THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

Case No: 56/09

RAJWANTHA SOOKHDEO MUNGAL
Appellant

and

OLD MUTUAL LIFE ASSURANCE CO SA LTD
Respondent

TREVOR VERNON FREEMAN
Appellant

and

OLD MUTUAL LIFE ASSURANCE CO SA LTD
Respondent

Neutral citation:
Mungal v Old Mutual (56/09) [2009] ZASCA 141 (20 November
2009)

Coram:
STREICHER, NUGENT, MAYA, SNYDERS JJA and LEACH AJA

Heard:
6 NOVEMBER 2009

Delivered:
20 NOVEMBER 2009

Summary:
Determination made by Pension Funds Adjudicator – whether
adjudicator had jurisdiction to consider the complaint –
endowment policy issued by an insurer - value upon early
termination.

ORDER

On appeal from: High Court at Durban (Sishi J sitting as court of first
instance)

The appeal in each case is dismissed.

JUDGMENT

NUGENT JA (STREICHER, MAYA, SNYDERS JJA and LEACH AJA
concurring)

[1] Chapter VA of the Pension Funds Act 24 of 1956 creates the office of
the pension funds adjudicator, whose function is to dispose of complaints
relating to pension funds in a ‘procedurally fair, economical and expeditious
manner’.1 After investigating a complaint the adjudicator may ‘make the
order which any court of law may make’, which is ‘deemed to be a civil
judgment’.2 Any party who feels aggrieved by a determination of the
adjudicator may apply to an appropriate high court for relief in which event
the high court ‘may consider the merits of the complaint . . . and may make
any order it deems fit’.3 It also follows from s 30P(3) that in considering the
matter the court may take further evidence.

1 Section 30D.
2 Section 30E read with s 30O.
3 Section 30P.

[2] In this case Mr Mungal, who was a member of the Protektor
Preservation Provident Fund, and Mr Freeman, who was a member of The
South African Retirement Annuity Fund, both of which are ‘pension fund
organizations’ as contemplated by the Act, lodged separate complaints with
the adjudicator that were directed at Old Mutual Life Assurance Company
(South Africa) Limited. The complaints had much in common and the
adjudicator dealt with them together. After considering the complaints the
adjudicator made certain orders against Old Mutual and in particular he
ordered Old Mutual to pay to Mungal the sum of R29 592 and to Freeman
the sum of R46 635.

[3] Old Mutual was aggrieved by the determinations. Invoking the
provisions of s 30P it applied in each case to the high court at Durban for
orders setting aside the respective determinations and for further declaratory
relief. The two applications were heard together by Sishi J and both
succeeded. Mungal and Freeman now appeal with the leave of the court
below.

[4] The funds are designed to accommodate employees to whom a benefit
has become payable in consequence of terminating their membership of
another provident fund. They are ‘underwritten funds’ by which is meant
that their only assets are claims under long-term insurance contracts. When a
person joins the fund the moneys that he or she received from the earlier
fund will be used to pay the premium on an insurance policy taken out by
the fund. The parties to the policy will be the fund and the insurer and the
member will be the ‘life assured’. Benefits that accrue under the policy are

paid by the insurer to the fund and the moneys are then available to pay to
the member the benefits to which he or she is entitled under the Rules. The
policies that were taken out when Mungal and Freeman joined their
respective funds were both issued by Old Mutual.

[5] Old Mutual is also the administrator of each of the funds. While the
funds are under the overall control of boards of trustees the responsibility for
their administration was assigned by the trustees to Old Mutual under what
was called a Fund Administration and Trustee Services Contract. The
agreement requires, and authorises, Old Mutual to perform all the functions
that generally attach to the administration of such a fund, which are specified
in some detail in an annexure to the agreement.

