Pension fund ordered to recalculate retiree’s benefits after R2.53 million shortfall dispute

Retired employee wins pension recalculation after R2.5 million shortfall. A pension fund has beenordered to recalculate a retired employee’s pension benefitsafter the Office of the Pension Funds Adjudicator (PFA) found that the lump sum it provided was insufficient to secure the guaranteed pension promised under the fund’s own rules. In a ruling issued by Deputy Pension Funds Adjudicator Naheem Essop, the ZF of South Africa Pension and Group Life Assurance Fund was directed to set aside its calculation of the complainant’s retirement benefit and determine the capital amount required to secure the pension defined in the fund’s rules.

The dispute arose after the complainant, who worked for ZF Services South Africa (Pty) Ltd from April 1995 until his retirement in October 2023, challenged the amount paid to him upon retirement. Under the fund’s rules, his annual pension was calculated at over R1.3 million equivalent to over R112,000 per month, based on his years of pensionable service and final salary. Rather than paying the pension directly, the fund opted to provide a capitalised lump sum of R14 million enabling the retiree to purchase an annuity from a registered insurer.

However, when the complainant obtained a quotation from Sanlam, he discovered that the lump sum would purchase a monthly pension of only about R91,200, significantly below the R112,300 monthly pension promised under the fund’s formula. Sanlam advised that a lump sum of approximately R17 million would be required to secure the guaranteed pension, leaving what the complainant described as a shortfall of about R2.53 million. The retiree argued that the fund’s rules guaranteed a defined benefit pension rather than a lump sum subject to actuarial assumptions.

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He further contended that the fund had effectively applied risk factors twice: first in calculating the lump sum and again when the insurer priced the annuity, thereby reducing the value of his retirement benefit. He maintained that transferring responsibility for paying his pension to an insurer did not relieve the fund of its obligation to provide the benefit promised under its rules. The fund defended its approach, saying the lump sum was based on a reasonable actuarial reserve value calculated using accepted assumptions relating to mortality, investment returns and pension increases.

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