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The Transformation Of Retirement Funding Arrangements For Employees
09 July 2007
March 2003

Information Document Concerning The Proposal By The City Of Johannesburg And Its Utilities, Agencies And Corporatised Entities ("UAC's") On The Transformation Of Retirement Funding Arrangements For Employees.

1. Introduction

1.1 The City and its utilities, agencies and corporatised entities (collectively referred to as "the Employers") have sought to transform the retirement funding arrangements for their employees because, in the opinion of the Employers, the arrangements that existed as at 31 December 2001 are inequitable, unaffordable and unsustainable.

1.2 The Employers sought to withdraw from most of the existing retirement funds with effect from 31 December 2001, and to require all employees who were members of those funds to belong to the newly established eJoburg Retirement Fund with effect from 1 January 2002. That initiative has been reversed following a number of court applications initiated by various funds and the two major trade unions representing employees. The Employers have resolved to consent to court orders restoring the status quo provided that (in the case of the UAC's) their status as contributing employers of the existing retirement funds is recognised by those funds.

1.3 Having restored (or having agreed to restore) the status quo as at December 2001, the Employers believe that transformation of the existing retirement fund arrangements remains essential. The Employers now seek to engage all relevant stakeholders in a further process of consultation before determining whether and in what manner to proceed with the introduction of uniform retirement benefits for all employees.

1.4 To this end, the stakeholders that the Employers have identified are the representative trade unions (Samwu and Imatu), employees not represented by one of these unions, the existing pension funds, and pensioners of the existing funds. Any persons not mentioned here and that are considered or that consider themselves to be stakeholders should notify the Employers (at the details provided in paragraph 5) of their interest in the matter.

1.5 The purpose of this document is to explain to stakeholders why the Employers propose to transform retirement fund arrangements for their employees, to explain what changes the Employers propose to introduce, and to invite representations from stakeholders in response to the Employers' proposal.

1.6 The Employers' overall objective must be clearly restated. It is to achieve equity, affordability, and sustainability in retirement fund arrangements for employees.

2. Reasons for the Employers' proposal

Historical overview
2.1 The Employers are at present required to contribute to eleven different retirement funds for the benefit of employees. The reasons for this are historical and must be explained in some detail.

2.2 Prior to 1994, local government in South Africa was arranged in a manner determined by the apartheid policies of the government of the day. In simple terms, this meant separate municipalities for different race groups.

2.3 The conditions of employment of employees similarly reflected stark racial divisions.

2.4 The present City of Johannesburg is the ultimate successor of approximately 12 local government structures that existed prior to 1994. These included the former city councils of Johannesburg, Roodepoort, Soweto, Diepmeadow, Dobsonville, Alexandra, Randburg and Sandton, the management committee of Ennerdale, the management committee of Lenasia, the South Western committee and the Davidson/ Fleurhof committee.

2.5 These municipalities were disestablished by Premier's Proclamation in December 1994 and were incorporated initially within the Greater Johannesburg Transitional Metropolitan Council ("GJTMC"). Their employees were initially transferred to the GJTMC, and many were subsequently transferred to four Metropolitan Local Councils that were established within the area of the GJTMC, also by way of Premier's Proclamation made in terms of the Local Government Transition Act.

2.6 The GJTMC and the four Metropolitan Local Councils were themselves disestablished in December 2000 by the Section 12 notice which established the present City. All of their employees, together with employees of the Midrand Transitional Metropolitan Council, were transferred to the employ of the newly established City.

2.7 On the establishment of the UAC's, employees were transferred from the employ of the City (or, in certain instances, its predecessors) to the relevant UAC.

2.8 Throughout this process, employees retained their existing conditions of service. The result of this is that employees of the City and UAC's at present retain many of the conditions of service, and in particular the retirement fund arrangements, that they enjoyed as employees of the municipalities that existed under the racially organised system of local government prior to 1994.

