A recent case to come before the Pension Funds Adjudicator (PFA) highlights the importance of making sure that the money deducted from your salary for retirement fund contributions is going where it is meant to be going. For this it’s helpful to go back to Retirement Funds 101.
If you are a salaried employee, you are probably contributing to an employer-linked pension or provident fund. The fund may specifically serve your organisation or it may be an umbrella fund operated by a financial services company, which houses many employers under one “umbrella”.
There are essentially three parties involved: you, your employer and the retirement fund. (A fourth party, in the form of an administration company, appointed by the retirement fund, takes care of the day-to-day administration of the fund.)
Your employer deducts your contribution from your remuneration and pays it over to the fund. Most of the money goes towards your retirement savings, which builds up over your years with the company. A small portion (10% or so) goes towards an insurance premium that covers you for death or disability, known as group risk cover. While the premium is quite low compared with private life cover, the benefit can be substantial: the life benefit would be a lump sum of three or four times your annual salary, and the disability benefit would typically pay you 70-75% of your salary until retirement age.
Finally, the fund takes an administration fee, which may be in the region of 2.5%.
For the system to work properly, each party has certain obligations:
1. You as a fund member need to ensure that your contributions are being deducted and are going to the fund. You need to ensure that the group risk cover is in place and to monitor your savings balance in the fund.
2. Your employer must ensure that the full contribution amount is paid over each month to the fund. If the fund doesn’t receive the money, not only will it affect your retirement savings, but importantly, it will affect your group risk cover. If the insurer providing the cover does not receive the premiums, you lose your cover, just as you would on a personal insurance policy.
3. The retirement fund must ensure that the contributions are received from the employer and the money is allocated correctly. It is also obliged to communicate regularly with you on the state of your savings and your risk cover.
The most common thing to go wrong along the chain is that the employer deducts the amount from your salary, but owing either to pure negligence or to a cash-flow problem, does not forward the money to the fund.
As an employee, you wouldn’t immediately know this, because you would still see the deduction on your salary slip each month. It’s only if you received a statement from the fund itself, and studied it closely, that you would realise something was wrong.
In instances where employers fall into arrears in paying over their employees’ contributions, funds are required to take steps to get the money and to report the employer to the Registrar of Pension Funds and, ultimately, to the Attorney-General. The fund is also obliged to report the non-payment of contributions to the affected members.
The issue of non-payment of contributions by employers has become a major headache for the PFA, Muvhango Lukhaimane, as she explains further on.
The case to come before her was, in fact, two separate cases, but they involved a single employer, the Maluti-A-Phofung Municipality (a municipality in the Free State), and a single family: a father, mother and their two children, a brother and sister. Both parents worked for the municipality and both died in service within months of each other: the mother died on January 1, 2018 and the father died on September 14 of the same year. They had been working at the municipality for some years, though the determinations give only the date they registered as retirement fund members, which was September 1, 2012.
The municipality originally had its own pension and provident funds, but in March 2014 these were incorporated into the Sanlam Pension and Provident Umbrella Funds.
In June 2017, for some reason, the municipality stopped paying the contributions of its employees into the Sanlam funds. The funds lodged complaints with the PFA on February 26, 2018 and decided to terminate the municipality’s participation backdated to October 1, 2017.
The funds informed the employer and members that the group risk benefits were no longer in force and that, should a claim arise during the period of non-payment, the claim would not be paid out. It was made clear that members and their dependants would have to approach the employer to recover any damages suffered as a result of the employer’s failure to pay over the contributions.
The municipality succeeded in not having its participation terminated and two months later it cleared the arrears and resumed paying contributions. However, it was unable to resume the group risk cover, which had lapsed in October 2017.
While the municipality later made arrangements to purchase group risk cover from another provider, there was a year’s window period, between October 2017 and September 2018, during which none of its employees was covered. This window period coincided with the deaths of the mother and father in question.
While their children, as beneficiaries, received their parents’ accumulated pension savings, they did not receive any life insurance payouts. When they lodged a complaint with the PFA, the Adjudicator had no alternative but to rule in favour of the fund in this matter: it was not liable for the group risk cover that had lapsed.
Lukhaimane subsequently told Personal Finance: “In these cases, the fund had removed the [group risk] benefits from the rules of the fund – meaning that as far as our office and the fund is concerned, the complainants have no claim. The situation would be different if the benefits were still provided for and the municipality just did not pay. In this instance, we would get the amount payable from the fund and still order the employer to pay the said amount to the complainants – the complainants would then be able to go as far as attaching the municipality’s property to satisfy the debt.”
'Municipalities the worst'
On the subject of employers not paying over contributions, Lukhaimane said: “The situation is endemic and municipalities are the worst – we currently have cases all over the place. The death benefits issue has been coming on for a while, because once the contributions are not made, then the cover falls away. It is not only municipalities though – you have employers in the metal and engineering sector, in the transport sector, and some of the state-owned entities.
“Unfortunately the employees continue to see a deduction on their salaries and are mostly unaware that no payments are being made to the fund, which in turn cannot pay the insurer in instances where the benefit is underwritten. However, even where the fund self-insures, they fail to tell members that if contributions are not up to date, certain benefits will not be paid, mainly death benefits.”