of the PFA in terms of section 78 (1)(b)(i) of the PFA, for a period of three years from 1 July 2017 to 30 June 2020, by amending the decision to read that the exemption is granted with effect from 1 July 2017 and remains extant and unless withdrawn in accordance with section 78(2).

[3] The first respondent in its answering affidavit contended that the alternative prayer has become moot as the first respondent has in principle decided that future exemptions will be for an indefinite period. As will be pointed hereinbelow, until now the exemptions have been and is time limited.

Legislative scheme

[4] Section 7A of the PFA requires that at least 50% of the members of the board of the Fund (the board members) are elected by members of the fund (fund members). This section reads as follows:

"7A Board of fund

(1) Notwithstanding the rules of a fund, every fund shall have a board consisting of at least four board members, at least 50%[3] of whom the members of the fund shall have the right to elect.[4]

(1A) The composition of the board shall at all times comply with the requirements of the rules of the fund and any vacancy on such board shall be filled within such period as prescribed."

[5] This section imposes the following two requirements on the fund: firstly, a fund must have a board of at least four board members; and secondly, fund members have the right to elect at least 50% of the board members.

[6] The right to elect 50% of the board members by fund members, is central to the dispute in this application. The fund submits that it simply means that at least 50% of the board members must be elected by fund members. Further, that the manner in which the 50% is elected is not prescribed by section 7A(1) of the PFA.

[7] The purpose of section 7A has been explained by Harms, JA (as he then was) in Gumede and others v Pep Provident Fund and others[5] as follows:

"[t]he purpose of the provision is to give members of a fund (at least) equal say in the affairs of the fund. It democratises the management of funds by creating minimum requirements relating to the representation of members. They, and not others on their behalf, have the right to elect the quota of trustees".

[8] Section 78 of the PFA provides for the possibility that the fund may apply for an exemption from either or both of the two requirements set out in section 7A(1) of the PFA. This section reads as follows:

"78 Exemptions

(1) The registrar may on written application of a fund and subject to such conditions as may be determined by the registrar-

(a) authorise a fund to have a board consisting of less than four board members if such number is impractical or unreasonably expensive: Provided that the members of the fund shall have the right to elect at least 50% of the board members;

(b) exempt a fund from the requirement that the members of the fund have the right to elect members of the board, if the fund-

(i) has been established for the benefit of employees of different employers referred to in the definition of 'pension fund' and 'provident fund' as defined in section 1 of the Income Tax Act, 1962 (Act 58 of 1962);

(ii) is a retirement annuity fund;

(iii) is a beneficiary fund; or

(iv) is a pension preservation fund or a provident preservation fund as defined in section 1 of the Income Tax Act, 1962.

(2) The registrar may withdraw an exemption granted under subsection (1) (a) or (1) (b) if a fund no longer qualifies for such exemption."

[9] This means that (i) where the fund consists of less than four board members, the fund may apply for an exemption. However, such exemption shall only be granted if the fund members have the right to elect at least 50% of the board members. (ii) A discrete list of four types of funds may apply for an exemption from the requirement that fund members have the right to elect board members. They are listed in this section. Common to all of them are that they are not pension funds established by a single employer where it is important to maintain an equitable balance between employer board members and employee board members in order to ensure fair governance of the fund. In the scenario contemplated by the section 7B exemption, it is envisaged that employers or unions may legitimately appoint more than 50% of the board members. Section 7B(1)(b) of the PFA does not prescribe the manner in which the

exemption may be granted nor does it set out who qualifies for an exemption. Section 78(2) of the PFA allows for an exemption to be withdrawn, the obvious instance would be where the fund no longer qualifies for an exemption in terms of the FA. The withdrawal of exemption accords with the oversight function that the Conduct Authority has in terms of the PFA.

The primary relief

[10] I will deal with the primary relief first and, if necessary, with the alternative relief in the event it is found that the fund does not comply with section 7A(1) of the PFA.

[11] The fund consists of multiple geographically and organisationally disparate employers (in the form of various municipalities). It is further a fund that is intended to benefit from the exemption provisions of the PFA. At present, the majority of the members of the board are directly and indirectly elected by members of the fund.

[12] The fund in the present case has, since 2016, been granted exemptions from section 7A(1) of the PFA.

[13] It is the applicant's contention that the exemptions thus far granted have been flawed in that they are tainted by an illegality in that each exemption has been, and is, time limited. The fund submits that the first respondent does not have the power to impose a time limited exemption in terms of 78(1) of the PFA as this section makes no reference to a time limit to be imposed on an exception granted. The fund submits further t at this unlawful imposition of a time limit is thus not only unlawful and unnecessary, but also creates uncertainty and leaves scope for regulatory abuse.

