Issue: September/November 09


That 13th cheque

Thank you for your most interesting and informative magazine that I have been reading since its inception. The spread of investment advice, opinions and updates as to what is going on in the pensions world is most valuable, and offers some interesting alternative perspectives. I have been a trustee for some 15 years. The other day one of our members asked a most pertinent question which has neither been previously raised nor considered, and I do not have an answer for it. Our administrator has been asked, but has so far not replied. I was wondering whether you, or one of your many contacts, could give me an independent answer to the following question:

How are 13th cheque pension-fund contributions credited to a member’s defined-benefit account, and worked into the final fixed formula?

In our fund, the 13th cheques are pension contributing. Surely, therefore, they must be credited in some way to the final retirement calculation. But I cannot see how these extra pension contributions are actually credited in any way.

In theory, one year of pensionable service should be added for every 12 years worked, or proportionately if less than 12 years. This would be based on 12 extra months of pension contributions on 13th cheques over a 12-year period.

However, it would appear that any credit for these extra contributions is in fact not worked into the final calculation for the year’s service. If a member retires after 24 years of actual service, “years of service” would be taken and calculated at 24 years, not 26 years.

It was mentioned that this credit could be reflected in the final salary. But again, this does not appear to happen as the “average of the last two years’ salary” would be taken into the calculation as the actual salary reflected over the two final years of service. Besides, the amount of the 13th cheque does not get added to a salary.

Where then do all these extra contributions go? It would seem improbable that pension funds siphon off this money without crediting the member. I can see that in a defined-contribution fund these extra contributions could simply be added to the member’s account, but this would not apply to a defined-benefit fund due to the existence of a set formula.

Our defined-contribution fund has a guaranteed minimum benefit which is also based on a formula. So in this instance the question would apply to the defined-contribution fund as well.

– Dr Rod Douglas, Head, Department of Herpetology,
National Museum, Bloemfontein.

Rowan Burger, head of institutional design at Stanlib, replies:

A defined benefit is based on the years of service and contributing salary. The salary calculation is based on contributions.

So, in an environment where the 13th cheque is pensionable, the monthly salary times 13 would be used to calculate the benefit due.

So, in an environment where the 13th cheque is pensionable, the monthly salary times 13 would be used to calculate the benefit due.

If he confirms the pensionable amount on his payslip, and finds that his benefit statement is different, there is a problem with the quality of the fund’s administration.