More heat on employers not paying over workers’ pension deductions

Financial regulators, together with the retirement industry, are closing in on employers that deduct pension contributions from their employees’ salaries but fail to hand over the money to the employees’ retirement funds. The problem is a massive one in South Africa – about 6 000 employers owe about R8.3 billion to funds, affecting about 590 000 members – and efforts to address it until now have had little meaningful impact.

But that is changing: regulators are beefing up legislation and processes to act against employers and recover monies owed to retirement funds, and trustees on fund boards are being drilled in their responsibilities to ensure that employers pay up.

Developments in tackling the unpaid contributions problem have been highlighted in recent presentations by the retirement industry, and it was a major topic of discussion at the annual conference of the Institute of Retirement Funds Africa (IRFA), held in Cape Town this week.
 

What measures are currently in place?

Regulators and fund boards already have substantial powers to act against errant employers. According to a conduct standard issued in 2022 by the Financial Sector Conduct Authority (FSCA), if the administrator of a fund fails to receive contributions from an employer, it is obliged to report the failure to the board of trustees, who are themselves obliged to monitor contributions.

If the board determines there has been "material non-compliance” – that the employer is unlikely to immediately correct the failure – it must report this to affected members and to the FSCA. After 90 days, if the problem has not been rectified, the board must report the matter to the South African Police (SAPS).

Members who pick up the problem before their funds do, often only when they don’t receive the benefit they expect, can lodge a complaint with the Office of the Pension Funds Adjudicator (OPFA), which can act against errant employers, but also against fund trustees who fail their members.

Why aren’t trustees acting more decisively?

A discussion at the IRFA conference revealed that, in many cases, trustees are simply not treating the problem with the seriousness it deserves. If they do open a case with the police, they often fail to follow up and, importantly, fail to try to recover monies due.

IRFA executive officer Wayne Hiller van Rensburg said the Pension Funds Act was clear about trustees’ responsibilities. “A capable board detects defaults early, follows the reporting and escalation path, documents every action, uses the compliance and recovery tools available, and remains accountable until the risk to members is resolved,” he said.

Keabetswe Tsuene, specialist analyst at the FSCA, said that unpaid contributions not only affected members, but also their households and communities. A shocking statistic was that 44 percent of arrears were outstanding for five years or more, indicating that funds sat for long periods with unresolved cases on their books.

Tsuene said many trustees were under the impression that their responsibilities ended once they had lodged a complaint with the OPFA or opened a case with SAPS. Members needed to be informed, not only that contributions had not been paid over, but of steps the fund was taking to recover those contributions.

“What we see is that funds don’t have processes in place if they follow the complaint route to the OPFA – usually we don’t see that documented anywhere, and it is not delineated in the fund’s framework,” she said.

Tsuene emphasised the difference between criminal and civil proceedings. Employers could face criminal prosecution once a case was opened with SAPS, but civil proceedings to recover monies owed to the fund still needed to occur.

What measures are being taken?

The unpaid contribution problem is being tackled from multiple angles:

• Pension Funds Adjudicator: The adjudicator, Advocate Lebogang Mogashoa, told IRFA conference delegates that 51 percent of complaints submitted to his office in the last financial year related to the non-payment of contributions. Mogashoa said the OPFA planned to turn up the volume on these cases and make the “maximum use” of the resources and authority given to it by legislation to deal with the problem. It has introduced a new form to make it easier for funds to complain and ensure there is no excuse for funds not to lodge a complaint.

Mogashoa also said the adjudicator’s office has the power to join a party to its proceedings if it believes they have sufficient interest in the matter. The adjudicator plans to make employers part of the process and see the consequences of not paying contributions. When employers or their representatives who are responsible for contributions fail to respond, they could be subpoened and made to realise how serious it is not to pay contributions.

There was a false perception that the OPFA did not have the power to issue execution orders, which often prompted funds to resort to the courts. An order from the OPFA has the same status as a court order, Mogashoa said – a sheriff can attach the assets of an employer, its directors or other responsible persons in order to recover monies for members.

• FSCA and National Treasury: In its Regulatory Actions Report released in July, the FSCA pinpointed measures it has implemented over the past few years, including improving the quality and consistency of reporting by retirement funds, publishing lists of defaulting employers, and engaging with stakeholders, including the National Economic Development and Labour Council and the SA Local Government Association (many errant employers are municipalities).

Furthermore, National Treasury has resolved to recognise retirement funds that are owed contributions as preferred creditors when withholding allocations to municipalities, and the Auditor-General of South Africa confirmed it would classify the non-payment of contributions as a material irregularity in the financial statements of municipalities.

• New legislation: The upcoming Conduct of Financial Institutions Act, which replaces a raft of existing financial legislation, will strengthen the FSCA’s powers to act against employers, according to the Regulatory Actions Report. There are also changes to the Basic Conditions of Employment Act, as outlined in the Employment Laws Amendment Bill.

According to Nicolette van Vuuren, Partner, and Amy King, knowledge lawyer at Webber Wentzel, the bill provides, among other things, that an employer's failure to pay contributions to a fund on behalf of an employee be treated in the same manner as a failure to pay any amount owing to an employee.

“The practical effect is that non-payment of fund contributions will attract the same enforcement consequences as non-payment of wages,” Van Vuuren and King say.

In a recent presentation for Discovery, the new president of IRFA, Nancy Andrews, welcomed the fact that the problem was being recognised beyond the bounds of the financial services sector.

“Employers are now facing the dual wrath of the law: there's a liability under the pension funds legislation, but equally there's a liability under the labour law legislation for non-payment of contributions,” Andrews said.

Challenge for the industry

In her closing remarks at the IRFA conference, Andrews committed the organisation to tackling the unpaid contributions problem by upping its efforts to educate trustees on the reporting and recovery process. Ultimately, members’ outcomes were at risk, she said.