Many superannuation funds were established as “Provident Fund” or “Pension Funds” and only provided pensions to members once they attained the Normal Retirement Age.
These funds did not initially offer lump sum benefits.
If a Member resigned or was retrenched before the Normal Retirement Age the Member became a “deferred benefit” member and the pension was not paid until the Member attained the Normal Retirement Age.
If the Member gained employment with another employer, the Member would receive a part pension from both employers.
A common formula for a pension is:
1/60th of final pensionable salary for each year of service with a maximum of 2/3rds final pensionable salary.
Many funds later executed Deeds of Variation that empowered the Trustee to offer a lump sum benefit in lieu of a pension, however the Member should retain the right to elect between:
- (i) a pension, or
- (ii) a lump sum benefit, or
- (iii) a combination of (i) and (ii).
However some Trustees claim it is the Trustee’s discretion as to whether to pay a pension and then unlawfully fetter that discretion by not offering a pension option to members at all.
This is especially the case if the conversion rate into a pension is very attractive.
By retaining fund membership members would also retain Death and Disability cover.
By forcing Members who resigned or are retrenched before the Normal Retirement Age to take a lump sum, the Members can then incur significant losses compared to if they had remained “deferred pensioners”
In her book “Retirement Heist – How Companies plunder and profit from the nest eggs of American Workers”, Ellen Schultz writes:
“Watson Wyatt (an international firm of Actuaries), ever the innovator, offered employers the Single Payment Optimizer Tool (SPOT), a software program that enabled employers “to compare the cost of lump-sum cash outs to the costs of keeping (former) employees on the retirement rolls”.
In 1999, Mary Fletcher, a marketing services trainer and fourteen year veteran of IBM, had to decide between taking a lump sum and a monthly pension when IBM sold a unit with 3000 US employees to AT&T. She hired and advisor who calculated that while the monthly pension would be worth $101,000 if cashed out, the Lump Sum being IBM offered Fletcher was worth only $71,500.”
The following is a typical example of how a company can make a “buy-out” offer that is well below the “cash-out” value of the pension entitlement.