Race discrimination
2.9 Almost all of the existing pension funds to which employees belonged under that regime were previously available exclusively to either white employees on the one hand (in terms of conditions of employment established for white employees of the local government predecessors of the City) or to black employees, as the case may be.

2.10 As a general rule, the retirement funds established for white employees have provided retirement benefits that are superior to those provided to black employees, and that require higher employer contribution rates.

2.11 Because employees have retained the conditions of employment, including the pension fund arrangements, that were established for them prior to 1994, racially discriminatory retirement fund arrangements have been preserved, and the Employers have been required to contribute to some 11 different pension funds, most of which were established exclusively for white employees or black employees, and whose membership still largely reflects these racial disparities.

2.12 In addition many black employees were, because they did not fall within a grade in which membership of a retirement fund was available, simply not entitled to membership of any retirement fund at all. Although these employees were at some stage, following the transformation to democratic government in 1994, given an option to join one of the existing funds, as at December 2001 approximately 4000 employees were not members of any retirement fund at all. The only retirement benefit available to employees in this category is an unfunded "gratuity" that is provided for in the conditions of service of the former Johannesburg City Council. All employees in this category are black.

High employer contribution rates
2.13 Most of the existing funds are defined benefit funds. But some may more properly be described as hybrid funds, in that their rules also prescribe a defined contribution. The existing funds are extremely costly to the Employers, and to the extent that contributions are defined, employer contributions in many cases far exceed those paid in the public service and in the private sector. Some require employer contribution rates of 22%, compared to 15% in the public sector and, typically, between 10% and 12% in the private sector. The two funds with the largest number of members employed by the Employers, the predominantly white Johannesburg Municipal Pension Fund and the black City of Johannesburg Pension Fund, have employer contribution rates of 20% and 16% respectively. The eJoburg Retirement Fund requires 15% employer contributions.

2.14 Even though recent actuarial reports have indicated that a much lower employer contribution rate (of around 10% or 11%) would be sufficient to fund the benefits provided in the rules of the Johannesburg Municipal Pension Fund and City of Johannesburg Pension Fund (and funded by the employer contributions), there has been no attempt either to reduce the contribution rate, or to utilise the over contribution towards funding of unfunded benefits (referred to below). Instead, overcontribution has simply been applied towards further benefit improvements.

Unfunded ("pay as you go") benefits
2.15 In addition, and unlike any comparable funds in the private sector, the rules of many of the existing funds provide for additional and unfunded benefits (sometimes referred to as "pay as you go" benefits) that impose significant financial liabilities on the Employers on a regular basis. These liabilities are atypical (and include, in some funds for example, a system of bonus years in terms of which employees are deemed to have longer service than is in fact the case, with more senior employees in some circumstances deemed to have double their actual years of service). These liabilities are also extremely difficult to quantify, make financial planning complex, and significantly increase the cost of these funds beyond the already high contribution rates.

2.16 The employers understand that these benefit arrangements were designed during a period when, as a general proposition, salaries of local government employees were significantly lower than private sector counterparts. In return, local government defined benefit pension funds provided benefits considerably superior to those typically found in the private sector.

2.17 In addition, previous accounting practices did not require that financial provision be made to reflect the contingent liability of unfunded pension benefits that would become payable at some unspecified time in the future. This lead to the predecessors of the Employers being willing to agree to considerable enhancements to retirement benefits that were not funded by the contributions paid, but would have to be funded by the Employers as and when they became payable by the funds. The rules of many of the existing funds provide a variety of benefits of this nature. Pension arrangements of this kind cannot reasonably be afforded or managed effectively from a financial point of view.

2.18 It is not an option to simply eliminate the unfairness and racial discrimination described above by making all employees members of the funds offering the best and most expensive benefits; an extension of these benefits to all employees would simply not be affordable, would have very serious financial consequences for the Employers, and would impact seriously on their ability to deliver services.