[6] In these proceedings Old Mutual says at the outset that the adjudicator
was not entitled to make any orders against it because the complaints by
Mungal and Freeman do not fall within the definition of a ‘complaint’ in the
Act. If there was to be a complaint at all, it was submitted on behalf of Old
Mutual, it ought properly to have been directed to the Ombudsman for Long-
term Insurance.4 That objection was not raised when the matter came before
the adjudicator but that is not material. If the adjudicator had no jurisdiction
in the matter then that is a sufficient and proper basis upon which to set aside
his determination.

[7] A ‘complaint’ is defined in the Act to mean, amongst other things
‘a complaint … relating to the administration of a fund … and alleging-

4 The office of the Ombudsman for Long-term Insurance has been created pursuant to the Financial
Services Ombud Schemes Act 37 of 2004.

(a)
that a decision of the fund or any person purportedly taken in terms of the rules
was … an improper exercise of its powers;
(b)
that the complainant has sustained or may sustain prejudice in consequence of the
maladministration of the fund by the fund or any person, whether by act or omission;
(c)
that a dispute of fact or law has arisen in relation to a fund between the fund or
any person and the complainant; or
(d)
…
but shall not include a complaint which does not relate to a specific complainant;’

[8] The complaints in this case were conveyed to the adjudicator in letters
written by Mungal and Freeman. Needless to say they were not framed in
the language of the definition but I do not think the form in which a
complaint is made is critical. Chapter VA clearly contemplates complaints
being made by lay persons who are not expected to have studied the
definition with legal expertise and to have framed their complaints
accordingly. More important than the form in which the complaint is
expressed is the substance of the complaint. If the various elements of the
definition are inherent in the complaint that seems to me to sufficiently bring
it within the terms of the definition notwithstanding that they have not been
expressed in those terms.

[9] The complaints were that Old Mutual refuses to pay moneys that are
said to be due to the respective funds under the policies. But they might just
as well have been couched as complaints that Old Mutual refuses to claim
the moneys on behalf of the funds. Because the corollary of its refusal, as
insurer, to acknowledge the validity of the claims, is a refusal, as
administrator, to perform its duty to take steps to recover the claims. And for
so long as moneys that are due to the funds are not claimed the right of its

members under the Rules to be paid pension benefits will be thwarted
because the members have no independent legal rights against the insurer
under the policies. If moneys are payable under the policies I do not see why
the members should be told to forego the pension benefits that will accrue to
them if the moneys are paid and to confine themselves to complaints against
the insurer to the Ombudsman for Long-term Life Assurance.5

[10] Seen in that context the complaints against Old Mutual are quite
capable of being construed as complaints ‘relating to the administration of
the funds’. Clearly the complainants will be prejudiced if the moneys are due
but are not recovered. It also seems to me that the refusal of the
administrator to acknowledge the validity of the claims and to take the
necessary steps to pursue them is capable of constituting ‘maladministration
of the fund’. The disputes in these cases are certainly ‘in relation to the fund’
and are between the complainants and the administrator of the funds as
much as between them and the insurer. Those allegations were not made in
terms in the letters that were written to the adjudicator but they are all
inherent in the nature of the complaint.6

[11] On that approach it might be that the order made by the adjudicator
ought to have been directed at compelling Old Mutual, as administrator of
the funds, to acknowledge that the claims are valid and to press for their
recovery, but that relates to the nature of the orders that were made rather
than to the nature of the complaints. Where the insurer is not also the

5 Although the members are not contracting parties complaints may be made to the Ombudsman for Long-
term Insurance by the life assured under the policy.
6 We were referred in argument to the analysis of the definition by Josman AJ in Armaments Development
and Production Corporation of SA Ltd v Murphy 1999 (4) SA 755 (C) but I do not think that analysis is
helpful on the facts of this case.

administrator there might be no purpose served by considering a complaint
of this nature if the insurer is not willing to submit to the conclusions
reached by the adjudicator. But where the insurer is also the administrator
those conclusions could hardly be altogether ignored, particularly if they
were to be confirmed by a court in proceedings under s 30P. Those are
matters, however, that relate to whether an order is capable of being made
that will be effective in resolving the complaint, and not to whether the
adjudicator has jurisdiction to consider the complaint. In my view there is no
merit in the objection and I turn to the merits of the complaint.

