UNTANGLING THE EMPLOYER CONTRIBUTION PROVISIONS OF THE PENSION FUNDS ACT

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1 UNTANGLING THE EMPLOYER CONTRIBUTION PROVISIONS OF THE PENSION FUNDS ACT Reading through section 13A of the Pension Funds Act, 1956 (the Act ) and its accompanying regulations (regulation 33) and guidance (PF Circular 110), I was reminded of the story of Sleeping Beauty (I have two young daughters and too much Disney in the house), or at least the part where the prince hacks through the rose bushes to rescue the princess from her evil fairy godmother induced sleep. Getting to grips with section 13A and its attendant issues can feel like a similar slog (but with no princess as a reward). The principle behind section 13A is simple employers must pay contributions in full on time and supply the supporting documentation which allows the board to check whether the payments have been made in full - but the practical application of the principle is complex. The purpose of this article is to help trustees, employers and administrators negotiate the thorny tangle of regulation. Unfortunately I am not able to wave a magic wand at it, but I hope that it clear a path through it. Section 13A the basics Section 13A makes it a statutory obligation on the employer of any fund member to pay any contributions which, in terms of the rules, is to be deducted from the member s remuneration or for which the employer is liable. It also specifies how contributions must be paid (to the fund s bank account, directly to the fund or, in the case of a fund backed entirely by one or more long-term insurance policies, to the insurer) and the date by which they must be paid (seven days after the end of the month for which the contribution is payable so, for example, contributions for September 2013 must be paid by 7 October 2013). Section 13A also requires the employer to submit to the fund certain information which is designed to allow the fund to determine whether the employer has paid its contributions in full. This information must be provided by no later than 15 days after the end of the month in respect of which the payment was made. The most important document which the employer must submit is the reconciliation between the current contribution statement and the contribution statement for the previous period, showing differences in data, notably new members, terminations, changes in pensionable emoluments. A full list of the information required is set out in Regulation 33(1) to the Act Reporting breaches of section 13A

2 Unsurprisingly in view of the importance of ensuring that contributions are paid in full and on time, the Act contains stringent and specific reporting requirements where the employer is in breach. First stage report to monitoring person If either contributions are not paid, or the required information is not provided, in accordance with the statutory deadlines, the person who is responsible for checking the receipt of contributions on behalf of the fund (in practice, usually the administrator) must, within 15 days of the relevant deadline, report to the principal officer or other person authorized for this purpose by the board (referred to in the Act as the monitoring person ) the following: The failure to pay contributions in full (although if the shortfall is 2.5% or less, this need not be reported); or Any of the following data-related issues: o If any of the matters raised in previous reports were not resolved; o If all of the relevant data was not transmitted; or o Where the payment and data cannot be reconciled (subject to a 2.5% allowable limit) Second stage report by monitoring person to board The monitoring person must, within seven days of receipt of the report from the administrator, report the compliance failures to the fund s board. Third stage report to Registrar and members The board must report a failure to pay the contributions due to the Registrar and ensure that the monitoring person reports the failure to those members affected by the failure. There is no deadline in the Act or Regulations for this, but the board s statutory and fiduciary duties to members require this to be done promptly. The board is, however, given discretion as to defer reporting a data-related breach until the following month if presented with reasons which are acceptable to it. If the breach has been rectified by the following month, there is no need to report it. Fourth stage further report to Registrar If payment of contributions is outstanding for 90 days, the monitoring person must report the matter within 14 days to the Registrar. The Act also provides for the monitoring person to report to the Director of Public Prosecutions, but this is unnecessary since a failure to pay contributions does not currently attract criminal sanctions (for the time being see section

3 entitled Sanction for breach below). The Registrar also has the discretion to report the matter to SARS. Calculation and payment of interest Compound interest is payable on late payments or unpaid amounts from the first of the month following the month in which such contribution was payable until the date on which payment is received. Thus, for example, interest on contributions for September 2013 not paid by 7 October 2013 will run from 1 October The rate of interest is prescribed by the Minister of Finance from time to time and is currently as follows: Amount outstanding Prescribed rate Current rate of interest (based on repo rate of 5%) Transaction less than R Transaction than R greater Repo Rate + 1/3 rd of the Repo Rate + 11%, subject to a 23% overall maximum Repo rate + 1/3 rd of the repo rate + 8%, subject to a 20% overall maximum 17.67% 14.67% The term transaction is not defined, but we understand it to mean that each month s contribution which is outstanding, and each amount of interest on which interest is payable (see below), must be treated separately. Thus, for example, if an Employer has failed to pay two months contributions, each of R8 000, interest at the rate of 17.67% would be payable on those amounts. Employers, funds and their administrators should also be aware of the following: Salary adjustments and other changes which impact the amount of an employer s contributions are deemed to take effect on the date on which the adjustment is made (the exception to this is retrospective changes, which are deemed to take effect from the date of the decision to make the adjustment) and so interest becomes payable from that date. The interest on outstanding contributions, if not paid when the outstanding contribution is paid, attracts interest at the rate set out above from the date of payment of the contribution. Payment of interest is due by the end of the second month following the month to which the outstanding contributions related (e.g. interest on late-paid September contributions is due by 30 November).