2.19 Furthermore, it would be completely inequitable to continue these arrangements for some employees only.

2.20 Significantly, the rationale usually given for the existence of such generous benefits, namely that salaries are lower than those in the private sector, no longer exists. The Employers have made extensive efforts to introduce salaries that are considered to be competitive with those paid in the private sector.

2.21 For all of these reasons, the Employers believe that the continuation of benefits as expensive as those provided by the existing funds cannot be justified in the future.

2.22 As it is, if all employees were to become members of the eJoburg Retirement Fund (with employer contributions at 15%), the Employers' total contributions would be greater than their total fixed contributions to the various existing funds (without taking into account the cost of unfunded benefits). This is because of the greater number of employees who will be included in formal retirement funding arrangements.

Inefficient governance and administration
2.23 The continued existence of at least 11 different retirement funds is highly inefficient. Each of the Employers must take an interest in the governance and administration of each of the funds, and in most cases must participate in the appointment of trustees and contribute the time and resources required by those trustees for the performance of their duties towards the funds. Administrative costs are increased and the management of payrolls is more expensive and less efficient. These considerations strongly dictate a move towards a single fund.

Protection of accrued entitlements
2.24 Transforming retirement fund arrangements so as to provide uniform retirement funding in respect of future service of all employees must, necessarily, involve reducing contributions and benefits accruing in respect of future service for certain categories of employee, while formal retirement funding will be introduced for a significant number of employees for the first time. This is the only affordable basis upon which the Employers can create equity in their retirement funding arrangements.

2.25 It must be pointed out that this does not involve reducing benefits that have already accrued to employees unconditionally in respect of past service. Benefits for past service are generally fully funded in existing pension funds, and are protected in terms of the rules of existing pension funds and by the provisions of the Pension Funds Act.

2.26 What the Employers' proposal changes is the nature of their contribution to the retirement funding that will accrue to their employees for the remaining period of their service, that is in the future. This is an important distinction, since the Employers' initiative has been portrayed incorrectly by some of its opponents as an invasion of accrued or vested rights.

2.27 If the Employers' proposal is implemented it will become the responsibility of the trustees of the pension funds to determine, in accordance with the rules of the various funds and the applicable legislation regulating pension funds, how to deal with the assets of those funds that have been accumulated to the benefit of the affected members. That process would determine, for example, whether those assets are to be transferred to the eJoburg Retirement Fund, paid out, or retained and invested by the existing funds. These are not questions that the Employers are entitled to determine of their own accord.

2.28 In summary, then, there are three primary reasons why the employers believe that transformation of retirement fund arrangements is essential.

2.29 First, most of the various different funds are racist in origin, in that they were established originally either exclusively for white employees or black, and their continued existence perpetuates racial disparities.

2.29.1 Although this direct discrimination has largely been eliminated by rule amendments, most of the existing funds remain overwhelmingly either white or black. A large number of predominantly lower paid black workers were not, until the establishment of the eJoburg Retirement Fund, members of any pension fund. And the benefit structures and contribution rates provided for in the various different funds are markedly different, with the consequence that different employees of the same employer have significantly different benefit arrangements. As a general proposition, white employees as a group enjoy superior retirement benefits to their black counterparts.

2.29.2 The employers believe that it is completely inequitable to continue with these disparities in retirement fund benefits for their employees.

2.30 Second, most of the existing retirement funds require contribution rates that are simply unaffordable in the long term, and provide benefit structures that are similarly unaffordable, and unsustainable in the long term.

2.31 Third, the continued administration of the existing funds is, from the Employers' perspective, financially and administratively inefficient.

2.32 For these reasons, the Employers resolved to establish the eJoburg Retirement Fund, and propose ultimately to require all of their employees to become members of this new fund, in an effort to ensure that they provide retirement funding arrangements for all of their employees that are equitable, affordable and sustainable.

2.33 The Employers consider that they have compelling reasons to introduce a single uniform retirement fund, that a defined contribution fund is most appropriate, most particularly since the full array of benefits is then funded from the joint contributions of employer and employee, and that an employer contribution of 15% is most appropriate.

