Unpaid contributions: FSCA prepares to hold non-compliant employers accountable

Dark clouds are gathering for employers in the public and private sectors who fail to pay retirement fund contributions on time. With the Conduct of Financial Institutions (COFI) Bill set to grant the Financial Sector Conduct Authority direct regulatory authority over employers, stricter oversight of non-compliance is on the horizon.

The introduction of the two-pot retirement system on 1 September triggered a surge of withdrawals from members’ savings components – and exposed maladministration.

A number of employers have been withholding contributions – a persistent issue where deductions are made from employees’ salaries but not forwarded to the retirement funds.

According to the FSCA, 7 770 employers across the private and public sectors have been reported for failing to make timely contributions. Of these, 36% are from the private security sector.

The total outstanding contributions have now reached about R5.2 billion.

Municipalities are also among the worst offenders, with nearly 150 implicated for not remitting contributions deducted from employees’ salaries.

The unpaid contributions from municipalities alone are estimated at R1.4bn.

While the COFI Bill is still to be tabled in Parliament, its enactment will broaden the FSCA’s regulatory reach, bringing participating employers under its supervision as regulated entities, alongside those already under its oversight.

Read: How the COFI Bill will affect the retirement industry

The Pension Funds Act (PFA) places the responsibility for ensuring compliance with contribution requirements on the boards of retirement funds.

Although the FSCA oversees retirement funds and ensures they comply with the PFA, it lacks direct regulatory authority over employers. Instead, it relies on boards to take legal action, such as pursuing civil litigation or reporting non-compliance as a criminal offence to the SAPS.

The expanded mandate under the COFI Bill will allow the FSCA to engage with employers involved in retirement funds directly.

Unathi Kamlana (pictured), the Commissioner of the FSCA, told Moonstone that although the Authority is refining how its direct engagement with employers will look under the expanded mandate of the COFI Bill, the sheer volume of non-compliant employers means that the FSCA’s strategy must be both targeted and strategic.

He said, to start, the focus will be on the worst offenders who cause the greatest harm. By bringing these violations to the public’s attention, the FSCA hopes to create a deterrent effect that compels employers across the board to take the issue seriously.

Collaborative approach to tackling pension arrear contributions

Kamlana delivered the inaugural lecture of the Gys Steyn Chair in Financial Regulation Law at Stellenbosch University on Tuesday. The theme of the lecture was “The effectiveness of the law in safeguarding retirement savings amidst rising pension fund arrear contributions”.

He discussed how the expanded regulatory scope of the COFI Bill offers an opportunity to collaborate with other oversight bodies to address ongoing compliance challenges.

As an example of a collaborative approach to addressing the challenge of pension arrear contributions, Kamlana shared that the FSCA, in partnership with the Office of the Auditor-General of South Africa (AGSA), is exploring the potential application of the material irregularity (MI) findings process. Under such an approach, audits of public entities revealing significant violations of the PFA would be referred to the FSCA or other relevant bodies for further investigation and enforcement action.

Kamlana told Moonstone that this is still an exploratory discussion. He explained that the AGSA has a public mandate to act when it discovers a material irregularity within a public entity, such as a municipality. If such an irregularity is found, the PFA allows the AGSA to refer the non-compliance to an appropriate entity for investigation and enforcement. While the FSCA is exploring this process, Kamlana noted that it still comes back to the issue of having to rely on boards within the government sector until the FSCA gains direct regulatory authority over employers.

In addition to the anticipated promulgation of the COFI Bill, Kamlana said in his lecture that the Authority is looking at enhanced collaboration with key stakeholders, such as SAPS, the National Prosecuting Authority (NPA), National Treasury, and South African Revenue Service. He said the need is for a holistic approach to addressing arrear contributions, given what is at stake – “retirement savings at risk”.

Strengthening compliance for contributions

Section 13A of the PFA holds employers accountable for ensuring timely contributions, both for themselves and their employees, to the retirement fund. Contributions must be paid to the registered fund by the 7th day of the month following the month in which they are due.

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. This Standard ensures that employers are notified of their duties under section 13A before joining a fund and are reminded annually.

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 a period not exceeding 10 years, or both.

In his lecture, Kamlana said that despite a strong legislative framework, the significant arrear contributions owed by non-compliant employers expose potential gaps, particularly within section 13A. He pointed out that the persistence of arrears indicates that although the legal requirements are clear, the mechanisms for ensuring compliance and holding employers accountable may be insufficient.

He explained that the reliance on indirect enforcement creates accountability gaps, as boards may face financial or logistical challenges in pursuing legal action – particularly smaller funds with limited resources. He also noted that there is conflict of interest considerations when boards act against employers, because the boards are made up of representatives from both employees and the employer in question.

Moonstone asked Kamlana what additional mechanisms the FSCA foresees for ensuring compliance and accountability once it gains oversight over employers under the COFI Bill. He explained that it was not so much about creating new mechanisms, but about the FSCA being empowered to use its existing toolkit to address employer compliance.

