Lize de la Harpe, Senior Legal Advisor at Sanlam Corporate

Introduction

The primary purpose of a retirement fund is to provide death and retirement benefits.

A “benefit” is defined in section 1 of the Pension Funds Act, 1956 (the Act) as “any amount payable to a member or beneficiary in terms of the rules of that fund”.

It is for this reason that pension benefits are specifically protected:

• A member or beneficiary is not permitted to use their fund benefit as security for other debts.
• A member or beneficiary’s attempt to transfer, cede, pledge or hypothecate such benefits will not be enforceable against a fund.
• Pension benefits may not be attached by creditors.

Section 37A specifically states that a benefit provided for in the rules of a registered pension fund or a right to such benefit, shall not (save for certain exceptions) be capable of being reduced, transferred or otherwise ceded, or of being pledged or hypothecated, or be liable to be attached or subjected to any form of execution under a judgment or order of court.

The effect of section 37A is that a fund is only permitted to make a deduction from a member’s benefit if such a deduction is allowed in terms of either the Pension Funds Act, the Income Tax Act, the Tax Administration Act or the Maintenance Act.

This way member benefits are protected from creditors in the sense that it may not be attached to satisfy debt, except for the certain exceptions.

Compensation for damages caused to an employer

Section 37D(1)(b) of the Act enables a fund to deduct compensation due to an employer in respect damage caused by the member to the employer by reason of theft, dishonesty, fraud or misconduct in respect of which:

• the member has admitted liability in writing; or
• judgment has been obtained against the member in court and includes a compensation order granted in terms of section 300 of the Criminal Procedure Act, 1977.

It is clear from section 37D(1)(b) that the deduction may only be made if (1) the member has in writing admitted that he is liable to the employer for compensation as a result of damage caused to the employer by reason of theft, dishonesty, fraud or misconduct by the member, or (2) a judgment has been obtained.

Limitation on type of damages

It is extremely important to take note that section 37D(1)(b) does not allow the fund to deduct any kind of damage caused to the employer – the damage caused must be linked to the member’s theft, dishonesty, fraud or misconduct.

The courts have ruled that the term “misconduct” in section 37D(1)(b) must be interpreted to require an element of dishonesty.

Examples of damages that may not be deducted from the members’ benefit:

• negligence
• performance bonusses paid
• breach of employment contract
• moonlighting
• breaching employer policy and procedures
• notice period not worked

Fund has a discretion

The wording of section 37D(1)(b) makes it clear the fund “may” make a deduction for damages due to an employer – it does not say the fund must.

As such, the fund has a discretion as to whether or not to allow the deduction after satisfying itself that the requirements for this type of deduction has been met.

Conclusion

Funds must act with caution when presented with requests from an employer to deduct damages due by a member. Fortunately there is various case law on this which offers guidance to trustees when interpreting section 37D(1)(b) of the Act.

ENDS