May a pension fund or provident fund lawfully pay special relief benefits to employed members in Cov
Summary: It is time for pension and provident funds to do what they can to mitigate financial hardship experienced by those of their members still employed but, as a result of the Covid-19 pandemic, are not earning their normal remuneration.
Pension funds and provident funds can lawfully amend their rules to provide for the payment of ‘special relief benefits’ to members still employed by participating employers but in financial distress due to circumstances other than a strike or lock-out and funded by reductions in member fund credits. To facilitate these payments, Parliament should amend the definition of the term ‘provident fund’ in the Income Tax Act and consider whether to provide in that act for the favourable tax treatment of special relief benefits.
It is widely accepted that the impact of the Covid-19 lockdown on the economy, on thousands of businesses and on millions of employees and their dependants has been devastating and is likely to continue to be so for some time.
Government has announced a number of measures intended to minimise the adverse impact of the lockdown on businesses and their employees. These include-
the COVID-19 Temporary Employer-Employee Relief Scheme (TERS); and
the deferment of the payment of employee tax; and
additional measures announced on 21 April 2020.
Some bargaining councils have concluded agreements in which provision has been made for the replacement of a portion of the normal remuneration of employees with payments by employers of a part or the whole of the shortfalls remaining after TERS benefits have been taken into account.
In its Communication 11 of 2020 the Financial Sector Conduct Authority (FSCA) has reminded funds subject to regulation in terms of the Pension Funds Act, 1956 (the PFA) that they are permitted to have rules that allow for the non-payment of contributions to pension funds and provident retirement funds (both referred to in this note as ‘pension funds’) during periods in which employees are temporarily laid off or are remunerated at rates lower than normal. While offering to process applications for the amendment of fund rules to allow for this on an urgent basis, the FSCA has urged funds to maintain risk benefit cover for the employees notwithstanding the reduction in, or non-payment of, contributions in the applicable period if such cover was provided in the ordinary course.
This, too, is an important measure because, the less that is required to be deducted from an employee’s remuneration and paid to a fund in the form of contributions, the more may be available to the employee as ‘take home’ pay.
Nonetheless, while these measures represent significant attempts to mitigate the financial distress likely to be experienced by employees, they are unlikely to be sufficient to replace the whole of their normal incomes for the whole of the periods during which they will not be earning their normal remuneration as a result of the lockdown.
Several fund administrators have reported receiving appeals from fund members for access to their retirement savings although, as they are still employed, they are not yet entitled to benefits from the funds in terms of their rules.
In the circumstances we have considered whether there is a basis on which a pension fund subject to regulation in terms of the PFA could lawfully grant to a member in financial distress a special benefit to assist in ‘plugging the gap’ between the amount of his or her normal remuneration and the TERS amount to which he or she will be entitled during the lockdown.
These are our views:
1. A pension fund may only pay the benefits provided for in its rules. If its rules do not now allow it to pay a Special Relief Benefit, it may not pay such a benefit unless and until its rules are amended to authorize it to do so.
2. A board of a fund that does not have a rule authorizing it to pay a Special Relief Benefit to a member -
may amend its rules to include such a rule provided that-
the board complies with the rules of the fund relating to rule amendments (which may, for example, require employer consent for the amendment of its rules); and
the FSCA approves the amendment in terms of section 12 of the PFA;
should amend its rules to provide for the payment of Special Relief Benefits because-
a pension fund is a vehicle for the delivery of state-subsidised social security benefits in partial compliance with the state’s duty in terms of section 27 of the Constitution and at considerable cost to the fiscus (in the form of the generous tax treatment of contributions, investment returns and benefits);
and it would be inconsistent with the duty of a fund to treat its members fairly to expect them and their dependants to suffer serious financial hardship now with potentially long-term consequences just to maximise the value of the benefits that will become payable to them on termination of employment.
3. The FSCA must approve a rule amendment if it is not inconsistent with the PFA and is not financially unsound. An amendment to provide for the payment of a Special Relief Benefit
will not be inconsistent with the PFA because the payment of Special Relief Benefits is one of the kinds of business that the PFA specifically authorizes a fund to conduct (subject to its rules); and