Financial challenges brought about by Covid-19 and the current lockdown will see some employers and employees default on their retirement fund contributions. Picture: 123RF/PIXEL BLISS
Financial challenges brought about by Covid-19 and the current lockdown will see some employers and employees default on their retirement fund contributions. Picture: 123RF/PIXEL BLISS

The financial services regulator is preparing for a number of distressed employers to default on their contributions to retirement funds, urging affected funds to register necessary amendments to their rules to deal with this non-payment.

The Financial Services Conduct Authority (FSCA) issued a statement on Friday morning saying the financial challenges brought about by the Covid-19 pandemic, and the nationwide lockdown, mean certain employers and employees will be unable to pay their full or, in some cases, any contributions to their retirement funds.

Olano Makhubela, divisional executive of retirement funds supervision at the FSCA, told Money it is difficult to tell at this stage how widespread the issue will be, as the FSCA has not yet received actual requests for rule amendments and some funds already have the necessary rules to deal with defaults.

However, the FSCA has received several queries from organisations such as the Institute of Retirement Funds Africa and large institutions, which indicates that employers are experiencing financial challenges, he said.

In a statement released by the FSCA, Makhubela said that in terms of the Pension Funds Act (PFA), employers are liable to pay full contributions due to retirement funds by no later than seven days after the end of the month in which they are due. This means, for example, that retirement fund contributions from both employers and employees for the month of March must be paid by April 7.

The FSCA says that most funds have rules in place to make provision for:

  • A temporary absence from work (with or without pay).
  • A break in service (in instances where employees are not working), and/or
  • A postponement of contribution payments and/or reduction of pensionable service (in respect of employees who are working reduced hours).

In cases in which employers have made formal requests to their retirement funds for the suspension or reduction of contributions, the board of trustees of the fund must consider the employer’s circumstances and apply the fund rules, the regulator says.

Rule amendments must be submitted immediately

Makhubela says funds that do not have these rules in place are advised to urgently submit rule amendments to the FSCA and it will approve them — though not officially stamp them until business resumes. Only rule amendments relating to financial distress arising from the Covid-19 pandemic can be submitted at this time.

Good intentions for short-term relief

Malusi Ndlovu, GM at Old Mutual Corporate Consultants, says the intention behind the FSCA’s decision to fast-track the retirement fund rule amendments is good as any short-term relief is welcome. “For most retirement funds, these amendments will be applied to the employer portion of contributions, which means employees may still have member retirement fund deductions from their salaries.” 

Ndlovu says if you belong to a retirement annuity fund, you should be able to stop contributions if you are in financial distress, although it is not advisable if you are still receiving a full salary.

Both Ndlovu and Makhubela appeal to funds to keep paying group life premiums to ensure employees continue to enjoy life, disability and funeral cover provided by the funds, particularly at this crucial time.

“Most insurers do not provide cover when premiums have not been received. In a pandemic situation, mortality rates are likely to rise, which means death and funeral benefits take on paramount importance,” Ndlovu says.

He says most life insurers in SA have indicated that they will continue to honour death claims, with no Covid-19 exclusions. “However, as the pandemic has matured, insurers in countries with high mortality rates have started introducing exclusions or increasing their pricing on premiums.” 

Implications for SMEs

Vicki Lange, head of best practice at Alexander Forbes, says the introduction of pension fund rule amendments will have different implications for different funds.

“There will definitely be a long-term impact on retirement savings and the longer the lockdown continues, the bigger the impact will be. Right now, there is a great deal of uncertainty — around lockdown timelines, the impact on companies and the impact on savings in general.”

Lange says that a number of umbrella retirement funds are likely to introduce rule amendments to accommodate Covid-19 and this will bring potential relief to small and medium enterprises (SMEs), which are likely to be most negatively affected by the lockdown. “Our stance is that retirement funds should only provide for this type of relief where it is absolutely unavoidable to do otherwise.” 

If employers are unable to pay your contributions to a fund and apply to the fund for a reduction or suspension of paying contributions, the fund must inform members within 30 days. The FSCA has requested funds to keep a proper record of all affected members.

Makhubela said Sars has agreed that the income tax approval status of retirement funds will not be affected by provision for the reduction or temporary stopping of contributions.

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