A large umbrella retirement fund has resolved to change its rules to prevent company directors from being held personally liable or going to jail for failing to pay contributions to their employees’ retirement funds when the employer is in financial difficulty.
The Sanlam Umbrella Fund is reportedly the first retirement fund to approach the Financial Services Board (FSB) to amend its rules on this matter and, if successful, it is likely that others will follow suit. The rule amendment may well be approved by the FSB, although the FSB says the trustees of any fund that allows a suspension of contributions must be satisfied that the conditions for such a suspension do, in fact, exist.
Employer contributions to retirement funds often include employees’ group life assurance premiums. So, if your employer suspends payment of the whole of its contributions, you not only face lower benefits at retirement; you may also suddenly lose your group life and disability cover.
An amendment to the Pension Funds Act, which became effective at the end of February, now holds directors and financial officers of companies or members of close corporations personally liable for the payment of contributions to their staff’s retirement fund and at risk of conviction of a criminal offence if the payments are not made.
This applies to contributions that, in terms of the fund rules, are deducted from your salary or wages, as well as those your employer has agreed to pay.
Each year, hundreds of employers fail to pay into retirement funds the amounts they are liable for, and when they use contributions deducted from employees’ salaries or wages to ease their business cash flow problems, their actions amount to theft.
Although the Pension Funds Act contains provisions aimed at ensuring contributions are paid on time, these have not been enough to stop the abuse. Parliament has sought to address the problem through a new provision in the Act, which extends criminal liability for unpaid contributions to financial officers and directors personally.
The amendment was introduced through the Financial Services Laws Amendment Act, which became law at the end of February this year. Directors or financial officers can be personally charged with a crime and, if convicted, can face a fine of up to R10 million and/or imprisonment of up to 10 years.
But there is no provision in the Act providing a solution for cash-strapped employers who are unable for a period to pay the contributions they owe, but do not want to terminate their participation altogether.
Kobus Hanekom, the principal officer of the Sanlam Umbrella Fund, says that, in light of the new legislation, the fund’s trustees decided to amend the rules so that participating employers can suspend payment of their contributions for up to six months if they run into cash flow problems.
Umbrella funds cater for employers who do not want the hassle of, or are too small to justify, the costs of stand-alone funds for their employees.
Unlike employer-sponsored funds, which give members the right to elect at least half of the trustees on the board, umbrella funds do not have to give them that right.
Pension lawyer Jonathan Mort says that if the Sanlam fund’s rule amendment is approved by the FSB, other umbrella funds are likely to follow suit, because these funds cater mainly for smaller employers, who are more susceptible to financial difficulties.
Rosemary Hunter, the deputy executive officer in charge of retirement funds at the FSB, says the FSB can only reject rule amendments if they are inconsistent with the Pension Funds Act or if they place the financial soundness of a fund at risk.
The FSB may therefore have no option but to approve rule amendments that cater for an employer’s temporary suspension of contributions.
But Hunter says that before the FSB approves such a rule amendment, it will require the rules to stipulate that before authorising the suspension or non-payment of contributions, the board of trustees must be satisfied that the conditions for the non-payment of contributions do, in fact, exist.
She says the FSB will also expect such a rule amendment to be worded in a way that will ensure that the suspension or non-payment of contributions will not make the fund financially unsound.
This may include provisions allowing administration fees and other expenses – including premiums for death and disability cover – to be deducted from members’ retirement savings or from other accounts in which provision for such expenses have been made.
Hunter says the contributions your employer pays to a retirement fund for your benefit form part of your remuneration, and even if the rules of your fund are amended to allow your employer to suspend contributions, the employer must first get permission from its employees to do so.
If it fails to get your permission, it will be in breach of your contract of employment, and you will have recourse under the employment laws, she says.
Mort says the trustees of your retirement fund have a fiduciary duty to look after members’ interests. Boards that contemplate changing the rules of their funds to cater for the suspension of contributions should consider how members will be protected by such an amendment. At the very least, members should be informed that contributions are being suspended, he says.