[14] In the present instance, the fund was granted its first exemption from the requirements of section 7A(1) on 6 July 2016 for a period of one year. In July 2017, the fund applied for a second exemption. The exemption was initially refused but was eventually granted following an appeal and the launching of an urgent application to this court to review the decision.

[15] On 31 July 2017, the second exemption was granted. It was granted for a limited period of three years and is due to expire on 30 July 2020. As a consequence, the urgent application was withdrawn.

[16] The fund now approaches this court for the relief sought in light of the fact that the limited exemption creates uncertainty. The applicant has since also obtained legal · advice and was informed that the exemption was in any event unnecessary in the first place as the constitution of its board of trustees complied with section 7A(1) of the PFA.

[17] In terms of the first prayer the applicant therefore prays for declaratory relief that its board of trustees, as presently constituted, complies with the provisions of section 7A(1) of the PFA (As already pointed out, only in the event that the court finds that it does not, the court will have to consider the legality of the current exemption.)

Compliance with the provisions of section 7A(1) of the PFA

[18] The main issue in dispute between the applicant and the first respondent is whether the currently constituted board complies with the requirements of section 7A(1) of the PFA which requires that at least 50% of trustees be elected to the board by members of the fund. The first respondent contends that the applicant has not complied with the section and therefore required an exemption in terms of section 78(1)(b)(i) of the PFA. That, according to the first respondent is the very exemption that the applicant sought and obtained from the first respondent.

Applicant's contentions

[19] The applicant persists that it has complied with the provisions of section 7A(1) of the PFA. According to the fund the main issue in dispute is whether section 7A(1) of the PFA allows for indirect election of board members by fund members. In this regard the fund relies on the fact that the fund's rules provide for fund members to elect board members.

[20] The members of the fund at each participating municipality that has more than 20 employees of the fund, elect two provincial representatives (who are fund members). A Provincial Annual General Meeting is then convened at which two provincial member representatives are elected to serve as trustees to the board. The trustees are thus elected from a list of nominees nominated by the members of the fund for each province. To restate: The trustees are thus not nominated by the employer but are elected from a list of nominees nominated by the members of the fund for each province. The fund explains the election process with reference to the following example: in Gauteng there are four municipalities: City of Johannesburg, City of Tshwane Metropolitan Municipality, Ekurhuleni Metropolitan Municipality and Sedibeng District Municipality all of which are participating employers. From each of this four municipalities two member representatives are elected. Each member of the fund then get an opportunity to nominate trustees from the list of member representatives to the board of trustees. Once this list of nominees is drawn up, the eight Gauteng member representatives then elected two trustees to the fund from the list of nominees at the Gauteng Provincial Annual General Meeting.

[21] Hence, the board of the fund consists of the following trustees:

(i) at least 18 trustees who are directly elected by the member representatives at the various Provincial Annual General Meetings who

are themselves elected directly by the members. The members themselves therefore elect the trustees indirectly;

(ii) two trustees who are elected by the South African Municipal Workers Union. (It should, however, be noted that an amendment - Rule

Amendment 8 - has been proposed which will have the effect that this clause be deleted which will mean that there will be no union

representatives); and

(iii) trustees directly elected by the members of the fund where there are more than 5000 members who are employees of a single employer.

[22] Hence, the majority of the board is elected directly and indirectly by the members of the fund. If the amendment as proposed takes effect, all of the board members will be elected directly and indirectly by the members of the fund.

[23] Currently, the composition of the board reflects the following: there are two trustees representing each of the nine provinces and two trustees representing the South African Municipal Workers Union, giving a total of 20 trustees. There are no trustees directly elected by the members of the fund where there are more than 5000 members who are employees of a single employer. For these reasons, it is submitted that the fund does not require an extension in terms of section 78 (1)(b)(i) of the PFA, as it already complies fully with section 7A(1) of the PFA.

[24] For these reasons, the fund seeks a declaratory order to the effect that as the fund is· presently constituted, it is compliant with the requirements set out in section 7A(1.) of the PFA and does not require an exemption in terms of section 78 (1)(b)(i) of the PFA from the obligation to comply with these requirements.

