Existing legislation is sufficient to address arrear retirement fund contributions; the problem is that the available protections for members are not being enforced, says Muvhango Lukhaimane, the Pension Funds Adjudicator.
The Adjudicator, the FSCA, and National Treasury briefed the National Assembly’s Standing Committee on Finance on Tuesday. On the agenda was an update on the implementation of the two-pot retirement system and the failure by some employers to pay contributions. As Lukhaimane noted, the two are connected: some fund members found there was nothing to withdraw from their savings components because of the non-payment of contributions.
Some of what the FSCA told the committee about how it plans to address arrear contributions has entered the public domain in recent weeks.
Read: Arrears in local government sector reach alarming levels
The FSCA disclosed last week that at the end of December 2023, 7 770 employers – affecting about 310 000 employees – were in arrears, with contributions totalling about R5.2 billion. This amount excludes umbrella retirement funds but includes late-payment interest, FSCA deputy commissioner Astrid Ludin said on Tuesday.
Committee chairperson Joseph Maswanganyi (ANC) repeatedly pressed the Adjudicator, the FSCA, and Treasury to spell out the steps they will take to deal with arrear contributions.
Ludin said the FSCA’s “plea” was for the committee to give the Authority the power, via the Conduct of Financial Institutions (COFI) Bill, to supervise participating employers directly.
Treasury has indicated to the FSCA that the COFI Bill will be tabled in Parliament between February and April next year.
Ludin, during her presentation and when responding to questions, referred to the enhanced powers the FSCA will have to deal with arrear contributions once COFI becomes law. This will include the ability to report delinquent employers to the police.
Read: Unpaid contributions: FSCA prepares to hold non-compliant employers accountable
Lukhaimane said bringing employers within the regulatory net did not mean they would comply with their obligations.
She said the legislation currently on the books “is more than enough” to deal with arrear contributions. The weakness lies in the lack of follow-through to enforce compliance.
Statutory obligations on funds
In terms of section 13A of the Pension Funds Act (PFA), the board of a fund is responsible for ensuring that contributions are paid timeously.
To support section 13A, the FSCA introduced Conduct Standard 1 of 2022, which outlines the responsibilities of employers and retirement fund boards regarding contribution payments.
Under the PFA framework, failing to pay contributions on time is not only a breach of contract but also a serious violation of the law. Section 37(1)(a) of the PFA classifies the non-payment of contributions as a criminal offence, punishable by a fine of up to R10 million, imprisonment for up to 10 years, or both.
Boards must report material contraventions to the affected members and the FSCA. Where the contravention persists for 90 days, boards must lay a criminal complaint with the South African Police Service (SAPS) against the persons at the participating employer who are responsible for compliance with the PFA.
The most problematic fund
The Private Security Sector Provident Fund (PSSPF), which was established in terms of a sectoral agreement, is owed the most contributions. It is also the fund about which the Adjudicator receives the most complaints.
Lukhaimane said the complaints concerned the failure by employers to register with the fund, employers registering long after they started trading, or continuing to deduct contributions after deregistering, not registering employees with the fund, and failing to pay contributions at the prescribed rate.
Lukhaimane told the committee she did not believe the PSSPF’s administrator, Salt Employee Benefits, has the capacity to administer the fund. In her opinion, based on the cases dealt with by the Adjudicator’s Office, it “will never” have the capacity to administer the fund.
The fund has 330 000 active members and assets worth more than R11.5bn.
The PSSPF emerged from statutory management at the end of April last year after four years of intervention in the fund’s administration by the FSCA.
Read: Statutory management of Private Security Sector Provident Fund to end
Lukhaimane said the “member experience” is the same as it was before the appointment of the board that came into office when the fund was taken out of statutory management.
One of the fund’s biggest problems is unallocated contributions of hundreds of millions of rands, and Lukhaimane said the fund does not have the capacity to ascertain to which individual members the money belongs.
Zareena Camroodien, the FSCA’s head of retirement fund governance and trustee conduct, told the committee that the Authority is looking into the challenges with the PSSPF’s administrator.
Impact of ‘naming and shaming’
Ludin said the purpose of the FSCA’s “naming and shaming” employers that owe contributions is to make members aware of what is happening and to highlight to funds what their responsibilities are when it comes to addressing arrear contributions. The Authority is focusing on funds because it does not, at this stage, have direct powers over participating employers.
Read: Arrear contributions: FSCA publishes third list of defaulting employers
Publicising the names of employers that are in arrears is making a difference, Ludin said. Since the publication of the first list of employers in August last year, a thousand employers have either paid up or concluded payment arrangements. The impact this is having on improving the position of individual fund members should not be under-estimated.