Umbrella funds usually communicate to members through employers, who may not want members to know that contributions have been suspended. The fund trustees should therefore make arrangements to communicate to members directly.
Hunter says that because many employers do not provide retirement funds with the contact details of their employees, it may be necessary for the FSB to prescribe that members provide their cellphone numbers as a condition of fund membership. Funds could then use the numbers to communicate directly with members.
Hanekom says it may be that an inability to pay contributions to a fund will constitute a legal excuse for not doing so, but until the courts interpret the amendment to the Pension Funds Act, it is not clear under what circumstances a company director or official will be excused.
The Sanlam Umbrella Fund’s rules previously only allowed for employers to terminate participation in the fund.
“[Termination] is a final and drastic measure, especially if the employer believes the cash flow concerns are of a temporary nature. We also understand that smaller employers are more often exposed to temporary periods of cash flow constraint, and creative ways must be found to assist them,” Hanekon says.
He says the Sanlam Umbrella Fund’s decision to allow employers a temporary suspension of contributions to the fund, or an immediate termination of participation if financial recovery is unlikely, may be an industry first.
As group life and disability cover are employment benefits, should you be left without these because your employer fails to pay the premiums while contributions are suspended without your consent, you could sue your employer for any damage suffered.
Hanekom says employers in the Sanlam Umbrella Fund will therefore be encouraged to take out a stand-alone group life and disability policy that is not paid through the fund to cover the benefits during the period for which contributions are suspended.
YOUR CONTRIBUTIONS DO NOT BELONG TO YOUR EMPLOYER
An employer may not use contributions deducted from your remuneration to ease its cash flow problems, as many employers do, Rosemary Hunter, the deputy executive officer in charge of retirement funds at the Financial Services Board (FSB), says.
If contributions are deducted from your salary and not paid to the fund, your employer may be guilty of fraud or theft. The fund will have a claim against your employer for the unpaid contributions. If it does not get the money, you may have a claim against your employer for the loss you suffer as a result.
The Pension Funds Act provides that if an employer fails to pay the contributions by the seventh day of the month following that for which they are due, the employer must be charged late-payment interest.
If the contributions remain outstanding, the fund can report the matter to the National Prosecuting Authority and it is obliged to do so if the contributions remain outstanding for 90 days.
The Registrar of Pension Funds at the FSB must also be advised of the action the fund has taken to recover the unpaid contributions.
The FSB may be able to refer the non-payment of contributions to its Enforcement Committee, but has not done so to date. If the committee finds your employer in breach of the Act, it may impose a fine on the employer.
Hunter says the Act states that if a fund’s rules are amended to provide for a reduction, suspension or discontinuation of the payment of contributions, this will not affect an employer’s liability for any contributions that were due before the trustees resolved to amend the rules, irrespective of the date on which the amendment may take effect.
This means the fund cannot amend its rules to allow an employer not to pay contributions retrospectively.
Hunter says that in approving this provision in the Act, Parliament recognised that there may be circumstances in which it would be better to allow members to continue to belong to a fund, even if their employer was not able to contribute to the fund for a period, rather than to terminate the employees’ membership altogether.
IF YOU HAVE A RETIREMENT ANNUITY
If your employer contributes to a retirement annuity (RA) on your behalf, it may have an obligation to do so in terms of its employment contract with you, but the directors or financial officers of the company cannot be held liable in terms of the Pension Funds Act for a failure to pay contributions to your RA.
Jonathan Mort, a pension lawyer from Jonathan Mort Inc, says the amendment to the Pension Funds Act that makes company officials personally liable for the non-payment of contributions may therefore encourage employers to use RA funds to provide for their employees' retirement savings.
WHAT YOU CAN DO
If the company you work for is in financial difficulty, you should ask the trustees of your fund to notify you and your fellow members directly if your employer has not paid over the contributions due by it or you. You can also check whether arrangements have been made to pay your group life and disability premiums.
If your employer does not pay to the fund the contributions for which it is liable, you can complain to Muvhango Lukhaimane, the Pension Funds Adjudicator, on 012 346 1738 or fax 012 431 0608.