Pensions face new threat

Companies representing thousands of employees have asked retirement fund administrators to allow them to reduce contributions to retirement funds for you, their employees.

And as company revenues nose-dive as a result of the coronavirus lockdown, administrators expect the requests to ramp up over the coming weeks.

John Anderson, head of client solutions at Alexander Forbes, says the administrator has had close to 100 employers asking to suspend or reduce retirement fund contributions. This is less than 10% of the employers who use funds administered by it, but the requests are an increasing trend.

He also anticipates that at some point retrenchments will increase as well.

Some employers have temporarily laid off employees on a no-work, no-pay basis, reducing their income and any retirement fund contributions and group life premiums calculated as a percentage of those earnings.

Appeals have been made to these employers to at least pay group life cover premiums as the failure to pay these premiums could have a devastating effect on families who need to claim on this cover, say administrators, insurers and the Financial Sector Conduct Authority (FSCA). 

Other employers are investigating reducing retirement fund contributions to soften the blow of lower pay levels for employees, while some may need to temporarily cease contributions to keep their businesses afloat.

Viresh Maharaj, the managing executive for Sanlam Corporate Distribution, says about 10% of the employers participating in Sanlam's umbrella retirement fund - mostly small ones - have already inquired about reducing contributions.

But he expects all retirement fund administrators will get many more such queries when employers return to work after the lockdown and assess its economic impact.

Andrew Crawford, retirement fund consultant at Seshego Benefit Consulting, says about 10% of the employers to which his company is a consultant, with about 7,000 to 8,000 members, are considering a temporary cessation of contributions.

He says employees in one company are facing about a 20% loss of income through lost overtime. Staff at another will lose a significant portion of their commission
earnings, and a third has reduced pay to 80% for the duration of the lockdown.

The two ways in which employers that are still paying their employees may seek to reduce retirement fund contributions are by reducing pensionable salaries on which your monthly contributions are based, or requesting a temporary cessation of contributions, say Crawford and Saleem Sonday, head of group savings at Allan Gray.

Your retirement fund may have rules in place that govern what must happen when you are unable to work, are working reduced hours or when your salary is reduced.

Your employer should make a formal request to the trustees of your fund and they must consider the employer's circumstances and apply the rules.

Vickie Lange, head of best practice at Alexander Forbes, says the fund rules will dictate whether or not contributions must be maintained at your full pensionable salary, whether contributions should be based on the new lower salary - with potential implications for your risk benefits - and whether or not your employee contribution is payable.

The FSCA recently notified funds that if they do not have these rules in place, they must register them as soon as possible.

Both Maharaj and Crawford say though fund trustees have the discretion to approve changes, employers also have obligations in terms of their contracts with you as an employee and in terms of labour law.

Law firm Webber Wentzel pointed out in an article written by Des Kruger and others this week that any suspension or reduction in contributions will mean you no longer enjoy the applicable tax deductions, which may result in your taxable income increasing and therefore more PAYE tax being due.

Sonday says if your employer needs to reduce or suspend contributions, the fund needs to inform its members within 30 days.

Lange says some funds have flexible contribution rates and members saving higher percentages may be able to reduce their contributions if they need to and if the rules allow changes at any time.

Both Crawford and Maharaj say temporarily reducing contributions will lower your final savings amount.

The biggest impact will be on younger members who preserve their savings until retirement as they will miss out on the most compounding growth on those contributions, they say.

Check if your group life cover is still in place

• Losing your group life and disability cover - typically a multiple of your salary - especially at a risky time like this can jeopardise you and your family's financial future.

Your employer has a moral obligation to keep paying these premiums, if it can.

Michele Jennings, the CEO of Sanlam Group Risk, says Sanlam is assisting distressed employers and funds to continue paying risk premiums in full and reducing only retirement-fund contributions so that you can keep all your risk benefits.

If this is not possible, employers can reduce the salary on which your risk premiums are based for a limited time, she says. In dire cases, this salary can be reduced to zero.

Employers are being advised strongly not to terminate your risk benefits and to reapply for cover when things improve because this could result in new pre-existing health conditions and other terms, she says.

Viresh Maharaj, managing executive at Sanlam Corporate, says reducing risk premiums must be a last-gasp measure.

Jennings says if an employer reduces or terminates risk benefits, it could be liable if an employee has a claim. Any changes must, in terms of the policyholder protection rules, be communicated to you, she says.

If your employer retrenches you or goes into liquidation, ask if there is a continuation option on the group life cover.