Section 37D Deductions – Employer Claims and Maintenance Orders
In this article we explore a recent decision of the Financial Services Tribunal (FST) about deductions from retirement fund benefits to compensate an employer for damage caused by an employee, as well as ongoing challenges faced by funds in respect of maintenance orders.
A quick refresher: Section 37A of the Pension Funds Act (PFA) prohibits members’ benefits from being reduced, ceded and so on. Section 37D of the PFA includes several exceptions.
Compensation for damages
Section 37D(1)(b)(ii) of the PFA permits a fund to deduct from a member’s benefit, compensation in respect of damage caused to the employer because of theft, dishonesty, fraud, or misconduct by the member where judgment had been obtained against the member in any court. It has been accepted that judgment could be a civil judgement or where the member is found guilty in a criminal case and the judgment includes a compensation order under the relevant legislation.
In the case of Highveld Steel and Vanadium Corporation Ltd v Oosthuizen(the Highveld case) the court confirmed that a fund may withhold a benefit while the employer pursues legal action against a member. It was recognised that judgment could not be obtained by the time the member leaves service and consequently the protection afforded the employer would be rendered meaningless if withholding is not permitted. The SCA also said that given the prejudice that this may cause the member, the fund must exercise due care and balance the competing interests.
In a recent determination of the FST, where a fund withheld a benefit in circumstances where the employer had laid charges and intended to request compensation, the FST drew a distinction between those facts and the Highveld case and noted that in the Highveld case the employer had instituted a civil action for damages. It found that the Highveld case is not authority for a fund being entitled to withhold benefits where no legal proceedings have been instituted or where a criminal case has been opened. It stated that the Highveld case is authority for the proposition that where the employer has instituted a civil action, the fund has the discretion to withhold benefits after carefully balancing the competing interests.
Where does this leave a fund?
The FST’s argument is compelling as laying a charge against someone is not the same as commencing legal proceedings. Once the National Prosecuting Authority (NPA) decides to prosecute, this may be regarded as legal proceedings being instituted. This would mean that if a member calls for a benefit, withholding may take place if the employer is able to show that the NPA has decided to prosecute and that it has applied for a compensation order.
FST determinations are not precedent so until the matter is settled by a higher court, it remains open, and it would be up to funds to decide how it would deal with requests by employers.
Section 37D(1)(d)(iA) of the PFA permits the deduction of amounts payable in terms of maintenance orders (as defined in the Maintenance Act), from members’ benefits, minimum individual reserves (if still in service) or pensions.
Section 26 of the Maintenance Act deals with the enforcement of maintenance orders, where members have failed to pay. Section 26(4) states that any pension, annuity or similar benefit may be attached or subjected to execution to satisfy a maintenance order under such circumstances (i.e., arrear maintenance).
In Sentinel Retirement Fund v Mtambo, the court held that an order for a fund to pay maintenance not yet due (future maintenance) in one lump sum is contrary to sections 37A and 37D of the PFA and the Maintenance Act.
The COFI Bill proposes a provision to allow funds to pay future maintenance in monthly payments or, where a fund cannot make monthly payments, to pay future maintenance annually in advance, but until COFI is promulgated, sections 37A and 37D of the PFA do not permit the deduction of future maintenance in a lump sum.
Despite the Sentinel decision, funds continue to receive maintenance orders directing them to pay future maintenance in lump sums.
Maintenance officers rely on section 16(2) of the Maintenance Act and the judgement in S v Botha, as authority for orders for future maintenance to be deducted from fund benefits.
Section 16(2) provides for an order:
“…directing any person, including any administrator of a pension fund, who is obliged under any contract to pay any sums of money on a periodical basis to the person against whom the maintenance order in question has been or is made, to make on behalf of the latter person such periodical payments from moneys at present or in future owing or accruing to the latter person as may be required to be made ….”.
Although section 16(2) refers to future maintenance, it only applies to funds that are obliged to pay sums of money to members on a periodical basis e.g., in S v Botha, where the accused had retired and was receiving a monthly pension from the fund.
In Government Employees Pension Fund v Bezuidenhout, the court held that a solution to funds that cannot pay monthly amounts is to order the funds to pay lump sum amounts into the Guardian’s Fund.
Maintenance officers increasingly rely on the Bezuidenhout judgement, for funds to be ordered to pay future maintenance to the Guardian’s Fund, but maintenance courts do not have the power to make such orders, because moneys received by the Guardian’s Fund by order of court must involve an order by the High Court and not a maintenance court.