Lize de la Harpe, Senior Legal Advisor at Sanlam Corporate

Introduction

The non-payment of retirement fund contributions by employers has been an ongoing problem for years, as again highlighted by the Two-pot system introduced in September 2024.

A recent judgment delivered by the Western Cape High Court on 16 January 2025 serves as a stark reminder of the serious consequences employers may face when contravening section 13A of the Pension Funds Act, 1956 (PFA).

Recap of the applicable law

Section 13A of the PFA, read together with FSCA Conduct Standard 1 of 2022 (RF), imposes a duty on the employer of a member of a fund to pay the member’s contribution deducted rom the member’s remuneration (and any contribution for which the employer is liable in terms of the fund rules) to the fund in full.  Contributions are payable no later than 7 days after the end of the month for which the contribution is payable.

If contributions, or any part thereof, is not paid timeously, interest will be payable by the employer to the fund at a rate prescribed in terms of the PFA.

The fund is legally obligated to collect the contributions and distribute the benefit payable to its members – as set out in section 7D, section 13 and section 13A of the PFA.

Failing to comply with section 13A is guilty an offence and can result in a fine not exceeding R10 million or imprisonment for a period not exceeding 10 years, or both.

In addition, section 13(8)(a) imposes personal liability on those directors of the employer who are regularly involved in the management of the employer’s overall financial affairs.

Engineering Industries Pension Fund and Another v Installair (Pty) Ltd and Others (1633/2023) [2025] ZAWCHC 8

In essence, the matter concerned the failure by the employer to pay over contributions deducted from their employees’ salaries to the First and Second Applicants, both of whom are registered retirement funds.

In explaining why they failed to pay over the contributions for the period of May 2020 to July 2020, the Second and Third Respondents who are the directors of employer, argued that the company was under financial distress at that time. As such employees were paid a sum which reflected their net salaries less their fund contributions while the deducted pension and provident portions were utilised to subsidise employee salaries.

At the time of the application, the employer (the First Respondent) was under liquidation and as such no order was sought against it. In an attempt to avoid personal liability, the Second and Third Respondents argued that, in instances where the employer and the directors are unable to comply with their statutory obligations due to reasons beyond their control and have been neither reckless nor negligent in their actions, the personal liability provisions of section 13(8) of the PFA do not apply to them.

In addition, they contended that the personal liability provisions of section 13A(8) do not apply to the Third Respondent, although listed as a director, as she was not involved in the affairs of the employer and as such no such order should be granted against her.

Given the serious prejudicial consequences of the failure to comply with the provisions of the PFA to the employees and other members of the Applicants, the court held that the Second and Third Respondents were not entitled to excuse themselves from these very serious statutory obligations. They failed to raise a bona fide defence and as such they must be held personally liable as provided for in the PFA.

The court also rejected the argument that the Third Respondent was not involved in the affairs of the employer and as such an order should not be granted against her. She was a director of First Respondent and therefore had to accept the responsibilities that come with it.

The learned judge held as follows at paragraph 29:

“[29] I would be failing in my constitutional duty if an order is not granted to the vulnerable groups. I reiterate, my attention is drawn to an article in the media and to the high interest in withdrawal claims from the two-pot retirement system which has exposed the failure of employers to pay pension contributions/s to funds who administer these contributions as envisaged under these unfortunate circumstances.”

(my emphasis)

The court accordingly ordered the Second and Third Respondents to pay over the contributions due to the Applicant and also to pay the Applicants’ legal costs on an attorney and own client scale.

Conclusion

As confirmed by the FSCA Commissioner at its Gys Steyn Chair in Law Public Lecture at Stellenbosch University’s Faculty of Law on 19 November 2024, currently, 7 770 employers in the public and private sectors have been reported for failing to make timely pension contributions, with 36% of these cases occurring in the private security sector. In fact, the latest data indicates that the total arrear contributions amount to some R5.2 billion.

The Commissioner specifically noted the “egregious practice (by municipalities especially) contributing to this is the recycling of employer pension contributions” and warned that this practice not only breaches fiduciary duties, but also “exacerbates the financial instability of the municipality when the backlog of unpaid pension obligations accrue interest and penalties over time”.

The FSCA has adopted several strategies to strengthen enforcement and encourage compliance with section 13A, through not only fines but also using the power of public accountability by publishing the names of employers in arrears, which has to date proven quite effective.

ENDS