The rules around pensions in a time of mass job losses 

The Financial Services Conduct Authority (FSCA) warned, at the end of March, that many distressed employers might default on their employees’ contributions to retirement funds, as a direct consequence of Covid-19’s impact on businesses and the economy.

While the FSCA reminded the public that most funds have existing rules for distressed employers and members, including relief measures for employees (such as ceasing the payment contributions if they are not being paid), history has taught us that sometimes companies simply don’t play by the rules. And in light of the current crisis, some funds don’t even have relevant rules in place.

Notwithstanding the provisions of Section 13A of the Pensions Funds Act, which obliges employers participating in funds to pay defined contributions in respect of their members within a stipulated time-frame, most funds have rules which make provision for temporary member suspension (no salary means no contributions), and a reduction in pensionable salaries, which will reduce members’ monthly contributions (subject to the rules of the fund). They can also request a temporary suspension of retirement contributions for the employer group.

In the event that funds do not have rules that make provision for financially distressed employers and/or employees, such funds have been advised by the FSCA to urgently submit such rule amendments, to allow for relief measures. But despite the advisory from the regulator, Business Maverick has it on good authority that many funds – especially the smaller union funds – still have to submit their rule amendments to the regulator.

Erich Kröhnert, head of consulting at Ultreia Consulting Services, says that most of the big umbrella guns, including Old Mutual, Momentum and Sanlam, have already implemented their relief rules, which, for example, allow for the temporary ceasing of contributions.

The problem, he says, is that although the FSCA directive is very clear on the submission of rule amendments, what the amendments are and allow for, instituting these amendments is up to the board of trustees of each individual fund. 

For example, while all funds allow for the suspension of employer contributions, some funds do not allow for a suspension of contributions by the employees, who themselves are under severe pressure, says Kröhnert.

“And despite the bigger umbrella funds having professional trustees who made sure their relief rules have been in place for some time now, it defies the purpose of the relief if it is not afforded to everyone,” he adds.

“Freestanding funds were not as fast to act as the big umbrellas. This is understandable given that these trustees aren’t professionals but may have had bigger issues to deal with, such as paying their employees.”

Employers and fund administrators need to be ethical, transparent and open with their employees about the financial position of the business and related retirement reserves, especially if it is in trouble or does not allow for relief measures, says Andrew Crawford, director at Seshego Consulting. It is a difficult time for everyone, and there is an obligation to communicate any rule change to fund members.

“If an employer is unable to pay contributions into a retirement fund on an employee’s behalf, the company needs to apply for a reduction or suspension and the fund needs to inform its members,” he says.

“Following formal requests by employers for the suspension or reduction of contributions, the boards of funds are required to consider such requests and apply the relevant rule/s to the particular circumstances of the employer.” 

That being said, the FSCA has strongly encouraged funds to ensure that full risk-benefit premiums continue to be paid in full in respect of the affected employees/members to ensure that the fund risk benefits will continue to be provided. 

“Imagine an employee contracts the coronavirus and dies, or is unable to work for some time, and his risk benefits had lapsed,” says Kröhnert.

The FSCA communiqué especially draws the boards of trustees of funds’ attention to apply the relevant rule/s to employers and members in order to alleviate the challenges they are currently facing.

Dumo Mbethe, CEO of Momentum Corporate, says that employers, the FSCA, retirement funds, insurers and financial advisers need to work together to safeguard employee benefits at this critical time.

“We have seen the FSCA make some much-needed adjustments to be able to fast-track Covid-19 related retirement fund rule amendments allowing for delayed contribution payments. 

“On the group life insurance side, most reputable insurers have also come to the party with several measures to provide short-term relief for employers and ensure employees continue to enjoy life, disability and funeral cover, particularly at this crucial time.”

But what if the worst happens and the employer shuts its doors, or is placed into liquidation, and can no longer honour the commitments of the umbrella fund or its standalone retirement structure?

A South African retirement fund is a separate legal entity to the company. A company elects to participate in an umbrella retirement fund or its own private fund.

After defining contribution rates and the retirement age, it is up to the retirement fund trustees to manage the retirement fund contributions within the fund rules. 

So, as long as the trustees apply themselves properly and are genuinely there for the benefit of the fund members, the legislation provides protection to avoid the kind of scandals that have occurred overseas, such as Enron in the USA and the Robert Maxwell saga in the UK.

In both these cases, the company had undue influence over the management of the retirement fund, which is how they were able to cause the members to lose out on their retirement savings. 

But, if all goes well, usually one will be given the option of either taking a withdrawal with high tax implications, preserving the fund in its current form or transferring it to a preservation fund.

The bugbear with preserving one’s savings in their current state is that Regulation 38, which pertains to that option and which was supposed to have been in place by 1 March 2019, has been repeatedly delayed by the FSCA.

With Regulation 38, retirement fund members are supposed to be allowed to leave their retirement fund benefits in the fund.

“The consequence is that many of the top 10 largest umbrella funds have still implemented the paid-up option in their rules, and continue to steer exiting members to the more expensive ‘retail priced’ preservation funds – in many cases flatly refusing to allow exiting members the paid-up option even when asked,” says Seshego Consulting’s Crawford.

“Under Regulation 38 the fund may not charge more than the institutional pricing the fund member enjoyed prior to their exit,” he adds.

According to Kröhnert, Old Mutual’s current administration fee is R31.50 per member per month. This is hardly cheap for members with small amounts saved.  

“Our input from a tax advocate is that the Income Tax Act wording allows a paid-up fund member to take multiple withdrawals post the Taxation Laws Amendment Act,” adds Crawford. 

“This has an obvious additional benefit to those that have lost their jobs in the current crises and who are uncertain of their future.” BM