4 When contributions are in arrears, and the contributions which are subsequently received are in excess of the current schedule, those contributions must be applied first to the current schedule with the excess then applied first to outstanding interest and then to arrear contributions from the oldest to the most recent. It is helpful to put all of this together in an example: Month to which contributi on relates Contribution amount and due date for payment Amount paid and date on which paid Nature of breach Consequences of breach July R15,000 7 August R15, August Contribution paid late Late payment interest on contribution from 1-18 August inclusive August R20,000 (increase reflects salary increase effective 1 August) plus R1,000* interest on late July contribution R16,000 7 September Shortfall in contribution of R5,000 Late payment interest due on outstanding R5,000 7 September September R26,500, i.e. R20,000 Sept contribution plus R5,000 outstanding from August plus R1,500* interest on that amount 7 October R25,000 7 October Shortfall of R1,500 September payment treated as paid Interest on outstanding August contribution treated as paid Shortfall is in August contribution: further interest due October R22,000, i.e. R20,000 plus R1,500 outstanding plus R500* interest on that amount R22,000 7 November None contributions up to date 7 November * Interest amounts are purely illustrative and not calculated by reference to any rate Will a member s benefit be cut back if contributions are in arrears when he or she withdraws or retires? The answer to this question will depend on the rules of the fund: if members benefits are stated to be by reference to the contributions paid, then if the employer is in arrears at the time, the fund may only pay what has been contributed. If, on the other hand, the benefit is by

5 reference to the amounts due or payable, or by reference to a formula (as is typically the case in a defined benefit fund), the member s benefit will not be cut back. The fact that a fund s rules provide for payment only of the amount actually contributed does not reduce its duty to seek to recoup unpaid or underpaid contributions from the employer for so long as the individuals affected are members. However, once an individual has ceased to be a member and has been paid his entitlement in terms of the rules (albeit that the benefit is lower than it would have been had the employer paid its contributions in full), the fund is no longer under a duty to recoup the shortfall in benefit after the member leaves the fund. Once an individual ceases to be a member, he or she must bring an action himself or herself against the employer based on delict for the loss suffered as a result of the failure of the employer to pay contributions. He or she would still have the right to bring a complaint before the Pension Funds Adjudicator. Sanction for breach Current position As the legislation currently stands: the fund or any of its members (or former members) may bring a complaint before the Pension Funds Adjudicator to recover unpaid contributions plus interest; and the Registrar may refer a breach of section 13A by an employer to the FSB enforcement committee which, if it finds the employer to be in breach, may impose a financial penalty on the employer and/or require it to make good the loss suffered by the fund or any of its members. Whilst this provides redress for funds and members (some might say inadequately), the number of abuses has demonstrated that it is not enough of a deterrent to stop unscrupulous employers from failing to meet their contribution obligations. Introduction of personal liability In an attempt to address this, the draft Financial Services Law General Amendment Bill, which is soon to become law, will make those who have control over the employer personally liable for the employer s failure to pay contributions in terms of section 13A and guilty of a criminal offence punishable by way of a fine of up to R10m and/or a prison sentence of up to 10 years. According to the draft legislation, the following people will be personally liable:

6 Where the employer is a company, every shareholder who controls the company and every director who is regularly involved in the management of the company s overall financial affairs; Where the employer is a close corporation, every member who controls or is regularly involved in the management of the CC s overall financial affairs; For any other type of employer, every person (i) in accordance with whose directions or instructions the governing body or structure of the employer acts or (ii) who controls or who is regularly involved in the management of the employer s overall financial affairs. It is important for employers to start taking steps to identify the persons potentially personally liable in terms of the Bill. It is worth noting that where an employer is a subsidiary of another company, the parent company will be potentially liable to make good its subsidiary s unpaid contributions. This is something which corporate groups, and in particular multinationals, must be aware of and put in place the necessary safeguards against a potential claim against an overseas parent. Funds also need to start engaging with employers on this issue. This should be relatively straightforward for employer-sponsored funds, but will be more problematic for umbrella funds and other funds (e.g. municipal funds) with multiple unrelated employers.