The first respondent's submissions

[25] The first respondent submitted that the manner in which members of the board are elected as alluded to by the applicant does not constitute compliance with the right to elect the members to the board. Members of the fund have at best, according to the first respondent,' the right to elect a delegate to the provincial meeting where the board members are elected from the provincial representatives. This does not, according to the first respondent, amount to a right to elect a member to the board complement of 18 trustees. What it means, according to the first respondent, is that members of the applicant have, at best the right to appoint two members to the board but with no right to have any say in the remainder of the elected representatives to the board. In its submission, reliance is placed on the decision in Gumede wherein it was held that a member of a fund must have a direct right to elect 50% of the trustees of that fund. Accordingly it is submitted that an indirect right for members to elect is not contemplated by section 7A(1) of the PFA and further, if the legislature had intended to permit the delegation of members right to elect trustees or to allow for members to the provincial representatives or to provide that the members have a right to elect only a minor component of the fund's board of management, it would have done so expressly. It did not do so. Accordingly, the applicant's process for election and appointment of trustees therefore do not satisfy the requirements of section 7A(1) of the PFA.

Assessment

[26] In assessing the requirements of the PFA, which requires that "every fund shall have a board consisting of at least four board members, at least 50% of whom the members of the fund shall have the right to elect", and whether it may be interpreted to allow for a right to elect directly or indirectly or both, it is necessary to consider the context within which this provision applies as well as the purpose thereof. As explained by· the court in Natal Joint Municipal Pension Fund v Endumeni Municipality[6] where Wallis, JA held that -

"[t]he 'inevitable point of departure is the language of the provision itself, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document."[7]

[27] The applicant submitted that a sensible and business-like interpretation of section 7A(1) of the PFA must include both the direct and indirect right to elect. A comparison is drawn with the manner in which South African parliamentarians are voted in, where the ordinary voter does not always vote for the candidate that then assumes a seat in Parliament: voters vote for parties which parties then nominate parliamentarians. Furthermore, this business-like or common-sense meaning is reinforced by the statutory context which requires that fund members have the right to elect board members. In further support of this contention, the court

was referred to the provisions of section 7A(2) of the PFA that provides that the fund's rules must include "the election

procedures of the members mentioned" and the "voting rights of members". It was submitted that the words "election

procedure" clearly refers to how an election process should work, including whether it results in direct election of board

members or indirect election of board members. A distinction is therefore drawn between the conferral of inviting right on a fund

member and the process by which such a voting right is exercised.

[28] It was also submitted that regard should be had to the purpose of section 7A(1) of the PFA which is to ensure that both employers and employees have equal opportunities to elect board members: the purpose of section 7A(1) of the PFA is to prevent a fund from being dominated by employer nominated representatives.

[29] The applicant does not take issue with the ruling in the FSB Appeal Board in Gumede where Harms JA, explained the purpose of section 7A.[8]

[30] The applicant submits in light of that quotation that, if it is accepted that this is the purpose of this provision, namely to democratises the management of the fund, it cannot follow that only an election process which results in direct election satisfies the requirements of this subsection. The purpose of this section is satisfied where there is direct or indirect election as the net result of both is that 50% of the board members are elected by fund members. In the present matter, the current board of trustees of the fund were all elected by fund members (and who are themselves fund members).

Conclusion

[31] I am in agreement with the submissions made on behalf of the applicant: it cannot in my view be concluded that only a direct election satisfies the requirements of the subsection. An indirect election which likewise results in the net result of 50% membership elected by fund members, will also satisfy the purpose of the provision which is to give members of the fund at least equal say in the face of the fund. It also makes sense to allow for the right to elect, to be exercised in a myriad of ways including direct and indirect elections.

[32] Accordingly, I am satisfied that the applicant complies with section 7A(1) of the PFA and that it is entitled to the declaratory order sought in prayer one of the Notice of Motion. Costs should follow the result.

[33] In light of the conclusion reached in respect of the primary relief sought, it is unnecessary to consider the alternative relief. In conclusion it is noteworthy that the first respondent has now taken a decision

Order

[34] In the event the following order is made:

1. The order is granted in terms of prayer 1 of the Notice of Motion.

2. The respondents are jointly and severally, the one paying the other to be absolved, ordered to pay the costs of this application, including the costs of two counsel.

JUDGE A C BASSON

JUDGE OF THE HIGH COURT

GAUTENG DIVISION

Appearances:

For the Applicant: Adv CE Watt-Pringle SC, Adv KS McLean

Instructed by: Shepstone Wylie Attorneys

For the Respondents: Adv A Cockrell SC, Adv LS Mbatha

Instructed by: Mothle Jooma Sabdia Inc.

Matter heard on:

4 November 2019

Date of Judgment: March 2020

[1] Act 24 of 1956.

[2] The Financial Sector Regulation Act 9 of 2017 ("FSR Act").

[3] My emphasis.

[4] Ibid .

[5] A decision of the FSB Appeal Board, case number A7/2016, 29 August 2016 at para [31].

[6] [2012] All SA 262 (SCA).

[7] Ibid at para [18].

[8] Quoted supra at para [7].