[12] There is no need to visit the Rules of the respective funds. The
complaint is directed at the collection of moneys that are alleged to be due to
the funds. Whether those moneys are indeed payable depends upon the
construction of the relevant policies.

[13] The policies that were issued to the respective funds were both
endowment policies with Mungal and Freeman respectively being the ‘life
assured’. The nature of an endowment policy is that in return for a premium
the insurer undertakes to pay to the policyholder a sum of money on a fixed
date in the future or a sum of money (not necessarily the same amount) upon
death of the life assured. In effect it is a fixed investment.

[14] Affidavits were deposed to by two actuaries explaining the actuarial
and investment principles upon which policies of that nature are modelled.
Needless to say the rights and obligations of the parties to a policy are
determined by the terms of the particular policy and not upon the model on
which it purports to be founded. But that evidence is nonetheless helpful to

understanding the various provisions of the policies. On matters of actuarial
and investment principle there is no material difference between the
actuaries. Such differences as there are between them are attributable to the
construction that each places upon the policies.

[15] Endowment policies are linked directly or indirectly to a particular
portfolio of investment assets. The premium is invested in the portfolio and
the returns on the investment accrue to the benefit of the policyholder.

[16] Some policies are linked directly to the portfolio in that the value of
the portfolio is attributed directly to the value of the policy. The benefits that
accrue to the policyholder are thus determined by the value of the portfolio
at that time. The drawback of such a policy is that the value of the portfolio
will fluctuate from day to day according to the state of the market and it is
uncertain what its value will be at the date the benefit accrues. The
policyholder is in much the same position as an owner of shares who sets a
date upon which the shares must be sold irrespective of their market value
on that date.

[17] Insurers counter that drawback by offering ‘smoothed bonus’ policies.
Policies of that kind are only indirectly linked to the value of the investment
portfolio. The policies are managed in such a way that fluctuations in the
value of the investment portfolio are smoothed out when that value is
attributed to the value of the policies. In that way the value of a policy on the
date that the benefits accrue can be predicted with some degree of certainty.
The aim of such a policy is to ensure that there is a positive return on the

policy even if the value of the portfolio is depressed at the time the benefit
accrues.

[18] Smoothing the effects of fluctuations in the value of the portfolio is
achieved by allocating to the policies during periods of growth in the value
of the portfolio only a portion of that growth and allocating the balance to a
reserve account (sometimes called a ‘stabilisation reserve account’). The
reserve may then be drawn upon to allocate past growth to the policies at
times when there is little or negative growth in the value of the portfolio. In
that way the value of the policies will follow the trend of the portfolio rather
than its fluctuations.

[19] The manner in which growth in the value of the investment portfolio
is allocated to the policies is by periodically declaring ‘bonuses’. It is usual
for such declarations to be made annually in arrear, though provisional
interim bonuses might be declared periodically through the course of the
year.

[20] The allocation of growth to the policies is an exercise in accounting
and does not involve the realisation of assets. A bonus that has been declared
and credited to the policies is thus capable of being revoked merely by
reversing the relevant accounting entries. To assure policyholders that that
will not occur before the benefits under the policies accrue to the
policyholders insurers usually undertake that at least a portion of a bonus
that has been declared will not be revoked. The portion that may not be
revoked is commonly called a ‘vesting bonus’ and the portion that may be
revoked is called a ‘claim bonus’. An insurer might offer even greater

certainty by guaranteeing that the policies will have a certain minimum
value at the time the benefits accrue. Where that is done the insurer is
effectively guaranteeing that bonuses will be declared over the life of the
policies in amounts that are sufficient to maintain a minimum level of
growth.

[21] That process of attributing the growth of the portfolio to the policies is
managed through an account for each policy that is usually known as an
‘accumulation account’. The accumulation account will be credited with the
premium (or premiums) and with bonuses as and when they are declared,
and will be debited with fees and charges that become due to the insurer.
The balance on the accumulation account at any time (which will always be
a credit when there is a single premium) represents the value of the policy at
that time.

