Retirement funds and Covid-19: payment of contributions and rules options
When employers or employees are financially distressed there are a number of options as regards making contributions towards retirement benefits. I have not set down all the options, just those that seem to have been more prevalently considered. The options available to you may also be suggested by what is already provided for in your fund’s rules. This article has a legal slant and fund boards should speak to their advisors about their options. Employers reading this article should also know that the options will depend not only on the rules of the fund but what the board of the fund may decide.
Liability for contributions
Contributions to funds are dealt with in section 13A of the Pension Funds Act (the Act) which requires an employer to pay any contributions which, in terms of the rules of the fund, must be deducted from the employee’s remuneration, and any contribution for which the employer is liable in terms of the fund’s rules. Fund contributions must be paid by no later than seven days after the end of the month for which the contributions are due.
It is important to note that non-compliance with this section by any person, including employers and directors, is a criminal offence that could give rise to a fine (up to R10 million) and / or imprisonment on conviction. Every director of a company ‘who is regularly involved in the management of the company’s overall financial affairs’ will be personally liable for the company’s payment of contributions and compliance with section 13A.
Thus, careful consideration needs to be given to altering the payment of fund contributions to avoid criminal liability or contravention of the Pension Funds Act (the Act).
Note: any contributions that have been deducted from remuneration must be paid over to the fund.
The most desirable option, from a retirement funding point of view, is to continue to make contributions to the fund at the same rate as previously. I have not dealt with this option as not much needs to be done.
It is also desirable that risk benefit premiums and fund expenses are paid. However, it may be that this is not an option, depending on the level of financial distress of employers and employees.
Option 1: suspend contributions to the fund altogether for a period;
Option 2: make partial contributions to the fund;
Option 3: change what is included in pensionable salary or the percentage of pensionable salary contributed.
Option 1: suspend contributions to the fund altogether for a period
This option assumes that the employer no longer pays any contributions whatsoever to the fund. Thus, there will be no allocation to retirement funding during the period of suspension. This may mean that:
(a) Risk benefit premiums and fund expenses (and anything else required to be deducted from contributions) are no longer paid; or
(b) That risk benefits and fund expenses (and anything else required to be deducted from contributions) are paid for from an alternative source by the fund, for example by reduction of members’ fund credits.
(a) Risk benefit premiums and fund expenses (and anything else required to be deducted from contributions) are no longer paid
If risk premiums are not paid then it is likely that insured risk benefits, such as the insured portion of death and disability benefits, as provided by the fund, will also fall away. However, it is important to determine if any employer-owned risk policies (for example disability policies) are being funded though deductions from contributions made to the fund. If contributions are suspended and the deduction for fund employer-owned risk policy premiums are not made, then employer-owned risk policies may lapse.
Fund expenses such as administration fees, consultants fees, board expenses, etc may be also be paid through deductions from contributions. If contributions are ceased, these payments will also cease, causing significant problems for the fund.
This bring us to (b): that risk benefits and fund expenses (and anything else required to be deducted from contributions) are paid for from an alternative source by the fund, for example by reduction of members’ fund credits.
Many fund rules already allow (particularly in the absence from service rules) for the option of risk benefit premiums and fund costs to be paid from fund credits where there are no contributions being made to the fund.
A question arises as to whether, notwithstanding the rules (which may not contravene the law) this would constitute a contravention of section 37A of the Act which prohibits not only reduction of benefits but reductions from “rights in respect of contributions” except for circumstances which include those set out in the Act, including sections 37A and 37D. I have not considered this question comprehensively, but it seems to me that a right in respect of contributions must be more than simply a fund credit to which the member has no right until an event occurs and a right is triggered under the rules. Thus, in my view, risk benefit premiums and fund costs being paid from fund credits, where there are no contributions being made to the fund, would not be a contravention of section 37A of the Act.
Funding risk benefit premiums and fund costs from fund credits should only be implemented if the rules allow for it.
Suspension of fund contributions under option 1 could be provided for by way of, for example:
(i) Absence from service rules; or
(ii) A general rule allowing contributions to be suspended.
(i) Absence from service rules
Absence from service rules generally allow for different scenarios where employees are being paid in full, being paid partially and not being paid at all. The specific fund rules will need to be considered to see whether the absence from service rules may be applied as they are currently worded. These rules were generally not drafted with a pandemic in mind. In my experience, I have found that very few sets of rules that I have looked at have absence from service rules that can be applied in the Covid-19 environment without amendment.
