Pension Funds Adjudicator Muvhango Lukhaimane. Picture: FINANCIAL MAIL
Pension Funds Adjudicator Muvhango Lukhaimane. Picture: FINANCIAL MAIL

The pension funds adjudicator is very concerned about the raw deal that government employees could get if they move to local government and transfer their savings to the Municipal Employees Pension Fund (MEPF) because of the way the fund calculates pensionable service for these members.

Pensionable service refers to the number of years of membership of a fund. It may differ from the number of years you were employed if, for instance, you joined your employer’s fund after you started working.

Describing the transfer of the savings of a member who complained to her as “ruinous” for him, Muvhango Lukhaimane criticised the fund for failing to explain the implications to the member.   

Members of pension funds must be kept appropriately informed before, during and after entering into contracts, Lukhaimane warned after finding that the MEPF was flouting the Treating Customers Fairly principles that guide the regulation of the financial services sector and its relationship with consumers.

CJ Modiba complained to the adjudicator’s office about his low withdrawal benefit from the MEPF following his resignation from the greater Sekhukhune district municipality.

In his complaint, Modiba said he had contributed to the Government Employees Pension Fund (GEPF) for 26 years and nine months and had a fund value of about R800,000 that was transferred to the MEPF. He then contributed to the municipal employees’ fund for a further nine years before he resigned.

His gross resignation benefit, however, amounted only to R478,000 and when R276,000 of this was paid to him, he complained.

The MEPF told the adjudicator that in August 2013 the fund received a transfer value from GEPF of R860,527 for Modiba.

As the municipal employees fund is a defined benefit, with the final pension based on years of service and the employee's salary, this transfer value was used to buy him 17 years and three months of pensionable service of the new fund. At the time of his resignation, Modiba had 20 years and three months total service in the fund.

The fund also provided the adjudicator with actuarial calculations for the purchase of past years of service and the withdrawal benefit paid to him.

Despite the years of service, Modiba’s resignation benefit amounted to just R468,259, and a loan of R106,319, income tax of R79,786 and arrear tax of R5,902 were deducted from this amount.

While the adjudicator accepted the fund’s explanation for the reduced amount that was paid to Modiba and dismissed the complaint, she said it was “unfair” that the MEPF had not explained to Modiba that his transfer value of around R860,000 would be used to purchase additional pensionable service from the fund.

This issue should have been disclosed to Modiba when he joined the MEPF so that he understood that if he left the fund, the money he transferred would not simply be added to his withdrawal benefit, she said.

The MEPF had a duty to provide Modiba with relevant information relating to his benefits, the determination says.  

“This result [for Modiba] has been ruinous, to say the least,” she said.

The adjudicator told Tiso Money that the fact that a member who had been a member of a fund for 26 years and nine months was only able to buy 17 years and three months of service in the new fund, was problematic.

The manner in which the MEPF is applying the rule relating to the purchase of years of service punishes members who transfer a rand amount to the fund and then do not retire but instead withdraws from the fund before retirement age, she says.

It is crucial that members of the GEPF, especially those who have been members for a long time, understand this especially as government employees tend to move to jobs at municipalities, she says.

Members of the GEPF are also guaranteed a pension based on years of service and final salary, so they have never had to worry about understanding how pensions work, the adjudicator says.

Lukhaimane says Modiba should have understood that he could have transferred his retirement savings to a preservation fund where the rand amount transferred would have remained in tact, rather than in the MEPF where it was converted to years of service.