Constitutional Challenges in the
Implementation of A Compulsory
Pension Fund: The Case of Lesotho
Prof Mtende Mhango
Deputy Head of the School of Law
University of the Witwatersrand
Overview
1) Worldwide move from DB to DC Fund
2) Brief synopsis of the judgment in Sechele v
Public Officers Defined Contribution Pension
Fund [2011] LSCA 23
3) Benefits of the pension reforms in Lesotho
4) Entrenching pension benefits in the
Constitution
5) Lessons from Lesotho pension reforms
Worldwide Move from DB to DC Fund
• What is a DB and DC Fund and its effects?
• DB Fund is a fund that pays a specific amount of
benefits. It calculates benefits based on salary times
number of years of service. Employer bears the
investments risk.
• DC fund is a fund in which an individual employee’s
pension benefit is determined based on the
contributions made and the investment earned. The
amount of an employee’s actual retirement benefit
cannot be determined until he has retired.
Employee bears the investment risk.
Worldwide Move from DB to DC Fund
• Since the 1980s, a worldwide move from DB to DC began.
• Employers desire to limit financial commitments associated
with DB Funds.
• limited choice between DB and DC led to creation of third
type of pension fund identified as a hybrid pension fund.
• In a hybrid fund, the risk is shared between the
employer and employee.
• It guarantees a portion of the benefits to the
employee and at the same time compel the
employee to assume some portion of the
investment risk.
The Genesis of Lesotho’s Reforms
• The pay as you go DB pension system
• Funding from the national budget
• Government of Lesotho observed that its
pension liability was too high to be financed from
the recurrent budget, and opted for a properly
structured system under the DC Fund.
• Government took a policy/political decision to
switch from DB to DC funding model and passed
the Pension Act
Public Officers Pension Act
– To establish a standalone independent DC
Fund with minimal financial risk to the
Government to pay pensions to all public
officers
– To make pension membership compulsory to
all public officers below the age of forty.
Sechele v Public Officers Defined Contribution Pension Fund.
1. Compulsory pension contribution and
membership requirement
2. Whether the compulsory contribution and
membership of the DC Fund violated the property
rights in the Constitution
3. Whether sec 27 of the Pension Act violated sec
150(1) & (2) of the Constitution
• Sec 27 says “On retirement, a member shall
be entitled to a portion of his or her fund credit
to the maximum of 25% as cash benefit. The
remaining percentage shall be used to
purchase an annuity for him or her.”
Sechele v Public Officers Defined Contribution Pension Fund
• Section 150 of the Constitution provides:
• (1) The law to be applied with respect to any pensions
benefits that were granted to any person before the
coming into operation of this Constitution shall be ...any
law in force at a later date that is not less favourable to
that person.
• (2) The law to be applied with respect to any pensions
benefits shall be the law in force on the date on which
that period of service commenced, or be any law in force
at a later date that is not less favourable to that person.
Sechele v Public Officers Defined
Contribution Pension
• The Court of Appeal read into sec 27 the
following provision to cure the defect.
• “Provided that the retirement benefits
payable to a member shall not be less
than the benefits such member would
have received under the law with respect
to pensions benefits which would have
applied if this Act had not been passed”
Sechele v Public Officers Defined
Contribution Pension
• The question is what kind of a fund is the Public
Officers Pension Fund? Is it a DC or DB fund?
• I argue that it is neither. The Sechele Court
imposed the creation of a hybrid public officers
pension fund in Lesotho.
• The Fund guarantees certain benefits to
members, which government is required to pay.
• The members do not carry all the risk that
members normally do in a DC fund.
• The members and employers (Govt) share the
investment risk.
Lessons from Lesotho Pension Reforms
Entrenching pension benefits in the Constitution
1. It constrains the hands of the legislature
2. Consultations are never sufficient when
changes to the pension benefits are needed
3.Pension benefits protected
Lessons from Lesotho Pension
Reforms
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Political Will
Compulsory pension contributions permitted
Rule of law (legality) requirement
Section 27 of Constitution-reasonableness/rationality
Cutting edge research that informs the reforms
Public Consultation on pension reforms is a legal
requirement
– Public Consultation is part of good governance
requirement
• Malawi consultation on Pension Act 2011
• South Africa’s own pension reforms since 2004
• Benefits include better calculation of political risks and public
education which can improve compliance levels.
Trade Unions Demonstrate Against the Pension
Bill in Malawi in 2011
Pension Act was passed in 2011
Conclusion
– Compulsory pension funds is an accepted
principle worldwide
– Nyambirai v National Social Security Authority &
Another, 1996 (1) SA 636 (upholding the
national social security scheme)
– Steward Machine Company v Davis 301 US 548
(1937)(upholding the New Deal legislation)
– Apostolou v The Republic of Cyprus (1985) LRC