The fund will also need to consider the rules in light of members who are working partially from home, that is, they are still doing some work but not the full services specified in their employment contract. I have heard of at least one legal opinion where the attorney was of the view that where an employee was performing partial services they were not absent from work. In my view, this is too narrow a view. Absence from work (or service) has traditionally been applied not just where employee has been completely absent from work but in cases where they have been partially absent from work. For example they arrive late, leave early, take long lunch hours, play games on their computer for hours, etc. Service is required to be rendered in terms of the employee’s contract of employment.
My view is that if the employee is not in a position to render the service set out in the contract of employment then the employee may be absent from service. It cannot be the case that if the employee is, for example, rendering five per cent of services that he can be said to be rendering the service required in terms of his contract of employment. The employer’s consent to the circumstance where the employee does not render service (even if providing a small part of what service actually requires) does not change the service required to be rendered in terms of the employment contract. It is merely an acknowledgment that it is not being provided with the employer’s consent.
However, whether I am right or wrong, there are other legal interpretations out there and this increases the risk of using the absence from service rules for employees who are doing some work.
If you are going to use the absence from work rules then I think a discussion with insurers would be a good precautionary measure to ensure that there will be no implications for risk benefits when labelling members absent from service.
(ii) A general rule allowing contributions to be suspended
If the fund has a general rule allowing contributions to be suspended for a period, this is, in my view a preferable option to using absence from service rules.
However, generally speaking, it would probably be necessary to amend rules to allow for the suspension of contributions specifically for the Covid-19 induced financial stress scenario as not many rules make allowance for this type of contribution suspension.
Many financially distressed employees want to suspend contributions for April 2020. April contributions would be ‘payable’, in terms of the Act, by 7 May 2020. Fund should note that section 13A(4) of the Act requires that an amendment to the rules of a fund relating to the reduction or suspension of contributions does not affect the liability to pay any contributions which became payable before the date of the actual resolution where the fund resolved to make (effect) the amendment. This applies notwithstanding the effective date stated on the resolution.
This means that the resolution to change the rules to suspend the April contributions would need to be made before 7 May 2020.
In addition to this time crunch, rule amendments may, generally speaking, not be put into action before they are actually registered by the FSCA. So legally speaking, the resolution should be signed before 7 May and the rule registered before then. In an environment where the FSCA will be inundated with requests for these types of rules (and other Covid-19 related matters) in addition to its usual workload while it is coping with the lockdown and remote working conditions, it seems unlikely to me that the turnaround time will be extremely quick on these amendments, however good the FSCA’s intentions. Thus, rule amendments need to be submitted urgently. In my view, it would be sensible for the FSCA to look at some type of leniency for example, involving exemption with conditions.
Umbrella funds with special rules: in my view, it is possible to amend the general rules of the umbrella fund to override the relevant sets of special rules (where special rules specify contributions) for financially stressed employers relating to Covid-19. Amending many sets of special rules is in my view, not legally necessary. In addition the time and expense involved in amending hundreds (or thousands) of special rules cannot be justified. However, I suggest that umbrella funds, once they have done the general rule amendment, should look at a resolution for each affected participating employer when the fund makes a decision to apply the general rule to the employer (after engagement with the employer).
“Repayment” of suspended contributions: some rules specifically provide that any contributions that are suspended must be paid over a period (set out in the rules or agreed between the board and the fund) after the suspension. Given that we are not sure of the full effect of Covid-19 on the economy, on employers and that the effect will be different for different employees, funds should be careful with this type of rule and should retain enough flexibility to respond to the employer’s and employees’ financial position going forward.
Option 2: make partial contributions to the fund
In this option, partial ongoing contributions are made to the fund (member, employer, either or both) for a period.
Usually the level of the partial contributions that is chosen is chosen specifically in order to be able to fund insured risk benefits and fund expenses. When choosing the level of the partial contribution it is important to ascertain with accuracy the correct level of contributions to cover what you want to cover. Remember, that employer-owned risk policies may also be funded from contributions and you may want to include these premiums as well. The employer nd the fund (and in some cases the fund’s actuary) should communicate closely about what upcoming costs there could be that should be covered by contributions. It should be very clear what costs the contributions will cover and what they won’t. In addition, it should be clear if there will be anything left going towards retirement funding for the period partial contributions are being paid.
