Withholding retirement benefits – retirement funds boards’ duty to scrutinise employers’ requests

June 1st, 2021
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This article discusses the role of retirement funds boards’ when employers associated with their funds request them to withhold members’ accrued retirement benefits pending the finalisation of court cases, which the employers instituted against members, who are their employees. The article aims to demonstrate that retirement funds boards should not adopt a passive approach when requested to withhold their members’ retirement benefits but should actively attempt to understand the circumstances, which employers have based their requests on to satisfy themselves that such requests are not designed to financially prejudice members. Generally, employers request retirement funds boards to withhold members’ retirement funds to provide them with an opportunity to obtain court orders that confirm members’ liability to compensate them for financial harm caused by such members, as their employees in relation to the workplace. Such orders enable retirement funds boards to deduct quantified amounts from their members’ retirement benefits to compensate employers.

Deducting accrued retirement funds

The regulation of the South African retirement fund industry is fragmented with many pieces of statutes regulating different retirement funds (see MC Marumoagae ‘The need for effective management of pension funds schemes in South Africa in order to protect member’s benefits’ (2016) 79 THRHR 614). At times, these different statutes have similar provisions, which while drafted differently, nonetheless, deal with the same issue see –

  • s 21(3)(c) of the Government Employees Pension Law Proclamation 21 of 1996;
  • s 9(a) and (b) of the Transnet Pension Fund Act 62 of 1990;
  • s 10B(2)(b)(iii) of the Post and Telecommunication-Related Matters Act 44 of 1958; and
  • s 37D(1) Pension Funds Act 24 of 1956 (the PFA).

These provisions provide for the deduction of members’ accrued retirement benefits, where it has been proven that such members have caused financial harm to their employers in relation to the workplace, for the purposes of compensating employers.

Section 10B(2)(b)(iii) of the Post and Telecommunication-Related Matters Act and s 9(a) and (b) of the Transnet Pension Fund Act appear to allow boards of retirement funds to deduct amounts owed to employers by members of these funds due to the alleged economic harm sustained by employers due to the members’ dishonest conduct, misconduct, or negligence in the workplace. These provisions do not expressly require retirement funds boards to make such deductions after members have admitted liability in writing or employers have obtained court orders to that effect. However, s 21(3)(c) of the Government Employees Pension Law Proclamation and s 37D (1) of the PFA expressly provides that such deductions may only be made when members have admitted liability in writing or employers have obtained court orders that establish members’ liability and employers’ entitlement to be compensated by members. It is not clear why these provisions are drafted differently. Nonetheless, it can be argued that the legislature’s intention is for retirement funds’ boards, irrespective of which legislation regulates their retirement funds, to deduct their members’ retirement benefits to compensate employers only when employees have admitted liability in writing, or if employers have obtained judgments against their employees, which clearly indicate that such employees, who are retirement fund members, are liable to compensate them. This can be a civil judgment or a compensatory order in a criminal judgment in terms of s 300 of the Criminal Procedure Act 51 of 1977 (see Apahane v Auto Workers Provident Fund and Another [2020] 2 BPLR 322 (PFA) at para 5.3).

Withholding retirement benefits

A careful reading of all these provisions reveals that none of the provisions expressly provides a duty for the retirement fund boards they regulate to withhold their members’ accrued retirement benefits at the employers’ requests. The Supreme Court of Appeal (SCA), dealing with s 37D(1) of the PFA, in Highveld Steel and Vanadium Corporation Ltd v Oosthuizen [2009] 1 BPLR 1 (SCA) noted some of the practical challenges brought by lack of legislative recognition for the boards’ power to withhold their members’ retirement benefits at employers’ requests. The SCA recognised that if employees do not admit liability in writing, employers are unlikely to have obtained judgments against such employees at the time of the termination of their employment contracts, which would enable boards to deduct members retirement benefits to compensate them (Highveld Steel at para 17). Further that court processes take time to complete. If members are provided their benefits, by the time employers obtain such orders, employers may not be able to enforce court orders because the retirement money employees received would have been depleted (Highveld Steel at para 17). The SCA was of the view that in order to protect the interests of employers, s 37D(1) of the PFA must be ‘interpreted purposively to include the power to withhold payment of a member’s pension benefits pending the determination or acknowledgement of such member’s liability’ (Highveld Steel at para 19). Thus, boards have discretion to withhold their members retirement benefits pending the finalisation of court processes that employers have undertaken against their employees, who are their members (Highveld Steel at para 19 and Charlton and Others v Tongaat-Hulett Pension Fund (KZD) (unreported case no 9438/05, 1-2-2006) (Balton J)).

The role of the board

The deduction of accrued retirement benefits for the purposes of compensating employers for the economic harm suffered through their employees is a clear statutory duty that does not appear to be controversial. What is controversial is the withholding of retirement benefits. It is evident that withholding retirement benefits is a remedy that is designed to protect the rights of employers. While it is meant to protect employers, there is evidence that some employers abuse this remedy, which brings into question the exact role of retirement funds boards once employers have approached them to withhold members’ retirement benefits. For example, in SA Metal Group (Pty) Ltd v Jeftha and Others [2020] 1 BPLR 20 (WCC), the board received the employer’s request to withhold the member’s retirement benefits. The employer did not indicate to the board whether the member had admitted liability or that the employer had instituted court proceedings against the member (or at the very least, if such proceedings have not yet been instituted when the employer would institute them). The employer merely alleged that the member had breached their employment contract without detailing the economic harm that the member had allegedly caused in the workplace. The fund withheld the member’s benefits and advised the employer to institute court proceeding within six months, emphasising that delays in instituting such proceedings may lead to the board releasing the benefits to the member (SA Metal Group at para 29).