2.34 Consequently the Employers propose, subject to the outcome of a further consultation process with affected parties, and further attempts to negotiate the matter with applicable trade unions, to withdraw from the existing funds to which they contribute and to require employees to join the eJoburg Retirement Fund.

3. Engagement with stakeholders

3.1 The Employers hold the view that the role of the existing funds does not extend to negotiating or attempting to negotiate future retirement benefits for their members. This is a matter to be determined by employers and their employees, represented by trade unions. In the Employers' view the role of the funds is limited to protecting the assets that have been accumulated to the benefit of the members through contributions to date, and ensuring that the members' past service benefits which have unconditionally accrued to date are protected. In addition, the Employers consider that the funds are obliged to co-operate to give effect to any change in employment conditions that is either negotiated and agreed with unions or otherwise lawfully imposed by the Employers.

3.2 The Employers previously attempted to negotiate with the recognised unions on their proposal to withdraw from all existing funds and to require all employees to belong to the eJoburg Retirement Fund. The unions refused to negotiate the matter in the Johannesburg division of the SALGBC, while SALGA (the national employers' organisation) was unwilling to regard a proposal that affected only employees in the greater Johannesburg area as a national issue to be negotiated in the SALGBC at a national level. The unions failed to take up a number of invitations by the Employers to engage on the proposal in the Johannesburg division. As a result, the Employers decided to implement their proposals. A collective bargaining dispute declared by the unions could not be resolved through conciliation.

3.3 Since the Employers have restored (or intend to restore) the status quo in respect of each existing fund, they intend to offer the unions a further opportunity to participate in collective bargaining dispute resolution processes. The funds will be informed of the outcome of those processes.

3.4 The funds and other stakeholders are invited, however, to make representations on the proposal irrespective of the outcome of any further negotiations with trade unions or collective bargaining dispute resolution that may take place. In making their representations stakeholders should deal with the Employers' proposal both on the assumption that no agreement is reached with the trade unions, and on the assumption that the unions agree to the proposal.

3.5 The Employers trust that their actions in agreeing to restore the status quo and to resume consultations with affected parties will create the opportunity for constructive discussions amongst all stakeholders regarding the future of retirement fund arrangements for their staff. The employers intend to approach these discussions with an open mind and they trust that all other stakeholders will do the same. At stake are the financial strength of the employers and the financial security of their employees. The City and the UACs believe that their proposal aims to balance these competing interests in a fair and effective manner.

4. The Employers' proposal

4.1 Stakeholders are accordingly informed that the Employers propose to restructure their retirement fund arrangements by -

4.1.1 with effect from the expiry of any period of notice that may be required to be given (and none is now being given) terminating all further contributions and other obligations and liabilities to the funds to which they contribute as at the date of the notice;

4.1.2 requiring their employees to commence membership of the eJoburg Retirement Fund with effect from the date immediately following the expiry of the notice period.

5. Invitation to make representations

5.1 If, for the purposes of making representations, any further information is reasonably required from the Employers which is not already within the possession of the stakeholder concerned or easily obtainable, or which is not in the public domain, stakeholders are required to direct a request for such information in writing, setting out specific details of the information required, to Makgane Thobejane in the office of the City Manager, Metropolitan Centre, 158 Loveday Street, Braamfontein, fax number (011) 403 1012. The request should reach him by no later than 15 January 2003.

5.2 Stakeholders are invited to make written representations to the Employers on their proposals, and to deliver any such representations to Makgane Thobejane (contact details set out above) by close of business on 28 February 2003.

5.3 After the Employers have considered and where appropriate responded to any representations made by stakeholders, a decision will be made as to whether it is necessary or appropriate to provide an opportunity to make oral representations on the matter.

Pascal Moloi
City Manager
City of Johannesburg

On behalf of the Employers

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Last Updated on 19 February 2013