[22] The two policies that are now in issue, so far as their provisions are
now material, are substantially the same, but they differ in some of their
detail (though the differences are mainly confined to terminology). For
convenience I will confine myself first to the Mungal policy.

[23] The commencement date of the policy was 1 January 1998 and it was
to endure until 1 January 2010 (the maturity date). A single premium of
R193 560.05 was payable on commencement. The ‘glossary of terms’ in
Part 2 of the policy records, under the heading ‘Accumulation Account’, that
‘[e]ach policy is administered through its Accumulation Account which is increased by
premiums and investment returns, and reduced by expenses and benefit charges’.

The ‘investment returns’ that are referred to are the bonuses that are declared
from time to time, representing that portion of the growth in value of the
portfolio that has been attributed to the policy. The ‘expenses and charges’
that may be debited to the account are specified elsewhere in the policy.

[24] The general provisions in Part 3 record that
‘Old Mutual will declare annual vesting and claim bonuses, which will be added to the
balance in the Accumulation Account’. The vesting bonuses, once declared, can never be
removed in respect of maturity and death claims. The claim bonus may be reduced or
removed altogether at any time before it becomes due as part of a benefit payable under
this policy’.
The policy guarantees
‘an average … growth rate of 0.35% per month … up to the date of any maturity, death
or disablement claim’.
The guaranteed value of the policy upon maturity is expressed in monetary
terms to be the sum of R319 076. The guaranteed value upon death or
disablement (the latter event is not relevant for present purposes) is naturally
not capable of being calculated in advance but is calculable once the event
has occurred.

[25] The dispute in this case arose because Mungal elected to terminate the
policy before it had run its full course (which is colloquially called
‘surrendering’ the policy) after being informed of the amount he could
expect to receive if he surrendered it (he was given contradictory figures at
various times but that is not material). At that time the credit balance on the
accumulation account was R295 730.71. Old Mutual paid R266 157.64 to
the fund – which was 90% of the credit balance – and the balance of that
amount after deducting tax was paid by the fund to Mungal.

[26] The reason that the value of the policy as reflected in the
accumulation account was reduced by 10% requires brief explanation. By
the nature of ‘smoothed bonus’ policies their value as reflected in the
accumulation accounts will seldom correspond with the market value of the
portfolio. When the market for the portfolio is buoyant the value of the
policies might be lower than the value of the portfolio and the converse
might occur when the market is depressed. To pay the full value of a policy
when it exceeds the related value of the portfolio is necessarily detrimental
to the remaining policyholders because that excess will need to be recovered
ultimately from future growth in the portfolio. Payment of the full value of a
policy when it is lower than the related value of the portfolio will have the
opposite effect on the body of policyholders. Maintaining bonuses and the
reserve at an appropriate level serves in the ordinary course to balance those
relative gains and losses. But it is self evident that an insurer is able to
maintain the appropriate balance only if the time at which benefits will
become payable under the pool of policies is capable of being predicted.

[27] Where the value of a policy exceeds the related value of the portfolio,
and the policy is terminated before it has run its term, it is common for
insurers to pay to the policyholder only the true value of the policy, so as to
ensure that the early termination is not detrimental to the general body of
policyholders.7 The tool that they use to evaluate its true value at the time of
termination is a factor that they call a ‘market adjuster’. A market adjuster is
merely a percentage by which the value of the policy as reflected in the

7 Where the situation is reversed the value of the policy as reflected in the accumulation account will
ordinarily be paid and the difference between that and the related value of the portfolio will accrue to the
benefit of the remaining policyholders.

accumulation account will be reduced so as to bring it in line with the value
of the portfolio. The percentage that will be applied is actuarially calculated
with reference to the current value of the portfolio and will fluctuate from
time to time according to the state of the market. At the time the Mungal
policy was terminated the market adjuster that was being applied by Old
Mutual stood at 10% and the balance on the accumulation account was
reduced accordingly.

