South African Local Authorities Pension Fund v Elundini Municipality (1457/2008) [2009] ZAECGHC 86 (10 December 2009)

FORM A

FILING SHEET FOR EASTERN CAPE HIGH COURT, POR ELIZABETH JUDGMENT

PARTIES:

Registrar:

Magistrate:

High Court: EASTERN CAPE HIGH COURT, GRAHAMSTOWN

DATE HEARD: 10 September 2009

DATE DELIVERED: 10 December 2009

JUDGE(S): N. DAMBUZA

LEGAL REPRESENTATIVES –

Appearances:

for the Plaintiff(s)/Applicant(s)/ Appellant(s): Adv M.S.M. Brassey SC Adv D.L. Wood

for the Defendant(s)/Respondent(s): Adv T.J.M. Paterson SC

Adv M.L. Beard

Instructing attorneys:

Plaintiff(s)/ Applicant(s)/Appellant(s): N N Dullabh & Co

5 Betram Street

GRAHAMSTOWN

Defendant(s)/Respondent(s): Messrs Netteltons

118A High Street

CASE INFORMATION -

Nature of proceedings : Damages

IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE – GRAHAMSTOWN)

Case No.: 1457/2008 Date delivered: In the matter between: SOUTH AFRICAN LOCAL AUTHORITIES PENSION FUND Plaintiff and ELUNDINI MUNICIPALITY Defendant

J U D G M E N T

DAMBUZA, J:

The South African Local Authorities Pension Fund (the plaintiff) is a defined benefit pension fund that provides retirement and other benefits to its members. Some of these members are employees of the defendant. The latter, in its capacity as an employer, contributes to the plaintiff, in its own right, a portion of the monthly premium payable to the plaintiff on behalf of its employees. It then deducts from each member’s salary, the portion of the premium due from the member. The total premium is then paid by the defendant to the plaintiff.

In the main proceedings the plaintiff claims from the defendant arrear contributions and interest payable thereon. The amount claimed emanates from an increase in the employer contribution portion. The increase was effected through an amendment to the plaintiff’s pension fund rules. In the plea to the plaintiff’s summons the defendant, on various grounds, takes issue with this rule amendment and the increase in the monthly contribution by the employer effected thereby. The defendant pleads in the main that it is only liable to pay the increased premium from the date of registration of the rule amendment as it was never notified by the plaintiff of the rule amendment; further, that Section 12(4) of the Pension Funds Act 24 of 1956 (PFA) does not make provision for a rule amendment to have retrospective effect i.e. from a date prior to its registration by the Registrar of Pension Funds (the registrar), that it has no knowledge thereof and is therefore not in arrears. In the alternative, the defendant pleads that the trustees of the fund lacked the requisite competence to resolve to amend the fund’s rules retrospectively. In addition, the defendant furthermore pleads that the plaintiff’s claims have in any event prescribed.1 The defendant filed a counterclaim in respect of certain increased contribution payments it made erroneously in terms of the rule amendment in the bona fide belief that the plaintiff was entitled to the increased contribution.

The plaintiff excepts to the defendant’s plea on the basis that it fails to disclose a defence and to the counterclaim, on the basis that it fails to disclose a cause of action.

It is trite that in an exception (of the nature raised by the plaintiff), in order to succeed, an excipient must persuade the court that upon every interpretation of the pleading in question and in particular, the document on which the pleading is founded, no cause of action or defence is disclosed.

“An exception complains of an inherent defect in the pleading: admitting for the moment that all the allegations in a summons or a plea are true, it asserts that even with such admission the pleading does not disclose either a cause of action or a defence, as the case may be. It follows that where an exception is taken the court must look at the pleading excepted to as it stands: no facts outside those stated in the pleading can be brought into issue – except in the case of inconsistency – and no reference may be made to any other document”.2

I shall therefore not concern myself with whether the plaintiff did send and/or the defendant did receive notice of the rule amendment.3 The issue is whether averments made by the defendant’s do constitute a defence in law.

In its plea the defendant pleads in particular that it :

“16.1 … has no knowledge of the rule amendment or the registration thereof by the Registrar of Pension Funds.

16.2 Communication of the rule amendment and the registration of the rule amendment by the Registrar of Pension Funds to a member of Plaintiff is a prerequisite for fixing a member with liability in terms of any such rule amendment”;

Alternatively, that;

“16.4 … properly interpreted, Section 12 (4) of the Pension Fund Act 24 of 1956 does not allow a pension fund to determine that the date on which the amendment of the rules should take effect is a date prior to the registration of the rule amendment in terms of that section by the Registrar of Pension Funds”;

Alternatively that:

“16.8 … the Plaintiff’s claim is for amounts that are due and payable on a monthly basis seven days after the end of each month.

…

16.11 Each amount is a debt as is envisaged by section 11(d) of the Prescription Act 68 of 1969, and accordingly each amount prescribes three years after it became due and payable.

16.12 Accordingly all the amounts due and payable prior to 7 June 2005 have prescribed”;

“16.14 … it was not competent of the trustees to make its resolution of 20 August 2003 of retrospective effect to 1 July 2003”.

