The past 30 years have seen a significant move away from employer-sponsored standalone retirement funds to employers participating in commercial umbrella funds.
The trend has been driven by the regulator wanting fewer retirement funds and the cost savings to both members and employers. It has also been enabled by umbrella funds being more flexible in relation to benefit structures and service provider choice, to accommodate the requirements of different employers.
The concern, however, is that many employers have seen umbrella funds as absolving them of any role or responsibility in terms of their employees’ retirement funding. A number of employers are to be commended for their commitment and have active management committees that drive employer involvement, but there are many who need to have a closer look at what they should be doing.
This article considers five key areas where the employer plays a key role.
1. Monthly contributions
An employer is required by law to pay contributions to the fund by the seventh of the following month. Failure to do this will incur late payment interest from the first of the month. But the employer’s responsibility goes much further than this. The employer must also provide a membership schedule that matches the payment, because without this, the administrator cannot process the payment and there will be a delay in investing the contributions.
Administrators cannot process part of the schedule because they cannot be expected to presume whose details are correct and whose details are incorrect.
The delay in processing the monthly contributions will also delay the processing of any exit benefits. In a recent case that was reviewed by the Pension Funds Adjudicator and the Financial Services Tribunal, the delay in processing the exit benefit resulted in significant losses to a member, and the rulings highlighted the failure of the employer to comply with the requirements.
It seems that some employers view retirement fund contributions as the solution to their cash-flow problems. Messages to a fund’s principal officer seeking permission to pay three weeks late are simply unacceptable. The fund cannot approve such requests for late payment.
It is a requirement that each employer identifies the individual who is responsible for paying the monthly contribution to the fund, and that person could face a heavy fine for failing to do so. Where the employer has not formally identified the responsible person, it is deemed to be the entire board of the employer.
The regulator is threatening to name and shame employers that are in breach. It is uncertain how effective that will be. Funds have opened criminal cases against employers that fail to pay contributions, but the South African Police Service seems to be unsure how to investigate and proceed with such cases.
2. Compliance with regulations
Employers seem to think that a fund’s governance structure is responsible to ensure compliance with regulations. To a large extent this is true, but there are aspects that only the employer can monitor and control.
An example is the requirement that all eligible employers must be members of the fund. An employer cannot exclude employees merely because they do not want to be a member of the fund. The fund needs to rely on the employer to ensure that all eligible employees are included on the monthly membership schedule. This sort of breach could potentially mean that the fund falls foul of the Income Tax Act and loses its status as a retirement fund, which would impact the tax benefits of all members.
3. Communication with members
Member communication is a huge part of a retirement fund, and the employer is often the only link to the members.
Funds provide communication to the employer for distribution to members, but this is often not done. Funds request an opportunity to present to members, and access is denied because it impacts on productivity. Funds request members’ contact details (cellphone numbers and email addresses), so they can communicate directly with members, but this information is not provided.
Members may blame the fund when they discover too late that they are underprovided for at retirement, but often the blame should be laid at the door of the employer for denying the fund the ability to communicate properly with members.
4. Death claims
The application of section 37C of the Pension Funds Act and investigating the claims of dependants and nominated beneficiaries is a huge task for a fund, and the employer is much better placed to ensure that the correct information is timeously gathered.
Many employers refuse to get involved in information gathering and will not engage with the deceased’s family. They will complain if the death claim is not resolved speedily, but without their help, there will often be delays. The employer knew the deceased, the employer has access to work colleagues who can provide useful insights, and the employer has access to HR files that can assist (for example, dependant members of a medical scheme).
5. Umbrella fund review
The FSCA has highlighted a concern that many commercial umbrella funds have inherent conflicts of interests. The sponsor is often also the major service provider and often provides multiple services (administration, risk benefits, investments and consulting). The sponsor cannot avoid these conflicts, and the employer needs to be the one protecting members from any possible abuse by the sponsor.
Employers will insist on three quotes every year before renewing a photocopier contract but will not review their choice of umbrella fund for 15 years. The umbrella fund’s trustees are responsible for the governance of the fund, but the employer is responsible for the choice of umbrella fund in which they participate.
Conclusion
The FSCA is going to start taking action against employers that breach their legal responsibilities. Umbrella funds have contracts/service level agreements with employers, and it is expected that the FSCA will start taking action to ensure that employers meet their contractual obligations.
Historically, umbrella funds may have given employers a large degree of leeway, as they want to retain the business. But as employers’ failure to comply will impact the fund’s compliance, we can expect to see umbrella funds taking a firmer line with delinquent employers.
