THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
CASE NO: 457/08

EKURHULENI METROPOLITAN MUNICIPALITY
Appellant

and

GERMISTON MUNICIPAL RETIREMENT FUND
Respondent

Neutral citation: Ekurhuleni Metropolitan Municipality v Germiston
Municipal Pension Fund (457/2008) ZASCA 154 [2009] (27 November 2009)

Coram:
NAVSA, LEWIS, HEHER AND MLAMBO JJA AND GRIESEL
AJA

Heard:
2 November 2009

Delivered:
27 November 2009

Summary:
Interpretation of pension fund rule: interpretation to be done
having regard to context – nature of fund, purpose of rule, general practice
and effect – in order to give commercially sensible meaning to rule.

_____

ORDER

On appeal from:  High Court, Johannesburg (C J Claassen J sitting as court of
first instance).
The appeal is dismissed with costs including those of two counsel.

JUDGMENT

LEWIS JA (NAVSA, HEHER AND MLAMBO JJA AND GRIESEL AJA concurring)
[1] This appeal turns on the interpretation of a pension fund rule. The
respondent is the Germiston Municipal Retirement Fund (the Fund). It was
established as the Germiston Municipal Pension Fund on 1 July 1924. The
appellant, the Ekurhuleni Metropolitan Municipality (the Municipality), the
successor to the Germiston Municipality, is the principal employer participating in
the Fund. When the Fund was established it was primarily a defined benefit fund
(the nature of which I shall discuss later). The Fund was converted in 1994 to a
fund with a primarily defined contribution nature. Both parties are bound by the
rules in terms of s 13 of the Pensions Fund Act 24 of 1956.1  The rule in issue
was carried over from the old rules (where it was rule 43.1) to the new, where it is
rule 10.8(1) (which I will refer to generally as the Rule).

[2] The Rule states:
'If the rate of interest earned on the total moneys (including any uninvested moneys ) of
the Fund during any financial year should be lower than five and one-half per cent
(5.5%) the Council [Municipality] shall contribute to the Fund such a sum as would

1 ‘[T]he rules of a registered fund shall be binding on the fund and the members, shareholders
and officers thereof, and on any person who claims under the rules  . . .’.

increase, on being added to the interest actually earned, the rate of interest to five and
one-half per cent (5.5%) during such financial year.'
[3] The Fund and the Municipality agree that ‘moneys' means more than
cash, and that 'interest' means more than interest earned on cash. It is not
contested that interest on moneys includes the return on investments. This
common understanding is based upon an interpretation of all the rules and the
context in which they are used. They differ, however, as to the meaning of the
phrase ‘actually earned’: the Municipality contends that it excludes  gains on all
unrealized assets, while the Fund asserts that in effect the Municipality has
guaranteed growth, at least to the level of a 5.5 per cent increase in the value of
the assets in every financial year.
[4] According to the Fund, in the financial year 1 July 2002 to 30 June 2003
its assets diminished in value by -4.3 per cent. This was the first time in the
Fund's history that it had not achieved at least 5.5 per cent growth in its
investments. The Fund accordingly instituted action against the Municipality,
claiming that it was liable to contribute to the Fund the difference between -4.3
per cent loss and 5.5 per cent return in that financial year. The amount claimed
was R61 173 822. The calculation of this figure was not disputed by the
Municipality. What was, and remains, in dispute is the meaning of the phrase
‘interest actually earned’. The Fund asserts that it includes a return on all its
investments, taking into account all realized and unrealized capital gains and
losses based on the market value of the assets. The Municipality contends that it
means a return only on the gains actually achieved, which would exclude
unrealized capital gains or losses. The Municipality raised the issue of
interpretation shortly before the trial commenced. It had relied previously on a
number of defences which it no longer pursues on appeal.  The meaning of the
Rule is the only issue before us.

[5] The high court accepted the Fund’s interpretation of the Rule and ordered
the Municipality to pay to the Fund the sum of R61 173 822 plus interest. It is
against this order that the Municipality appeals with the leave of the high court.
Conversion from a defined benefit to a defined contribution retirement fund
[6] Before turning to the different interpretations placed by the parties on the
Rule I shall deal briefly with the differences between the nature of the Fund when
it was established in 1924 and the nature after it was converted in 1994. It had
previously been a defined benefit fund – one where every member is promised a
pension benefit that is calculated as a percentage of the member’s salary on
retirement. The contribution of the Municipality as employer was thus calculated
to meet the promise of a particular benefit. Where the Fund’s investments in a
particular year were good, the contribution by the Municipality might thus have
been reduced: it had only to meet its promise as to the benefit payable. And
conversely, in a bad financial year, the Municipality may have had to increase its
contributions. (See Tek Corporation Provident Fund v Lorentz2 and Financial
Services Board v De Wet NO3 on the nature of a defined benefit fund and the
employer’s liability to make good its promise.)  The Municipality thus carried the
risk of bad investment performance.
[7] A defined contribution fund, on the other hand, is one where the rules
define the contributions to be paid by both members and the employer. There is
no guarantee of any particular benefit. And equally where a surplus or a loss is
experienced by the fund the employer does not get the benefit of a contribution
‘holiday’, nor does it have to pay in where there is a loss.4 The member, on
retirement, is entitled to the contributions made by him or her and by the
employer, and any return on the amount in the member’s account that has been
invested.