Prior to the rule amendment, rule 4.2.2 (B) of the plaintiff’s rules provided that the monthly contributions payable by an employer to the plaintiff was 18,07% of a member’s annual salary. This contribution was increased by the rule amendment to 20.78% of a member’s annual salary. The resolution by the trustees of the fund to increase the employer’s contribution was in response to a report by valuators done as at 1 July 2002 showing that the plaintiff was under valued. On 20 August 2003 the plaintiff’s Board of Trustees resolved to “introduce a scheme of arrangement” aimed at improving the plaintiff’s financial condition. This resolution was made effective from 1 July 2003. On 5 July 2006 the plaintiff’s Board of Trustees applied to the Financial Services Board (“the FSB”) for the rule amendment and on 5 July 2006 the FSB the rule amendment was approved and was registered by the registrar on the same day, but was made effective from 1 July 2003.

The plaintiff’s case is that the only pre-condition for enforcement of the terms of a rule amendment is registration of the rule amendment by the registrar. In this regard Section 12 of the PFA provides that:

“(1) A registered fund may, in the manner directed by its rules, alter or rescind any rule or make any additional rule, but no such alteration, rescission or addition shall be valid─

if it purports to affect any right of a creditor of the fund, other than as a member or shareholder thereof; or

unless it has been approved by the registrar and registered as provided in subsection 4.

Within 60 days of the passing of the resolution for alteration or rescission of any rule or for the adoption of any additional rule, a copy of such resolution shall be transmitted by the principal officer to the registrar, together with the particulars prescribed.

If any such alteration, rescission or addition may affect the financial condition of the fund, the principal officer shall also

transmit to the registrar a certificate by the valuator or, if no valuator has been employed, a statement by the fund, as to its financial soundness, having regard to the rates of contribution, what arrangements will be made to bring the fund in a sound financial condition.

If the registrar finds that any such alteration, rescission or addition is not inconsistent with this Act and is satisfied that it is financially sound, he shall register the alteration, rescission or addition and return a copy of the resolution to the principal officer with the date of registration endorsed thereon, and such alteration, rescission or addition, as the case may be, shall take effect as from the date determined by the fund concerned or, if no date has been so determined, as from the date of registration.” (my emphasis).

Mr Paterson who appeared on behalf of the defendant submitted that section 12 (4) of the PFA must, on the strength of which the amendment was passed, be interpreted in the context of other statutory framework applicable to municipalities, including legislation governing fiscal accountability by or within municipalities. He traced legislation applicable to budget procedures of municipalities from Municipal Ordinance 19 of 19514 and Ordinance 20 of 19745 to the Local Government: Municipal Finance Management Act 56 of 2003 (“the MFMA”)6 which governs the same process currently. Section 15 of the MFMA prescribes that municipalities may only incur expenses in terms of an approved budget and within the limits of the amounts appropriated from the different votes in an approved budget.

It was submitted on behalf of the defendant, and I did not understand this to be in dispute, that there is no provision in the MFMA for debts incurred retrospectively. Further I did not understand it to be in dispute that section 12(4) was enacted and continues to operate within the context of the legislative prescripts referred to. I have difficulty in understanding how the relevant accounting officers or the municipalities are required to meet debts created in this manner.

The submission by Mr Brassey on behalf of the plaintiff that municipalities cannot be afforded special consideration with regard to the application of Section

12(4) of PFA does not solve the problem.

I do not agree that Section 12(4) of the PFA permits unbridled imposition of liability on employers as has occurred in this case.

Registration of the rule amendment in this case took place almost three years after the passing of the resolution relating thereto. Section 12(2) PFA provides for a period of only 60 days between the passing of the resolution and the transmission thereof to the registrar for registration. It seems to me that unilateral imposition of liability or obligation in respect of a period that has passed, is absurd, particularly where the debtor receives no prior warning thereof. Against this background I agree with the submission, on behalf of the defendant, that the matter falls within the ambit of the presumption against absurdity and that the difficulty arising from the creation of a debt in this manner should colour every aspect of this matter.

As submitted on behalf of the defendant, for the same reason that employers need to alert the fund of changes in the circumstances of members of the fund, such as death,

resignations and change of salary, the fund also needs to communicate to employers such information as is necessary for employers to be able to meet obligations to the fund. The plaintiff’s rules do not provide for such communication. But I am persuaded that notice of change in these details is necessary for proper implementation of the pension fund agreement. I also agree with the submission by Mr Paterson that the requirement under Section 16(1) of the PFA that the requirements that notice of a valuation report be given to an

employer is based on the interest the employer has in the solvency of the fund and of measures to be taken to address any problem

arising from the report. The employer is an interested party in the pension fund agreement, although strictly speaking, it is not a party thereto. For that reason it is only reasonable that “notice” be read into the rules of the PFA.

Further the decision by the registrar to register the rule amendment is an administrative decision. The defendant, as an interested party affected thereby was entitled to notice thereof.

