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There is a way retirement funds can pay special Covid-19 relief benefits to members undergoing financial distress

There is a way retirement funds can pay special Covid-19 relief benefits to members undergoing financial distress
Pension and provident funds can step up to the plate, not to bail out Eskom, but to help some of South Africa’s most vulnerable individuals weather the economic storm in this country, says the writer. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

Pension funds and provident funds can lawfully amend their rules to provide for the payment of ‘special relief benefits’ to members still employed by participating employers, but in financial distress due to circumstances other than a strike or lock-out and funded by reductions in member fund credits. To facilitate these payments, all Parliament needs to do is make a few amendments to the Pension Funds and Income Tax acts.

In his latest weekly letter to the nation, entitled From The Desk of the President, Cyril Ramaphosa has painted a grim picture of South Africa’s economic prospects, warning of further job losses, salary cuts and a hugely weakened fiscal position.

The president’s address follows announcements by major corporations — both in the private and public sector — of far-reaching liquidations, business downscaling and mass retrenchments. 

South Africa, which already holds one of the worst unemployment rates in the world, will be severely affected by the downturn.

“For a country such as ours, which was already facing an unemployment crisis and weak economic growth, difficult decisions and difficult days lie ahead,” the president said. Ramaphosa added that while relief efforts undertaken by both government and the private sector — including loans, tax relief, debt restructuring, extended credit lines and retail rental exemptions – had managed to mitigate some of the worst of the financial fallout, the long-term prospects remained ominous. 

But it seems that not all relief possibilities have been tapped into just yet. The time has come for pension and provident funds to step up to the plate, not to bail out Eskom, but to help some of South Africa’s most vulnerable individuals weather an economic storm in this country not seen since World War I. This is especially applicable to workers who had to take a pay cut or have been temporarily suspended from employment during the lockdown.

For the context of this article a “special relief benefit” is a benefit which may be paid to a member of a fund who is still employed, but is in financial distress due to loss of or reduction in pay resulting from circumstances other than a strike or lock-out. These include the Covid-19 Temporary Employer-Employee Relief Scheme (TERS), the deferment of the payment of employee tax, and additional measures announced on 21 April 2020.

According to Rosemary Hunter, partner at Fasken Attorneys and a pension funds specialist, some bargaining councils have concluded agreements in which provision has been made for the replacement of a portion of the normal remuneration of employees with payments by employers of a part, or the whole, of the shortfalls remaining after TERS benefits have been taken into account. 

In its Communication 11 of 2020, issued in March this year, the Financial Sector Conduct Authority (FSCA) reminded local retirement funds subject to regulation in terms of the Pension Funds Act (PFA), that they are permitted to have rules that allow for the non-payment of contributions to pension funds and provident retirement funds during periods in which employees are temporarily laid off or are remunerated at rates lower than normal.

“This is an important measure,” says Hunter, “because, the less that is required to be deducted from an employee’s remuneration and paid to a fund in the form of contributions, the more may be available to the employee as ‘take-home’ pay in these difficult times. 

“Nonetheless, while these measures represent significant attempts to mitigate the financial distress, they are unlikely to be sufficient to replace the whole of their normal incomes for the whole of the periods during lockdown or other economic restrictions,” she adds.

Cosatu has claimed that it asked the government in March 2020 to take the necessary steps to make the payment of special relief benefits by pension and provident funds possible, and was disappointed by its failure to act.

In these circumstances, could a pension fund subject to regulation in terms of the PFA lawfully grant to a member in financial distress a special benefit to assist in “plugging the gap” between the amount of his or her normal remuneration and the TERS amount to which he or she will be entitled during the lockdown?

There is. The definition of “pension fund” in the PFA makes it clear that a fund may legitimately include in its benefit offering “the relief or maintenance of members, or any group of members, when unemployed or in distressed circumstances, otherwise than in consequence of the existence of a strike or lockout as defined in section 213 of the Labour Relations Act, 1995…”

All it will take is for the private pension and/or provident fund to amend its individual rules to provide for the payment of such special relief benefits and for the FSCA to approve the amendment. National Treasury could then ask Parliament to amend the PFA and the Income Tax Act to the extent necessary to facilitate these Covid-19 relief measures, among others that it is already considering. This can be done within a few months, says Andrew Crawford,  director at Seshego Benefit Consulting.  

According to the PFA, a retirement fund may only pay benefits as stipulated by its own rules. A board of trustees that does not have a rule authorising it to pay a special relief benefit to a member may approve an amendment to make it so, provided the board complies with the rules relating to amendments (which may, for example, require employer consent for the amendment of its rules); and the FSCA approves the amendment in terms of section 12 of the PFA.

The FSCA must approve a rule amendment if it is not inconsistent with the PFA and is not financially unsound, Crawford says. If the FSCA thinks that the sections of the PFA that require funds to pay benefits on early withdrawal in amounts based on the amounts of contributions paid to the funds and investment returns, National Treasury can ask Parliament to amend the PFA to make it clear that these prescribed minimum benefits can be reduced to take account of advance payments in the form of special relief benefits.

Furthermore, the amendment of the rules of a “pension fund” as defined in section 1 of the Income Tax Act to provide for the payment of Special Relief Benefits will not place its status as an approved pension fund for income tax purposes at risk — however the same is not true for an equivalent amendment to the rules of a “provident fund”. This problem may be addressed by Parliament in due course by its amendment of the definition of the term “provident fund” in terms of a taxation laws amendment act. 

“Unless the ITA is amended to provide that, subject to appropriate conditions, Special Relief Benefits will be excluded from the ‘gross income’ of a taxpayer for tax purposes, they will be taxable. This will mean that pension funds and provident funds will not be able to pay them without first obtaining tax clearance certificates from the South African Revenue Service (SARS).

“This will result in considerable delays in the payment of the benefits and so this is an issue which the national executive and Parliament should urgently address by legislative means,” says Hunter.

Cosatu has claimed that it asked the government in March 2020 to take the necessary steps to make the payment of special relief benefits by pension and provident funds possible, and was disappointed by its failure to act.

The South African Clothing and Textile Workers Union made formal submissions concerning the matter to the minister of finance in April, but there is still no public indication of any willingness on the part of the government to do what the governments of other countries such as Australia have done – to allow fund members access to a portion of their retirement savings just to see them through this crisis. BM


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