Far-reaching new legislation has been introduced which will make non-payment of retirement fund contributions by employers a criminal offence, punishable by a fine of up to R10 million and/or imprisonment of up to 10 years. In terms of the Financial Services Laws Amendment Act 2013, signed into law last month, company directors can also be held personally liable for non-payment.
According to Sanlam Umbrella Fund principal officer Kobus Hanekom, while the new legislation should be welcomed since it will better protect fund members, it does constitute a significant business risk for employers. “In the past, non-payment of employer contributions was, to a large extent, merely regarded as a breach of contract. Deducting contributions from members salaries and failing to transfer them to a fund was considered theft, but it wasnt so easy to hold the employer or a director liable in their personal capacity and recover the losses suffered by the fund members, he says.
The revised Act stipulates that “every director who is regularly involved in the management of the companys overall financial affairs will now be personally liable for the payment of fund contributions. Retirement funds are required to request employers to identify such persons, failing which all the directors will be personally liable. In the case of a closed corporation (CC), liability will rest with the members who are regularly involved in the CCs financial affairs, and in other firms, with members of the governing body who are involved in the firms finances.
“We agree that pension contributions should enjoy special protection. One of the reasons previous measures failed is because once an employer is insolvent, deterrents in the form of additional fines and penalties have little effect. Identifying the finance director responsible for non-payment and holding that person personally liable is bound to have much more success, says Hanekom.
He expresses concern, however, that “all the implications of the legislation have not yet been fully considered. For example, what will the implications be for financial directors who cannot pay the contributions purely because there are insufficient funds in the company account? If inability to pay will constitute a legal excuse, under what circumstances will they be excused? We may speculate, but ultimately well have to wait and see how our courts will interpret these rules.
Hanekom says creative solutions are required by retirement funds to assist employers to manage the business risk posed by the new legislation, and the Sanlam Umbrella Fund has already taken measures in this regard. “We have amended our rules and introduced a temporary suspension of participation arrangement for participating employers. It offers finance directors a six-month window period to manage the situation a little better.
He says the fund rules previously only allowed for employers to terminate participation in the fund. “This is a final and drastic measure, especially if the employer believes the cash flow concerns are of a temporary nature. We also understand that smaller employers are more often exposed to temporary periods of cash flow constraint, and creative ways must be found to assist them.
Participating employers will now have the option of either immediate termination if a financial recovery is unlikely, or a six-month suspension if the employer believes it will recover financially.
“We introduced this new option to protect our members from loss, but also to assist employers to adjust to, and navigate the new risks. Temporary suspension will, however, still have a significant impact on members, and it will need to be managed very carefully, Hanekom concludes.
18 February 2014
By Kobus Hanekom, Head: Strategy Governance and Compliance