On the issue of retrospective application of the rule amendment, Mr Brassey submitted that such “retrospective” application only exists insofar as the resolution taken on 20 August 2002 was made effective

from 1 July 2003. That may be so, but this does not alter the fact that on 5 July 2006 the rule amendment imposed a debt on the defendant with effect from 1 July 2003. The plaintiff, relying on Section 12(4) of the PFA, contended that although the amendment was registered on 5 July 2006, liability as a result thereof is retrospective (or retroactive) to 1 July 2003. It is in this regard that the defendant complains of “retrospective” application. The real question is whether such “retrospective” or “retroactive” application is proper.

Counsel for both parties referred to Shell and BP SA Petroleum Refineries v Murphy NO 2001 (3) SA 683 D, wherein a situation converse to the one in issue in this matter existed. An actuarial surplus of approximately R193 million was declared in the fourth respondent, a defined benefit fund. The fund had been closed to new membership in 1995 and by 1996 the applicant was the sole participating employer in the fund. As a result of restructuring the fund was left with 20 active members,

263 pensioner members and 282 beneficiaries. From 1 December 1994 the applicant had not contributed to the fund as the actuary had reported that the fund’s financial position was such that the applicant could suspend payment of its contributions and take a “contribution holiday”. The applicant gave notice to the fund, as a result of the fund’s favourable position, that it (the applicant), would no longer pay the fund’s administration expenses from 1 January 1995. A member of the pensioner group queried the charging of the administration expenses to the fund instead of the employers as was stipulated by Rule 15 of the fund’s rules. As a result of this query the fund, on 8 November 1996, resolved that Rule 15 be amended to give effect to the fund bearing its own administrative expenses. The resolution was to take effect from 1 January 1995. Following a complaint by the group of pensioners, the pension funds adjudicator ruled, amongst others, that the retrospective amendment had been unlawful and unreasonable as the members had not been given any notice thereof or invited to make input to the amendment. The adjudicator ruled that the amendment would take effect only from the registration thereof with the Registrar of Pension Funds. The court, however, held that Section 12(4) of the Act permitted an amendment to take place with retrospective effect. Further, so the court held, the amendment to the rules of the fund gave effect de jure to the existing factual situation and that the rights and obligations of the parties to the pension fund were inherently contractual in nature; it was therefore wrong to equate the retrospective application of a particular rule with retrospective amendments of a statute or other legislative amendments.

A fundamental difference between this case and Shell is that the rule amendment in Shell did not result in the absurdity or difficulties that exist in this case. I can find no indication that payment of the administrative

costs by the fund was inconsistent with some or other legislative prescript or operational rule. Moreover as has already been

stated, the rule amendment in Shell merely gave effect to de facto situation which had prevailed for some time. It is a fundamental principle of contract that parties to an agreement must contract to an amendment of the terms of their contract. And it seems to me that even in a case such as this where the fund has authority to unilaterally vary the terms of the pension fund contract, it cannot seek strict enforcement of the rule amendment by relying on Section 12(4) of the PFA where, as a result of its own conduct, the circumstances around the rule amendment fall to be faulted. Whilst I agree with Mr Brassey’s submission that the contractual nature of the relationship between the interested parties to a Pension Fund agreement is subject to the procedure for rule amendments provided for in Section 12(4) of the PFA, it must be borne in mind that where trustees have the power to vary a contract unilaterally, such as in this case, they have a duty not to act arbitrarily or unreasonably.

It may be that Section 12(4) of the PFA does entitle the fund to determine a date prior to registration of a rule amendment as the effective date of such amendment but an interested party is, in my view, entitled to raise absence of notice of such determination as a valid defence against a claim arising from the determination. Such failure to give notice may, on its own constitute a valid defence or the defence may be valid in the light of retrospective application of the resolution of the trustees. Further, retrospective application of the resolution of trustees may, on its own, constitute a valid defence where, for example, it is unreasonable and/or results in absurdity. It seems to me that much depends on the circumstances of each case.

In this case I am satisfied that absence of notice and “retrospective” application of the rule amendment are defences good in law and provide a proper foundation for the defendant’s counterclaim.

In so far as costs are concerned I am persuaded that the issues involved in this matter were of such complexity and importance to the parties as to warrant use of two counsel.

In the result, the following order will issue:

The exception is dismissed with costs, such costs to include costs of two counsel.

_________________________

N. DAMBUZA

JUDGE OF THE HIGH COURT

1 At the hearing I was made to understand that the defendant was not persisting with this defence. Indeed where the plaintiff could only claim payment of the debts on 6 July 2006 after registration of the rule amendment, and the action was brought on 10 July 2008, the claims had not prescribed.

2 Erasmus; Superior Court Practice; B1-151 and the authorities cited therein

3 In the summons the plaintiff alleges that the amendment was communicated to the defendant in a letter addressed to SALGA and sent to all Municipal Managers and Chief Financial Officers of Municipalities affiliated to SALGA. Such communication is disputed

by the defendant.

4 Section 85.

5 Section 74

6 Section 15