While section 197 of the Labour Relations Act, 1995 deals with transfers of a business as a going concern, the impact of the section 197 transfer on employee benefit schemes becomes a key focus in the transfer. If transferring employees are able, following the transfer, to remain contributing members of their existing pension fund, then no difficulties arise. However, often, this is not possible.

Section 197(3)(a) of the LRA requires employees to be transferred to the new employer on terms and conditions which are, on a whole, not less favourable than those on which the employees were employed by the old employer. This section does not require transferring employees to continue as contributing members of the old employer's pension fund. Section 197(4) gives express recognition to the fact that pension rights are frequently capable of unqualified transfer from the old to new employer, and that some form of modification may be necessary.

What this would mean is the new employer may require transferring employees to belong to a new pension fund. Employees may only be transferred to a new fund if the 'criteria' of section 14(1)(c) of the Pension Fund Act, 1956 are satisfied.

The Labour Relations Act and Pension Fund Act
Section 197(4) of the LRA states: '… does not prevent an employee from being transferred to a pension, provident, retirement or similar fund other than the fund to which the employee belonged prior to the transfer, if the criteria in section 14(1)(c) of the Pension Funds Act, 1956 are satisfied.'

Section 14(1)(c) of the PFA states that the scheme must be 'reasonable and equitable' and must accord full recognition to the rights and reasonable benefit expectations of the persons concerned as well as any additional benefits that have become established practice. In addition, the proposed transaction may not have the effect of rendering any fund unable to meet the requirements of PFA or to remain in a sound financial condition.

The primary purpose of the provisions are to ensure that the transfer of business of a fund does not prejudice fund members of the fund concerned in respect of their past service, that is, the period of service prior to the transfer. Employees' pension entitlements in respect of their past service are determined by reference to the rules of the old fund, and must be dealt with in terms of those rules. The new employer has little or nothing to do with those entitlements. Its obligation is to provide a reasonable and equitable substitute in respect of the employees' future service.

Dealing with retirement savings accumulated in respect of past service
If employees are not able to remain members of the old fund, they will usually be given the option (in terms of the old fund's rules) of preserving their accumulated retirement savings in the old fund or transferring those savings to another fund. If employees choose to preserve their accumulated retirement savings in the old fund, they will become 'deferred pensioners' of the fund and will receive benefits from the old fund when they reach pensionable age.

The rules of some funds permit a transfer to a preservation fund. This requires that a termination of employment benefit be paid, and results in a tax liability accruing at the point of transfer to the preservation fund.

Where retirement savings are transferred to a new fund, the rules of the transferor fund, read together with the provisions of section 14 and 14A of the PFA, provide the basis for calculating a transfer value. Once approved by the registrar in terms of section 14, the transfer will extinguish the liability of the old fund to members concerned and members will not be credited with benefits in the new fund.

What is the practical effect of section 197(4)?
Interpreting section 197(4), it follows that a fund may not transfer pension benefits without the approval of the members. The new employers obligations regarding pension rights, once transferred, translates into an obligation to make the same contribution for the benefit of the employees to a similar fund and not necessarily the same fund.

Section 197(4) does not mention any agreement between the new and old employer and employees regarding the transfer of their pension benefits. Section 197(4) requires cooperation with the Registrar of Pension Funds when the pension benefits of employees are transferred to a similar fund. The registrar must be satisfied that any scheme to amalgamate or transfer funds is reasonable and equitable.

The intention of section 197 is to leave the rights of employees intact. Section 197(4) is permissive and not mandatory, which ought to illustrate that the legislature is aware of the difficulties relating to pension rights when contracts are transferred in terms of this section. The provisions of section 197 strongly suggest that the new employer is not required to provide access to an identical fund.

Wrritten by Lauren Salt, Senior Associate, and Dean Joffe, Candidate Attorney, Employment & Compensation Practice, Baker McKenzie, Johannesburg