Now that South Africa is headed into a serious financial crisis, employers and employees are facing an uncertain future. Until we have more clarity, the right thing to do is to keep up with the payment of workers’ risk premiums and retirement fund contributions. Old Mutual Corporate Consultants’ Erhard Theunissen explains your options.
Before we go any further, there are two important things to always keep in mind.
If you had to reduce employees’ hours or are unable to pay them while they’re at home for the lockdown to avoid having to close down the business, it is important to let your fund administrator know and to continue paying at least the administration costs and risk premiums. If you don’t pay the administration costs, they will eat into employees’ benefits. And as long as you pay the risk premiums, employees will remain covered for the full risk benefits, which could be a lifesaver in this time.
Option 1: Continue making contributions
Of course, it would be best to continue paying all employee benefits. This means paying contributions, risk premiums and other costs as normal. While you may be juggling your cash flow right now, be sure to pay them no later than the seventh of the month following the month they were due. If not, you will incur late payment interest and your fund manager will be obligated to report you to the authorities.
Option 2: Reduce retirement fund contributions
If you can’t make all payments, you may need to enter into a form of business continuity planning to minimise contributions to your retirement fund to allow you to stabilise your operational cash flow.
This must be allowed for in the fund rules, however, and can only be done for a set period, which must be formally agreed with the trustees of the fund.
You’d be required to at least pay the value of the administration costs and risk premiums during this period to prevent costs impacting heavily on members’ benefits and to keep members covered for risk benefits.
Option 3: Reduce salaries and cost to company
Reducing pensionable and/or risk salaries as a proportion of your employees’ cost to company would allow you to reduce the value of the contributions and risk premiums payable.
This will, however, result in lower risk benefits for any members who pass away or become disabled during this period.
You could also consider reducing the level of risk benefits in order to reduce risk benefit premiums. This, however, typically takes time, as the change needs to be communicated to members and the rules need to be amended and registered. So it’s not a quick, short-term solution.
However, it needs to be said that it is not in the best interest of members to lose their insured benefits, especially not during tough times.
Option 4: Enter into a payment plan
Provided that the rules allow it, you could enter into a payment plan in respect of contributions. This would have to be agreed with the trustees of your retirement fund and the fund rules must allow for prescribed late payment interest.
You would also have to be certain that you can meet the agreed payment plan. Confirmation must also be obtained from insurers to ensure that members will retain risk cover during this period.
Option 5: Terminate participation in the retirement fund
The last resort would be to terminate your participation in the retirement fund, because it means that members will no longer have the death and disability cover most retirement funds offer.
It will also mean that members’ investment losses are locked in, that they will pay relatively high tax on their benefits, and that they will not receive benefits from that point on.
Before taking an outright decision to terminate, speak to a consultant to see if it’s possible to enter into an arrangement with the relevant insurers to give you more time to pay risk premiums while members retain their cover. Such requests are decided on a case-by-case basis and are not a given. If no premiums are paid to the insurer without such an arrangement, members’ cover will lapse and no benefits will be payable.