Payment of partial contributions under option 2 could be provided for by way of, for example:
(i) Absence from service rules; or
(ii) A general rule allowing partial contributions to be paid.
The same issues as raised about option 1 would apply with respect to (i) and (ii) in option 2.
Option 3: change what is included in pensionable salary or the percentage of pensionable salary contributed
This option would involve reducing how much is contributed to the fund by:
Reducing what makes up pensionable salary so that more remuneration is left out of the definition;
Reducing the percentage of pensionable salary that is contributed to the fund.
Theoretically speaking, anything between zero per cent and 100 per cent of pensionable salary could be what is required to be contributed to the fund for a period thus allowing for the suspension of contributions or the payment of a much lower contribution to the fund. The much lower contribution to the fund could be set at a rate whereby overall contributions still allow for certain deductions from contributions like risk benefits premiums and fund expenses (please see the discussion relating to this above in option 1).
Most rules will allow the employer or the fund to change pensionable salary and many rules allow pensionable salary to be changed every time a contribution is made.
It has been my experience that this has not been a popular option for employers and funds to opt for. This mainly seems to be for the reason that there may be different pensionable salaries applicable to the members or categories of members across the fund and this would require extensive, extremely onerous administrative changes for both the employer and the funds. In my view, if extensive changes are required this also gives rise to a greater risk of administrative error.
What has the FSCA said?
Amongst other Covid-19 related documents, the FSCA has issued Communication 11 of 2020 (Retirement Funds) on the 26th of March 2020 which is headed Covid-19: section 13A of the Act and financially distressed employers and employees – submission of urgent rule amendments. The FSCA’s Communication applies to pension and provident funds (as defined in the Income Tax Act). I have not set out the contents of that whole Communication in this article, but the points below should be noted as relevant to that Communication.
Funds need a formal request from the employer as regards the suspension or reduction of contributions. Retain the request by the employer;
The fund and the employer would need to agree the date from which the rules will be applied. It is preferable that this is set down in writing. This is an important decision to be made by the fund (where the rules allow for a decision or discretion to be applied) and the fund must ensure the decision is recorded in a resolution;
The fund must engage with the employer. Retain correspondence and other evidence around the fund’s engagement with the employer; and
It is important that, where possible, premiums for risk benefits continue to be paid. Thus, the FSCA has stated that funds “must attempt to ensure that full risk benefit premiums continue to be paid in full in respect of the affected employees/members in order to ensure that the fund risk benefits will continue to be provided”.
The rule amendment
As regards the relevant rule amendment:
Submit your rule amendment urgently;
Submit the employer request with your rule amendment;
In the covering letter to your rule amendment submission to the FSCA refer to the fact that this is an urgent COVID-19 related amendment;
Ensure that there is agreement between the fund and the employer as to the date when the contributions will be suspended or reduced, that the correspondence and the rule amendment reflects this date and the effective date of the rule amendment is correctly reflected;
Only include the rule amendment about cessation or reduction of contributions and not any other rule amendments in the same amendment.
The FSCA (given the lockdown) have stated that funds will only receive a letter and an unstamped version of the rule amendment from them. Funds will then receive the stamped version of the rule amendment once business resumes as usual.
The FSCA require that funds keep a proper record of affected members of the fund, which they will be required to produce upon request by the FSCA.
In my view, funds should note this to their administrators and request these reports so that they can see them for themselves.
The FSCA requires funds to inform affected members of the employer’s request to reduce or suspend contributions and of the attendant proposed rule amendments within 30 days of receipt of the request or a decision.
30 days from the request and 30 days from the decision by the fund may be two different dates, thus, in my view, to be safe it is probably better to apply the earlier date when counting down your 30 days.
Be vigilant and act efficiently
It is important to stay close to all the stakeholders of the fund during this time and to keep communications open.
Don’t forget to talk to your administrator about any contemplated changes, including rule amendments so that administration requirements can be dealt with as part of the process and in time. Continual engagement with employers is necessary to determine financial conditions as well as to ensure terms and conditions of employment are not breached and neither are agreements with trade unions. Engage with service providers around any service or delivery problems as well as fund strategies. Keep engaging with insurers to ensure that changes do not affect insurance terms and conditions and that you are aware of any new exclusions or conditions. Make sure as a fund you are aware of meeting rules and signature requirements with respect to rule amendments. Obtain the advice you need. Keep communicating with members.
Communicate and engage. Stay safe.
Leanne van Wyk
ICTS Legal Services (Pty) Ltd