2 1999 (4) SA 884 (SCA) paras 5 and 16.
3 2002 (3) SA 525 (C) para 9.
4 Financial Services Board para 10.

[8] The parties were agreed, however, that the Fund, prior to 1994, was not
purely a defined benefit fund, and that post 1994 it was not purely a defined
contribution fund. It was hybrid in nature before and after conversion, with a
primarily defined contribution complexion after the rules were amended.
[9] When conversion to a defined contribution fund was considered by the
parties towards the end of 1993, the Fund started discussions with the members.
The proposed rule amendments not only had to be approved by the Municipality
and the Registrar of Pension Funds, but also by members. The amendments
were presented to members in various circulars and at consultative meetings.
There is not much information available about the entire consultative process. It
is clear, however, that the package of rules was accepted by the necessary
majority of members. Active members were treated differently from pensioners.
The latter were governed by the old rules (in terms of Annexure C to the new
rules). Pensioners and their spouses would be treated on the same basis as they
had been prior to the conversion.
[10] On conversion in March 1994 the Fund changed its name to the
Germiston Municipal Retirement Fund, whereas previously it had been called a
Pension Fund. Nothing turns on this, and it remains the same legal entity.
[11] The Fund is now a hybrid that has both defined benefit and defined
contribution features. These include the fact that the pensioners, as at the date of
conversion, are entitled to defined benefits whereas the benefits of the active
members are determined on a defined contribution basis.  In addition, provision is
made for safeguards that protect members’ shares, such as the establishment of
a reserve fund into which investment earnings, inter alia, are paid. The Rule must
be interpreted in this light.
The meaning of the words in the Rule

[12] Interpretation of what is meant by ‘interest actually earned’ should be
approached with ‘common sense and perspective' (Bekker NO v Total South
Africa (Pty) Ltd 5) argues the Fund. And in determining the meaning of the words
used in the Rule regard must be had to the entire set of rules – the contract
between the members, the Fund and the Municipality. Both parties accept this
canon of interpretation, invoking Sassoon Confirming and Acceptance Co (Pty)
Ltd v Barclays National Bank Ltd.6
Principles of interpretation
[13] The principle that a provision in a contract must be interpreted not only in
the context of the contract as a whole, but also to give it a commercially sensible
meaning, is now clear. It is the principle upon which Bekker NO was decided,7
and, more recently, Masstores (Pty) Ltd v Murray & Roberts (Pty) Ltd8 was based
on the same logic. The principle requires a court to construe a contract in context
– within the factual matrix in which the parties operated. In this regard see KPMG
Chartered Accountants v Securefin.9

Context and commercial sense
[14] What, then, is a commercially sensible construction of the Rule? The high
court, relying on what it regarded as the ‘grammatical and ordinary meaning’ of
the phrase ‘interest actually earned’, held that the Rule established a guarantee
which would be invoked where the growth of the Fund’s investments was less
than 5.5 per cent in the financial year in question. The Municipality’s principal
attack on this construction is based on another purely linguistic – grammatical –
canon: where different words are used in a document they must mean different
things.

5 1990 (3) SA 159 (T) at 170G-H.
6 1974 (1) SA 641 (A).
7 The decision was reversed on appeal, but the approach of Kriegler J in the court a quo was not
disapproved.
8 2008 (6) SA 453 (SCA).
9 [2009] ZASCA 7 (13 March 2009); 2009 (4) SA 399 (SCA) para 39.