[28] The reduction of the value of the policy was the source of Mungal’s
complaint. He said that the policy had no provision specifically allowing for
the application of a market adjuster and Old Mutual was thus obliged to pay
him the full credit balance on the accumulation account. The adjudicator
approached the matter in the same way and searched the policy to see if it
contained such a provision. Having found none he declared that Old Mutual
was ‘not entitled to apply the market level [adjuster] to reduce the
complainant’s benefit’ and on that basis ordered the deducted portion of the
value to be paid.

[29] That approach was also adopted in the opinions expressed in the
affidavit deposed to on behalf of Mungal by his attorney, in the opinions
expressed by his actuary, and in the submissions that were made on his
behalf before us, but it misdirects the enquiry. It assumes a priori that the
policyholder is ordinarily entitled to the benefits of the policy – the credit
balance on the accumulation account – without interrogating whether that
assumption is correct.

[30] The benefits that are conferred by the policy appear from the insuring
clause in which Old Mutual ‘undertakes to pay the benefits, as set out in Part
1 of this policy document …’. Only two benefits are provided for in that part
of the policy.8 One is a benefit that is contingent upon the policy enduring to
its maturity date. The other is a benefit that is contingent upon the death of
the life assured. In both cases the benefit that accrues when that contingency
occurs is an entitlement to the credit balance on the accumulation account
(which is guaranteed to be not less than a specified amount upon maturity,
and upon death to be an amount that returns at least 0.35% on average per
month until the date the benefit is claimed).9

[31] In its terms the policy exists to provide policyholders with the benefits
that are to be had from fixed-term investments (the fixed date being maturity
or the death of the life assured). It would be most surprising if the returns
that are promised on a fixed-term investment were to be payable to investors
who terminate the policy before the term has expired. Fixing a date for
payment of the benefit, whether that date be maturity or death, would be
altogether superfluous. It would also be surprising if an investment scheme
that is actuarially modelled upon the predicable termination of policies were
to have been intended to apply even to unpredictable early terminations.

[32] What is overlooked by the argument advanced on behalf of the
appellants (and by the determination that was made by the adjudicator) is

8 The benefits are expressed in Part 1of the policy in the following terms: ‘On survival of the Assured to 1
January 2010 the balance in the Accumulation Account is payable, with a guaranteed amount of R319 076.
On the death of the Assured before I January 2010 the balance in the Accumulation Account is payable.’
9 Although not expressed as such in the definition of the benefit that is the effect of the guarantee in the
general provisions that there will be ‘average … growth of 0.35% per month … up to the date of any …
death claim’.

that the entitlement to be paid on early termination is not one of the
‘benefits’ of the policy. It is no more than a separate entitlement that arises if
the undertaking to pay benefits is terminated before the benefits accrue. That
is clear from the text of the policy alone, quite apart from the anomalies that
would otherwise arise.

[33]  While the policy provides in terms for the payment of the credit on
the accumulation account (the benefit that the policy promises) upon the
occurrence of one of the specified contingencies – maturity or death of the
life assured – it provides for what is payable upon early termination in
altogether different terms. If that event occurs Old Mutual is obliged to pay
the ‘surrender value’ of the policy. What that means is expressed in the
general provisions of the policy as follows:
‘The amount of the surrender value will be determined by Old Mutual at the time of
surrender and will take into account disinvestment costs, the recovery of unrecouped
expenses, any debts against the policy and legal limits in force’.

[34] It was submitted on behalf of Mungal that the proper meaning of that
clause is that upon surrender the policyholder is entitled to be paid the full
value of the policy as reflected in the balance on the accumulation account,
with the deduction only of such disinvestment costs, unrecouped expenses
and debts as are determined by Old Mutual (none of those amounts were
deducted in this case). Counsel could direct us to nothing in the text of the
policy to support that construction of the policy and there is none. The plain
meaning of the language is that Old Mutual will determine the value of the
policy at the time of termination – not merely the amount of the costs,

unrecouped expenses and debts. Those are stated in terms to be no more than
amounts that may be taken into account in determining the value.

