Your company gets liquidated: What happens to your retirement fund?
Retirement / 8 January 2019, 10:00am / Lesego Mpete and Tshego Mosifane
The fortunes of a company and its staff are inextricably linked. But there is one area where even if the company is liquidated, an employee is not affected – the management of the individual employees’ retirement fund.
While a company is responsible for collecting each staff member’s contributions made to the company provident or pension fund, once the contributions have been forwarded to the administrator managing the retirement fund, they become assets of the employee.
In the unfortunate event of the company being liquidated, creditors of the company have no claim on the retirement funds collected on behalf of employees. Retirement funds belong to the employees and will be safely looked after by the fund administrator.
We know of companies that experience cash-flow problems, and the deciding factor is how they choose to deal with it. The key is honest communication from the outset.
There are cases where liquidation is unavoidable, employee retirement funds cannot be attached to cover any debt owed by the insolvent company, as they are not the company’s assets, but the assets of the relevant employee. They remain their property until the employee decides how they wish to apply the savings.
There are certain steps to follow in the case of an imminent liquidation, which can soften the blow for the employees and ensure they gain the benefit of their retirement funds.
As the company enters the liquidation process, an effective date of the liquidation will be decided upon by liquidators. The company will cease making retirement contributions to its employees’ retirement funds after this date and contributions will remain under the management of the fund administrator.
The date of termination of employment often differs from the effective date of the liquidation of the fund.
Claims are processed as deemed resignations and the fund cannot be terminated without the members being informed of the process the company will be following.
In terms of retrenchment packages, these will have to be looked at in terms of the Labour Relations Act and the company should acquire the assistance of a Labour Relations expert to determine if employees have recourse against the company.
In the case of business rescue, the terms and conditions will need to continue on the fund but the fund can be liquidated with the agreement of the members. The contracts are usually suspended on insolvency from a sequestration order.
Risk cover benefits will depend on the date of termination of the fund as well as the risk policy documents. Once the risk benefits have been terminated due to non-payment of premiums, employees are unable to claim any of the benefits.
Whether employees are able to convert risk benefits to personal benefits, will depend on whether the scheme has that conversion option, as well as if the conversion is done within the time frame allowed by the risk cover provider. Employees must be informed of the termination of the risk benefits to ensure there is no open liability should a claim arise after the date of termination.
The process followed for the liquidation of a fund and company liquidation are different. In terms of a company liquidation, once all employee contributions have been forwarded to the fund, the assurer can start processing claims on the funds.
As soon as their employment is terminated, employees have the option to either receive cash (net of tax), preserve their funds tax-free in a preservation fund, or transfer tax-free to their new employer's Retirement Fund. However, there will be a time delay as payments can only be made once the ‘liquidation’ of the Fund has been finalised.
The employer is obliged to make good on the investment of all retirement fund contributions deducted from an employee’s salary. Employers should not be able to access their employees’ retirement funds unless the fund is a self-administered fund under management control, or where the management have not paid over contributions to the fund administrators.
Firms are obliged to continue making these payments, on pain of litigation from the insurance company, which has a claim on those payments on behalf of the employees.
Companies facing liquidation should communicate openly with their staff from the onset. They should explain when the effective date of termination will be, and that contributions will continue to be paid until that date.
This also makes staff aware of the date after which their disability and severe illness benefits will no longer be valid. They can then try to ensure they are in new employment by that date or make provision in their personal capacity.
What the newly retrenched individual chooses to do with their retirement funds, will depend on their situation. When in a financial tight spot, it’s natural to want to dip into our funds, but it’s advisable to try to preserve most of them. Preserving their funds allows the employee to enjoy the benefits of compounding interest over the remaining years of their career.
The liquidation period is one of some stress and anxiety, but employee benefits consultants consulting to the fund can explain options to staff, liaise with the insurance company, and give members their benefit statements. A consultant will also be able to explain the implications of risk benefits such as life cover, disability cover and income protection cover.
In the event of a company’s liquidation, employee rights to their retirement funds remain protected. However, it is crucial that all employees remain involved and aware of their retirement fund position. This means getting regular valuation statements, engaging with employee benefits consultants, asking questions and taking advice.
Lesego Mpete and Tshego Mosifane are corporate benefits consultants at BDO.