The Authority has a “war room” that monitors the most problematic funds, she said.
Engagements with the NPA
Funds must take reasonable steps to recover arrear contributions, including filing a criminal case with the police. “That’s the part that needs to be strengthened,” Ludin said.
Funds need to take matters to the police, who need to understand this is a serious issue and hand over a proper case to the National Prosecuting Authority (NPA), which needs to have the resources to take it further, she said.
The FSCA asks boards to explain whether they have pursued delinquent employers, and where boards have been found to be negligent, they have been removed and trustees have been held personally liable.
Camroodien told MPs that the FSCA has been engaging with the NPA because funds and administrators have pointed out that when they report employers to the SAPS for non-payment, the police do not understand this is a statutory crime.
The Authority had a “very constructive” meeting this month with the NPA, which indicated it is willing to take forward a number of cases, she said.
Ludin said the FSCA is engaging with Treasury, the Auditor-General, municipalities, and funds about the contributions owed by municipalities.
Criminal cases under way against former and current municipal managers implicated in the non-payment of contributions, she said.
Camroodien said the Authority “probably should have done more earlier”; however, “a lot is being done now to arrest the problem [of arrear contributions]”.
“It’s also not that nothing was done over the years […] data was being collected, various strategies were looked at […] naming and shaming has happened, which has had a very positive impact […] We are engaging our colleagues internationally as to how they’ve dealt with it, but it appears that we are on the right track […],” she said.
Arrears in context
Ludin said the non-payment of contributions can have a devastating impact on individual members, it does not pose a prudential risk to an individual funds or the retirement system.
The R5.2bn arrear contributions represents only 0.2% of the R3.15 trillion in assets held by funds supervised by the FSCA. The FSCA does not supervise funds that are not subject to the PFA. These funds include the Government Employees Pension Fund, the biggest fund in South Africa, with 1.267 million contributing members.
Arrear contributions affect 3% of fund members, which means “the system is working for 97% of members”, Ludin said.
The arrears owed to the PSSPF constitute 2.4% of the value of the fund. This is indicative of significant non-compliance, but it does not threaten the existence of the fund. Although the impact on individual members should not be minimised, it is not something that would prompt the FSCA to deregister the fund.
Deregistering a fund puts all the members at a disadvantage, and the FSCA cancels or deregisters a fund only if it has no money, Ludin said.
Prescription prevents full recovery
Lukhaimane said her Office estimates that half of the R5.2bn in arrear contributions cannot be recovered because it has prescribed. In terms of the PFA, the time limit for claims related to retirement fund contributions or benefits is three years.
When handling complaints, her Office tries “very hard” to find grounds on which it can interrupt the running of prescription. This is easier when the complaint comes from an individual member, who might have a legitimate reason for not knowing that contributions have not been paid. But this is not possible with a fund, because it should know from the first month in which it did not receive contributions.
Lukhaimane said her Office does not have a mandate to address systemic issues, such as arrear contributions; it can deal only with specific complaints. Her Office provides the FSCA with data on complaint trends, which will assist the Authority to regulate the industry.
Lukhaimane said the governance of commercial umbrella funds influences their approach to dealing with non-contribution participating employers. She was referring to the absence of “mini-boards” on which members are represented. There is a tendency for these funds not to report non-contributing employers to the police. Instead, they will terminate the employer’s membership of the fund, which may be liquidated. The employer may continue to deduct contributions, even though it is not participating in any fund – something members discover only when they try to claim their benefits.
Closing gaps in the legislation
Alvinah Thela, National Treasury’s chief director for financial sector development, said that in addition to bringing participating employers under the FSCA’s supervision through COFI, there may be gaps in legislation that need to be closed. Treasury would assess whether, for example, it should be mandatory for funds to hold delinquent employers civilly, not only criminally, liable for unpaid contributions.
Treasury would look into addressing gaps in the mandate of the Adjudicator’s Office, and whether it is necessary to give additional powers to the Adjudicator and the FSCA.
If the FSCA cannot rely solely on the SAPS and the NPA for enforcement, Treasury could consider giving the Authority some powers to take enforcement measures against employers directly.
Thela said Treasury and the FSCA would also look into a Conduct Standard to address the issue of boards that are not reporting delinquent employers. Alternatives could be investigated to removing a board, only to be replaced by another dysfunctional board, or allowing funds simply to terminate the participation of a delinquent employer.