To provide context, Kamlana explained that sometimes it is the economic hardship faced by the employer that results in them incurring arrear contributions. Sometimes it is the cyclical nature of the business and the concomitant volatility of income that contributes to this. He said this is particularly relevant in the private security sector. He added that the Covid-19 pandemic exacerbated the issue of arrear contributions, with many firms struggling to survive. However, he admitted it is sometimes sheer management ineptitude. He said keeping this in mind, it is not always desirable to levy a fine.

For example, he said that sometimes an intervention is needed to understand the situation and the causes of the arrears. If economic hardship is the reason, arrangements can be made to clear the arrears over time, offering reprieves. However, he noted that since employers fall outside the FSCA’s scope, the Authority is currently unable to intervene.

Should boards pursue civil litigation for arrears?

Paragraph 4(3) of the Conduct Standard imposes a positive obligation on the board of a retirement fund to report contraventions of section 13A(2)(a) to 3(b) to the SAPS. This report must be made within 14 days after a 90-day period of continued non-compliance.

During his lecture, Kamlana explained that this requirement is designed to ensure that instances of non-payment are brought to the attention of law enforcement, “making it clear that failing to meet contribution obligations is not just a regulatory issue but a criminal matter”.

However, he pointed out an anomaly in the legislation: while the Conduct Standard mandates that the board reports such non-compliance as a criminal offence to SAPS, it does not similarly require the board to initiate civil proceedings against the employer.

This “gap in the legislation” means that while a fine of up to R10m may be imposed on a defaulting employer as part of a criminal conviction, the fine is not payable to the retirement fund itself. Instead, it serves as a deterrent to the employer for failing to comply with legal obligations, rather than compensating affected fund members.

Kamlana told Moonstone that while section 37(1)(a) of the PFA – with diligent enforcement – serves as a strong deterrent for employers (including directors with section 13A(8) holding directors and senior management personally liable), fines or imprisonment do not directly address the unfair impact on pension fund members’ savings caused by arrear payments.

He urged boards seriously to consider pursuing civil litigation alongside criminal action but emphasised the need for careful evaluation.

Over the years, many boards have taken proactive measures to hold defaulting employers accountable, whether by referring cases to the Pension Funds Adjudicator or pursuing civil litigation to recover unpaid contributions. While civil litigation has often been effective, it comes with significant challenges.

For smaller funds, the pursuit of legal action can be financially burdensome, as the associated costs may impact the retirement savings of members. This financial strain can force funds to weigh their options carefully.

Kamlana noted that, ultimately, if civil litigation proves too costly, the board must make a decision that is in the best interest of the members.

Employer terminations by umbrella funds: a risk to member security

During Kamlana’s lecture, he highlighted a concerning trend: in some cases, umbrella funds (which consolidate the assets of multiple employers into a single pension structure) have been terminating the participation of employers with prolonged arrears, as permitted by their rules.

Kamlana stated that although this approach can deter employers from defaulting, it is not always in the best interest of members. He warned that when an employer is terminated from an umbrella fund, the fund may undergo partial liquidation, which can leave members without adequate retirement coverage.

The consequences for members can be severe. He noted that this process may result in members being unenrolled, jeopardising their financial security.

He added that the harm to members is more severe when the rules of the fund specify that a member’s share excludes any arrear contributions at the time of withdrawal or transfer.

Kamlana also cautioned that terminating an employer’s participation might disincentivise Boards from pursuing all necessary steps to recover arrear contributions.

The focus, he explained, can sometimes shift away from prioritising the recovery of arrears to managing the risks and costs associated with litigation and fund liquidation. This, in turn, risks compromising the financial security of members, he said.

Stronger enforcement against boards being considered

While acknowledging the challenging role of boards – balancing the recovery of arrear contributions with the need to protect members’ financial interests – Kamlana told those in attendance that the FSCA “is considering taking greater enforcement action against boards and/or administrators who do not act, or do not take timely action, in the best interests of their members with regard to arrear contributions”.

Kamlana emphasised that the primary responsibility for the governance outcomes of retirement funds, including ensuring compliance with the provisions of the PFA, currently and will continue to reside primarily with the boards of trustees even once the COFI Bill is promulgated.

He said enhancing the powers of the FSCA over employers will not and should not shift the nexus of responsibility away from those boards entrusted with the day-to-day duty to protect the savings of members of retirement funds.

“This appreciation will inform the focus of our future enforcement actions in this area,” he said.

Speaking to Moonstone, Kamlana reiterated that the fiduciary responsibilities of boards remain unchanged, regardless of whether the FSCA gains additional powers. He emphasised, “boards have a clear scope and guidelines to address non-compliance,” adding that the FSCA will continue to hold boards accountable for safeguarding their members’ interests.

When asked about the “greater” enforcement actions the FSCA is considering against boards or administrators who fail to act – or delay action – Kamlana explained that the FSCA will use “all the tools in our toolkit,” tailored to the severity of the non-compliance and the shortcomings of the boards involved.

“There is no single silver bullet; instead, it requires a strengthened strategic focus because it’s in no one’s interest to let this issue escalate and become a systemic feature of our retirement funding system,” he said.