Pressure on finances caused by the lockdown - Could your pension help?
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The financial consequences of the South African lockdown - caused by the Covid-19 infection which is currently sweeping the globe - are being immediately felt. Loss of earnings and the consequences on debt obligations are serious concerns which individuals are having to cope with right now.
South Africa’s Pension Funds Act already caters for unforeseeable events such as the nationwide lockdown currently underway, to assist employers or individuals who may be experiencing financial difficulty because of lack of income.
Bruce Knight, Senior Consultant at wealth and financial advisory firm GTC, says that as individuals and companies need to cut costs wherever possible including pension fund contributions, all mechanisms to accommodate both employers and employees’ urgent needs will need to be reviewed to prevent defaults on contractual payments.
“The Pension Funds Act caters for situations where employees are temporarily absent from work, where employers need to downwardly adjust – or reduce – staff members’ salaries, or even cease or reduce company or member contribution levels during this uncertain time,” says Knight. “Within our own GTC Umbrella Funds, the trustees are able to assist participating employers by outlining a range of suitable solutions when assessing financial relief requirements for them and their employees.”
He details the options available and outlines solutions which may assist companies and individuals with payment relief during these unprecedented and difficult times.
1. Temporary absence
“This option applies when pension fund members are temporarily absent from work, on either a reduced salary from their employer, or no pay at all,” says Knight. “In this situation, participating employers may elect to suspend contributions in respect of retirement benefits.”
He outlines that the suspension of contributions would apply for the period that the staff member is absent, and this can be applied for up to a maximum of 12 months. The relevant risk benefits would remain in place, meaning that members would continue to have their death and disability benefits during their absence, and these would remain unchanged and not reduced according to their reduced salaries.
Knight cautions, though, that risk premiums and administration fees will continue to be payable.
To qualify for this option, he adds that it is important for the participating employer to notify the fund - and the employee - that members will be temporarily absent for an extended period.
“Also, the monthly membership and payroll data submission must reflect the member’s temporary absence,” he continues.
2. Amendment to pensionable salaries
“Participating employers can also choose to amend their employees’ pensionable salaries for a period. This means that employers may reduce staff salaries as a preventative measure, in order to stay in business,” says Knight.
Risk salaries may be maintained to ensure the risk benefits remain in place and unchanged at the level determined by the previous salary. The level of life and disability cover will not be reduced according to the new reduced salaries.
Once again, Knight says that risk premiums and administration fees will continue to be collected.
“As with ‘temporary absence’ the participating employer must notify the fund that pensionable
salaries will be amended for a period,” he continues. “And monthly membership and payroll data submission must reflect the member’s revised pensionable and risk benefit salaries, where applicable.”
3. Reduction or suspension of contributions
Where members are not absent from work, participating employers may elect to reduce or stop employer, employee (or both) retirement benefit contributions.
“This means that although the company continues to operate in a ‘business as usual’ manner, it will probably be at a reduced working level as a result of the lockdown, forcing many employers to make financial adjustments to sustain the business.”
Even though the contributions will have been decreased or suspended, risk benefits would remain in place and unchanged, ensuring that even though premiums in respect of retirement savings are no longer being submitted, the life and disability benefits remain in place and these are still provided for, through the fund.
As with the previous two options, risk premiums and administration fees will continue to be collected.
“For inclusively costed funds (which are funds where the employer contribution rate includes the risk benefit and running costs of the fund), employer contribution rates would need to be maintained at a level to cover the risk premiums, administration fees and other agreed costs,” explains Knight. “For those companies where their contribution excludes the cost of benefits and administration, that portion of the contribution will have to continue being paid by the employer. In normal circumstances, these costs are usually funded from the employer’s contribution.”
Again, the participating employer must submit a request to the fund to reduce or stop employer, employee (or both) retirement benefit contributions for a period, and monthly membership and payroll data submission must reflect the member’s pensionable and risk benefit salaries (where applicable).
The process to be followed:
For all the options mentioned – i.e. temporary absence, amendment to pensionable salaries and reduction or suspension of contributions – the notification to the fund must include a motivation for the option taken, the effective date and the expected duration of the temporary absence.
“Also, the amendment is subject to agreement between members and the employer and the communication, which was sent to members, must be submitted to the fund,” Knight adds.
Knight urges employers to liaise with their employee benefits consultants and to conduct a thorough investigation into the various options available for the business, according to the company’s specific financial situation as a result of the lockdown.
“Once a suitable strategy is agreed upon, amendments to the terms of employment with employees should commence. Most amendments have been implemented with effect from 1 April 2020 onwards, subject to receipt of the documentation required by each Fund,” Knight continues.
Knight notes that the financial consequences of the lockdown, as distinct from any other motivations, have been more severe and immediate than any economic or market downturn GTC has previously experienced in some thirty years.
“Whereas difficult economic conditions may see businesses struggling, and eventually failing, the instant shutting down of many businesses which are thereafter incapable of generating any revenues, has had a far more profound effect on these businesses and their staff,” Knight concludes.