The significance, if any, of different words
[15] As the Municipality points out, the words 'investment yield’ and 'market
value' are used elsewhere in the rules but not in the Rule. So, for example, the
definition in the rules of ‘accumulated contributions’ has as a component the
contributions paid by a member together with interest at a rate to be decided
having regard to the ‘investment yield achieved by the Fund’.  Members’ shares
include ‘investment earnings’ transferred from the reserve account (to which I
shall revert): the earnings are based on ‘the investment yield achieved by the
Fund during the period for which the investment earnings are credited to the
member’s account’ (rule 2.2(1)(v)).  And rule 10.5 requires the actuary to
estimate what portion of the investment earnings is attributable to various
accounts to ensure that any gain from investment assets is credited to the correct
accounts.
[16] In rule 2.2(3)(c)(i)  there is a reference to fluctuations in the ‘market value
of the Fund’s investments’. Why not use the same phrase – rather than interest
actually earned – if that was what was intended in the Rule, asks the
Municipality? The Fund’s response is that the rules have been drafted over a
long period by different people, and that accordingly one cannot expect
consistency in language. That may be so. But I think there is a more principled
objection to the use of this guide to interpretation in this case: it is a guide
resorted to in order to ascertain the linguistic meaning of words, not the real
intention of the parties. It must thus be invoked only where that intention cannot
otherwise be ascertained.10 If the Rule cannot be given a commercially sensible
meaning by looking at it in context – in its general factual matrix11 - then the use
of different terms in different places may assist in interpretation. But if the parties’
intention is ascertainable having regard to the context, we should not resort to
purely linguistic, and invariably contrived, constructions.

10 See R H Christie The Law of Contract in South Africa (5 ed) 2006 p 219.
11 KPMG Chartered Accountants v Securefin above para 39.

[17] The Municipality contends further that the high court did not have sufficient
regard to the phrase ‘actually earned’ in the Rule. It concedes that ‘actually’ does
not add to the meaning. The word simply means ‘in fact’ and adds emphasis. But
the Municipality argues that ‘earned’ means gained: a gain is one which has in
fact been made. Thus appreciation in the value of an asset that is not in fact
realized is not a gain: nothing has been earned. One does not ‘earn’ simply
because assets appreciate in value. And similarly, depreciation in value does not
mean that a loss has been incurred. Thus fluctuations in the value of the Fund’s
investments in a particular period have no significance in themselves. Only where
an asset is realized would there be a gain, and thus anything earned.
[18] This argument too is based on purely linguistic grounds: the Municipality
seeks to give the words in the Rule their ordinary or usual meanings. It does not
take account of the context: the purpose of the Rule, general practices in the
pension fund industry and the effect of its interpretation.  As the Fund contends,
the investment performance of a pension fund is determined by having regard to
the market value of its investments. Its financial stability is dependent on the
value of the assets. If, in determining investment performance, one disregards all
assets that have not been realized during the course of the financial year, one
would not have a proper picture of the performance at all. In order to assess the
market value of the Fund one must take into account the value of all the assets
held by the Fund. Depreciation will mean that there has been an actual loss.
Appreciation will result in a gain – an earning.
The context or factual matrix
The purpose of the Rule
[19] Both parties contend that the purpose of the Rule is to provide a safety net
for members. They differ, however, on what that is. The Municipality argues that
it is to guarantee that the employer will pay in to the Fund the amount necessary

to achieve a 5.5 per cent earning on investments realized, or interest earned. The
Fund argues, on the other hand, that the net is safer than that. The Municipality,
it contends, is required to make good the difference between the value of all
assets in the Fund, as at the end of the financial year, and the total value with at
least a 5.5 per cent appreciation. That difference in July 2003 is the amount
claimed – R61 989 551. The high court adopted the Fund’s interpretation, finding
that the Municipality’s view would exclude the biggest single indicator of the
Fund’s performance in the financial year – the market value of its investments.
[20] The Municipality argues that the high court did not take into account the
anomaly that results from this interpretation: it can be called upon to pay in to the
Fund simply because the financial year end coincides with a temporary fall in the
stock market. If the market improves soon afterwards the Fund will have a
gratuitous windfall, unrelated to earnings generated on the Fund’s investments.
Moreover, such an anomalous windfall would not be consonant with a defined
contribution Fund. (As indicated, the Municipality does acknowledge that the
Fund is a hybrid one.)
[21] The Fund responds that all deadlines give rise to anomalies and that there
must be a cut-off point when the Fund’s investment performance can be
analysed. Moreover, it argues, the Municipality could have protected itself by
providing 'claw backs' in subsequent periods when performance is better. It
would be equally anomalous if the guarantee would be triggered only upon the
realisation of losses, through the sale of investment assets, but not by the
performance of investments generally.
[22] The arguments for the Fund’s interpretation are based also on the need
for the safety net provided by the Rule, the purpose for which it was agreed being
to meet that need. The purpose is to provide a guarantee by the Municipality to
its employees, or former employees, of investment performance to ensure the
financial well-being of the Fund. The rules of any fund must be based on sound