[35] It might be that in particular cases Old Mutual will determine that the
amount that is payable is the credit on the accumulation account. But then
that amount is payable because it is the amount that Old Mutual has
determined to be the surrender value. And while the amount payable is
usually determined by applying the market adjuster to the credit balance on
the accumulation account that is only because the credit balance provides a
convenient starting point for making the determination.

[36] In my view the policy means just what it says. Upon early termination
the policyholder is entitled to an amount that is determined by Old Mutual at
that time (which may or may not equate to the credit on the accumulation
account). I might add that we are not called upon to decide whether any
determination made by Old Mutual would be open to contestation and
judicial scrutiny. It is not disputed that the amount was determined in this
case in accordance with general insurance and actuarial practice.

[37] Freeman’s appeal can be disposed of rather more briefly. The policy
in that case commenced on 1 November 1994. Benefits were payable upon
retirement date or death. The selected retirement date was 1 November 2012.
The benefits were described in the policy as follows:
‘On survival of the Assured to 1 November 2012 the balance in the Accumulation
Account, with a minimum guaranteed amount of R908 385, becomes available to
purchase an annuity. On the death of the Assured before 1 November 2012 the balance in
the Accumulation Account becomes available to purchase an annuity’.

[38] The general provisions of the policy do not provide for surrender but
provide instead for the policyholder to change the date of retirement (thereby
terminating the policy by bringing it to earlier maturity) in the following
terms:
‘The Assured also has the option, subject to the Rules of the Fund, legislation in force at
the time and the conditions imposed by OLD MUTUAL at the time, to change the date of
retirement.’

[39] In August 2003 Freeman advised Old Mutual, after he had been
informed of the amount that would be paid, that he wanted to change the
date of retirement to the then date (which would ordinarily then have entitled
him to the retirement benefit). Old Mutual acceded to his request but was
willing to pay only R886 072.72. Once more that amount was arrived at by
applying the market adjuster (which was set at 5% at that time) to the credit
balance on the accumulation account, and it led to the same complaint being
made. Once more the adjudicator made an order declaring that Old Mutual
‘was not entitled to apply the market adjuster to the balance in the
Accumulation Account to determine [the] benefit on the ground of [the
advanced] retirement date’.

[40] What occurred in substance is that Old Mutual was willing to advance
the retirement date only on condition that Freeman would not then be
entitled to the ordinary retirement benefit but only to the value that Old
Mutual attributed to the policy. The policy makes it perfectly clear that
Freeman was entitled to change the date of retirement only if he accepted
that condition. There is no basis for construing the policy to mean that he

was entitled to change the date of retirement unilaterally and continue to be
entitled to the retirement benefit that would have accrued had that been the
date of retirement initially.

[41] Permeating all the arguments that were advanced on behalf of the
appellants at various times is the fallacy that the declaration of a bonus vests
in the policyholder an unconditional right to receive the bonus. The right that
vests in the policyholder is one that is conditional upon a defined event
occurring. The accumulation account is not to be likened to an ordinary
creditors’ account. It is an account that records contingent liabilities. And the
contingencies that will give rise to liability – at least in this case – do not
include early termination of the policy.

[42] For these reasons the court below was correct in setting aside the
adjudicator’s determinations and the appeals must fail. Because the case has
wider implications Old Mutual has graciously not sought the costs of the
appeal.

[43] The appeal in each case is dismissed.

_________________
R W NUGENT
JUDGE OF APPEAL

APPEARANCES:

For appellant:
M S M Brassey SC

D L Wood

Instructed by:

Legal Resources Centre, Durban

Matsepes Inc, Bloemfontein

For respondent:
A Oosthuizen SC

Instructed by:

Cliffe Dekker Hofmeyr Inc, Cape Town

Claude Reid, Bloemfontein