Lize de la Harpe, Senior Legal Advisor, Sanlam Corporate

Introduction

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

For this reason, pension benefits are specifically protected. Section 37A of the Pension Funds Act, 1956 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 under a judgment or order of court. Section 37D in turn sets out exceptions to this general rule and lists certain permissible deductions, including the right of a fund to deduct compensation due to an employer.

Compensation for damages caused to an employer

Section 37D(1)(b)(ii) of the Pension Funds Act makes provision for 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 this section that the deduction may only be made if the requirements set out therein are met.

Right to withhold a benefit

In cases where a member has not admitted liability and the employer is forced to approach the courts to establish such member’s liability, usually the member will have already exited their fund due to being dismissed by their employer or resigning.

Upon dismissal or resignation, the member may (subject to Two Pot restrictions) become entitled to a withdrawal benefit. If the member was paid his or her withdrawal benefit before the employer was able to obtain a judgment against them, such court order may be rendered futile.

As confirmed by the Supreme Court of Appeal in Highveld Steel and Vanadium Corporation Limited v Oosthuizen [2009] 1 BPLR (SCA) the wording of section 37D(1)(b)(ii) implies a right of the fund to withhold a benefit payable to the former employee pending a court order or admission of guilt, when requested to do so by the employer.

Considering the potential prejudice to a member who may urgently need to access his withdrawal benefit and who is in due course found innocent, it is necessary for the fund to exercise its discretion with care.

The fund must therefore carefully consider whether:

• the pending legal proceedings are of a civil nature (by virtue of the fact that opening a criminal case will not be sufficient)
• it is satisfied that there is no undue delay by the employer in pursuing the claim
• the member has been given an opportunity to respond to the employers’ allegations, and
• the employer has a reasonable chance of succeeding with its claim and will suffer irreparable harm or loss if the benefit is not withheld.

A Buys v Sentraal Suid Aftree Fonds and Another (PFA/WC/00109585/2024)

In essence, the complainant approached the Adjudicator to secure the release of her withdrawal benefit that was being withheld by the fund at the request of her former employer.

The complainant and her husband (to whom she was married in community of property) were employed by the same company. In August 2022 the employer accused her husband of defrauding the company in the sum of R13.8m. He was placed on paid leave and the employer opened a criminal case against him. The complainant was subsequently placed on leave as well, at which stage her employer informed her that considering the circumstances it would be difficult for her to continue working there. As such, and upon advice from her lawyer, she resigned with immediate effect. Her husband eventually admitted to the alleged fraud whereafter the employer obtained a sequestration order against their joint estate.

When requesting payment of her withdrawal benefit, the fund informed her that the benefit was being withheld at the request of the employer based on her suspected involvement in the alleged fraud. The complaint was lodged a year and five months after the hold was placed.

The question before the Adjudicator was whether or not the withholding of the withdrawal benefit at the request of the employer was lawful.

In answering this question, the Adjudicator turned to case law on this aspect and noted the Highveld Steel judgment (mentioned above) where the SCA confirmed that the fund has a discretion to withhold payment pending determination or acknowledgment of such member’s liability. This discretion, however, must be exercised carefully.

The fund argued that the withholding of the benefit was justified on the basis of a criminal case being opened against the complainant’s husband coupled with the fact that the Directorate for Priority Crime Investigation (the “Hawks”) was investigating both the complainant and her husband for money laundering.

The Adjudicator disagreed and held that the mere investigation by the Hawks was not enough to withhold the complainant’s benefit. As confirmed by the High Court in SA Metal Group (Pty) Ltd v Deon Jeftha & Others (2020) 1 BPLR 20 (WCC) the mere satisfaction by the trustees that the employer has placed allegations before them which, if true, would show damages arising from dishonest conduct by an employee is not sufficient on its own to meet the test set out by the SCA in Highveld Steel.

Furthermore, no civil judgment had been obtained against her, and more than enough time had passed for the employer to institute same, which the employer failed to do without providing any reason therefore. As such, the fund did not act independently (nor impartially) and failed to act in the best interest of the complainant, which conduct falls short of the requirements of the Pension Funds Act. The fund was accordingly ordered to release the withdrawal benefit to the complainant without delay.

Conclusion

Section 7C of the Pension Funds Act requires Boards of Trustees to act with due care, diligence and good faith, to act impartially and to avoid conflicts of interest. This duty includes the scrutiny of claims made against benefits by employers. Funds are therefore required to apply their minds when assessing such requests to withhold benefits – it cannot merely act as a rubber stamp of the employer.

ENDS