financial principles and the board of a fund has the obligation to ensure that
members’ interests are protected (see ss 7C and 7D of the Act on the objects
and duties of pension fund boards). An administrator of a fund must maintain
adequate financial resources to meet its commitments and manage the risks to
which a fund is exposed (s 13B(5)(f)). The guarantee must be seen in the light of
these provisions and makes sense given the duties to protect members’
interests.
Practices in pension funds generally
[23] The Fund contends further that in ascertaining the meaning of the Rule the
court must have regard to general practices in the pension fund industry. Usually
performance of funds is determined with reference to changes in the market
value of their assets, and the ability to meet their obligations to their members.
The Municipality’s interpretation, the Fund argues, is unrelated to the market
value of the fund's assets. It introduces the notion of realizing profits and losses
which, the Fund contends, is foreign to the usual operations of a pension fund.
Moreover, the assets of the Fund have readily ascertainable market values. The
realization of the assets does not change the actual financial position of the
Fund. The only effect that realization would have is to convert the assets into
cash. Further, on the Municipality's interpretation, the guarantee would be
triggered only where, in addition to the fall in value of the assets, the Fund had
converted the assets to cash. This is an arbitrary consequence.

The effect of the Rule according to the different interpretations
[24] The investment risk that the Rule guards against is the depreciation of the
Fund’s investments. On the Municipality’s interpretation, where the value of the
Fund’s assets falls, the members may find their benefits reduced in
consequence, and the Municipality would not have to contribute to alleviate the
situation for so long as the Fund did not realize those assets that perform poorly.
Such a result, the Fund contends, could not have been intended by the members

when they agreed to the amendments to the rules and the change in nature of
the fund.
[25] The Fund argues that the Rule had the same meaning and effect prior to
the amendments. Where a defined benefit was payable to a pensioner the Rule
would have ensured that the Fund was able to meet its commitments to
pensioners. But the same safety net is needed for members after 1994 and there
is nothing to suggest that members agreed to give up the protection they had
had. If there is a depreciation in value of the Fund’s assets then the members will
be prejudiced on the Municipality’s interpretation.  In my view, that cannot have
been intended. It is not a commercially sensible outcome.
[26] It is not one that the Municipality appeared to accept either. For even in its
amended plea,12 it set out the ‘average annual rate of interest’ for the years
ending June 2000 (14 per cent), June 2001 (14.7 per cent) and June 2002 (12.5
per cent) based on the market value of the Fund’s assets. (It states also that for
the year ending June 2004, the average annual return on the total moneys
invested exceeded 5.5 per cent.) The figures reflect a gain on the value of all
assets, and not those actually realized.
[27] A further difficulty arising from the Municipality’s approach is that the
obligation to pay would be triggered only when assets are realized and losses are
incurred. This consequence runs counter to the general practice that the health of
a pension fund is measured by the value of its investments and their
performance.
[28] It is important to bear in mind also that people who were already
pensioners in 1994 continue to be governed by the former rules of the Fund,
including one identical to the Rule (former rule 43.1). It would be most odd if the
Municipality were obliged to make good the guarantee in respect of them, but not

12 Para 9. The figures were originally set out in a letter from the principal officer of the Fund to the
chief financial officer of the Municipality dated 11 December 2003.

in respect of other pensioners or active members of the Fund. And how would
this be achieved? Would the guarantee be triggered for pensioners when the
overall assets of the Fund are determined at financial-year end, but not for active
members? Again, the interpretation of the municipality makes no commercial
sense.
[29] The Fund argues too that in order to determine what risk it is that the Rule
guards against (what purpose the ‘safety net’ serves), the court must have regard
to the benefits to which members are entitled. Rule 4 provides that on retirement
the member’s share will be transferred to an account (a pensions account or an
insurer’s account, say) to secure the pension. Thus the benefit to which a
member is entitled depends on what is in his or her account – what the share is.
The sources of the credits in the member’s account are determined by rule
2.2(1)(a), and in particular (a)(v). This provides that investment earnings must be
transferred from a Reserve Account: and such investment earnings ‘shall be
based on the investment yield achieved by the Fund during the period for which
the  . . . earnings are credited to the Member’s Share Account; . . .’. Thus it is not
profits realized that are placed in the member’s account, but the investment yield
(rule 2.2(1)(b)(i)). Equally, ‘valuation losses’ must be debited to the member’s
share (rule 10(5)). The corresponding provision is to be found in rule 2.2(3) which
establishes a Reserve Account, which comprises a record of all moneys of the
Fund that have not been allocated to the Share Account or the Pensions
Account. Valuation losses debited to the Share Account must be credited to the
Reserve Account (rules 2.2(3)(a)(iii) and 2.2(1)(b)(i)). And rule 10.5(4) provides
that if the financial position of the Fund requires it, on the recommendation of the
actuary, ‘the Committee may increase or decrease the contribution rate and/or
the benefits under the Fund in any manner including the granting of bonuses;
provided that if the valuation reveals a surplus and the Actuary so agrees, such
surplus shall be allocated to the various accounts . . . to increase the benefits
supported by such accounts’.