The employer failed to institute court proceedings against the member within the six-month period from the date the member’s retirement funds were withheld by the fund. After the seventh month, the member lodged a complaint with the office of the pension funds adjudicator for the release of their benefits. Three months after the member lodged the complaint, the employer issued summons against the member at the High Court claiming damages amounting to R 3,7 million (SA Metal Group at para 52). The employer alleged that the member, as its employee, colluded with one of the service providers, resulting in the service provider charging the employer excessive prices, thereby causing the employer financial loss (SA Metal Group at para 17). The employer did not rely on this allegation when the request for the member’s retirement benefits to be withheld was first made to the fund. The fund agreed to withhold the member’s retirement benefits without evaluating whether the employer had a prima facie claim or at the very least, a claim that could stand in court against the member.

The fund failed to scrutinise the employer’s claim before agreeing to withhold the member’s retirement benefits. This raises the question whether the board has such a duty? The court was of the view that the board’s fiduciary duty ‘envisages careful scrutiny of claims made against benefits of members submitted by employers, and a weighing of the competing interests of the parties after affording a member the opportunity to place his case properly before the fund’ (SA Metal Group at para 73). This duty is in line with s 7C(2)(a) of the PFA, which requires the board to take ‘all reasonable steps to ensure that the interests of members in terms of the rules of the fund and the provisions of this Act are protected at all times’. It is evident that the member will be prejudiced when the board agrees to withhold the member’s accrued retirement benefits at the employer’s request without either the member’s admission of liability or the employer providing evidence of court proceedings against the member. By so doing, the board will be withholding the member’s retirement benefits without an idea as to how long it would need to withhold such benefits. Boards should never allow employers to make them withhold members retirement benefits for unreasonably long periods or indefinitely (see Watson v Corporate Selection Retirement Fund: Participating Employer – Impact Cleaning CC and Others [2013] JOL 30315 (PFA) at para 5.7).

The duty to scrutinise the employer’s request is also supported by s 7C(2)(b) of the PFA which requires the board to ‘act with due care, diligence and good faith’. The boards should require more information from employers regarding the alleged economic harm caused by members to be satisfied that such claims can be competently taken to court. Further that such claims are not meant to prejudice members. The SCA in Highveld Steel at para 20 held that in ‘[c]onsidering the potential prejudice to an employee who may urgently need to access his pension benefits and who is in due course found innocent, it is necessary that pension funds exercise their discretion [to withhold members’ retirement funds] with care’.

I submit that once retirement funds boards have received the relevant information that supports the request to withhold payment of members’ retirement benefits by employers, such information should be forwarded to affected members to allow them to respond to the allegations made against them. This will enable retirement funds boards to properly weigh employers’ and members’ competing interests. It is also fundamentally important that boards do not take instructions from employers to withhold members’ retirement benefits but consider the requests from employers to do so. This can be achieved when boards act independently, which they are required to do in terms of s 7C(2)(d) of the PFA.

Scrutinising employers’ allegations is important because it would also empower retirement funds boards to ask employers to quantify their loss, so that they can determine how much of the members’ retirement benefits should be withheld. It will generally be prejudicial and unreasonable to withhold members’ entire retirement benefit in circumstances where, even if employers receive orders in their favour, such orders will not lead to members’ entire retirement benefits being used to compensate employers (see Nkosi v Alexander Forbes Retirement Fund (Pension Section) and Others [2020] 2 BPLR 512 (PFA) at para 5.7). It is reasonable to withhold only that portion of the benefit which, should the employer be successful in court, will be sufficient to satisfy the employer’s claim.

Conclusion

Withholding members’ retirement funds is a necessary remedy which, if used properly, can benefit employers. It is recommended that employers should only resort to this remedy when they have indeed suffered financial harm caused by their employees’ dishonest conduct, misconduct or negligence. Further that when approaching boards to withhold their employees’ retirement funds, employers’ must have already instituted, or at the very least, be in the process of immediately instituting court cases against their employees. In their requests for retirement funds to be withheld, in order to assist boards to properly exercise their discretion, employers should try to provide sufficient details regarding the alleged economic harm, such as –

  • the nature of the damage caused;
  • the value of the damages suffered;
  • the amount claimed in court;
  • court proceedings, which have been instituted or about to be instituted, including case numbers; and
  • type of court where the case has been lodged, including the location (see Momentum ‘Legal update – Withholding benefits’ (https://eb.momentum.co.za, accessed 5-5-2021)).

Finally, retirement funds boards should always demand to be updated of the progress of the case and circumstances, which may occasion delays. I submitted that it amounts to good governance for retirement funds to also communicate with members who are subjected to court proceedings, to regularly advise them why their retirement benefits will continue being withheld.

Clement Marumoagae LLB LLM (Wits) LLM (NWU) Dip Insolvency Practice (UP) PhD (UCT) is a Director at Marumoagae Attorneys and an Associate Professor at the University of Witwatersrand in Johannesburg. Mr Marumoagae is also a council member of the Legal Practice Council.

This article was first published in De Rebus in 2021 (June) DR 16.

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