[30] Thus, argues the Fund, it is clear that the financial position of the Fund
has a direct effect on the benefits received by members. It matters not that
depreciation in value in a financial year may be made up in following years. In
each year the financial health of the Fund may impact directly on the benefits or
bonuses payable to members. The better the performance in a year the more
likely it is that a member’s share would be increased. And of course, the poorer
the performance the more likely it is that the benefits will be reduced. Thus the
Municipality’s guarantee of a rate of ‘interest’ of 5.5 per cent in a financial year
amounts to a guarantee that benefits will not be reduced beyond a particular level
when the Fund’s performance is poor. The rules reflect the truly hybrid nature of
the Fund: the pension of a member is related not only to contributions that are
defined, but also to good financial performance that may result in increased
benefits and possibly bonuses too.
[31] The Municipality’s interpretation, on the other hand, provides no ‘safety
net’ for members. It entails the consequence that the benefits received on
retirement are related only to realization of assets and not the overall
performance of investments. It does not protect members against the risk of poor
investment performance.
[32] It is true that the rules provide for other ‘safety nets’. The creation of the
Reserve Account into which, inter alia, investment earnings are paid ensures
some level of risk aversion. So too does the requirement of actuarial valuations
on a regular basis. But that is no reason to assume that another measure of
protection is not desirable. Given that both parties regard the Rule as providing a
risk aversion measure, one must ask what the risk is and how members are to be
adequately protected. In my view, the Fund’s argument that the real risk is the fall
in the value of investments overall is compelling. There is no need to protect
against random losses incurred in the realization of only some assets.

[33] Having regard to the context of the rules – the nature of the Fund, the
general practice of pension funds, and, most importantly, the purpose and effect
of the Rule – the only sensible commercial meaning to be given to it is that
argued for by the Fund and accepted by the high court. The Municipality is
accordingly obliged to pay to the Fund the amount claimed.
[34] The appeal is dismissed with costs including those of two counsel.

_______________
C H Lewis
Judge of Appeal

Appearances:

For Appellant:

A E Franklin SC

D L Wood

Instructed by

Wright, Rose-Innes Inc

Bedfordview

Goodrick & Franklin

Bloemfontein

For Respondent:

C D A Loxton SC

N Fourie

Instructed by

SHB Attorneys

Germiston

Naudes’s Attorneys

Bloemfontein
SUPREME COURT OF APPEAL OF SOUTH AFRICA

PRESS RELEASE

27 November 2009
STATUS: Immediate

Ekurhuleni Metropolitan Municipality v Germiston Municipal Pension
Fund (457/2008)   [2009] ZASCA 154  (27 November 2009)
Please note that the media summary is intended for the benefit of the media
and does not form part of the judgment of the Supreme Court of Appeal

A rule of the Germiston Municipal Pension Fund (which had converted from
being a defined benefit fund to a defined contribution fund in 1994) provided
that if the 'rate of interest earned on the total moneys’ of the Fund during any
financial year should be lower than 5.5%’ the Municipality ‘shall contribute to
the Fund such a sum as would increase, on being added to the interest
actually earned, the rate of interest to 5.5% during such financial year.'

The Fund interpreted this to mean that if the return on all its investments in a
financial year was less than 5.5 per cent then the Municipality would be bound
to make up the difference. The Municipality, on the other hand, contended
that it was only the interest earned on realized assets that had to be taken into
account.

The Fund claimed some R61m, being the difference between the actual return
on all its investments and a 5.5 per cent appreciation in value of its
investments in the year ending July 2003. It was the first year in which the
Fund had not earned at least a 5.5 per cent return. The High Court,
Johannesburg had ordered the Municipality to pay the sum claimed, accepting
the Fund’s argument.

On appeal to the SCA, the Municipality contended that the phrase ‘interest
actually earned’ did not include a gain in value. This court held, however, on
the basis of a commercially sensible interpretation of the Rule in its context,
that the Municipality had guaranteed a return of at least 5.5 per cent, and that
it was accordingly liable to pay the Fund the amount claimed.

The SCA accordingly dismissed the appeal.