Edition: Mar - May 2014
LAW AND PRACTICE
About to retire from Borwa Financial Services, Stephen Greybe has spent his career on the side of employees. He recounts areas of abuse that deeply concern him.
Laws are usually framed by lawyers who don’t experience the coalface consequences of implementation. It’s for this reason that legislation and regulations, intended to be just and fair, continuously evolve. Changes are largely brought about at the instigation of stakeholders whom the rules were supposed to have helped.
What happens in practice is especially relevant in the pensions arena when there isn’t strict compliance. Some role players simply ignore the law and develop their own practices.
The Pension Funds Act cannot be the sole reference that determines behaviour. Also to be taken into account are, in particular, the Labour Relations Act and the common law as well as the Constitution itself. In fact, the Constitution and Bill of Rights didn’t exist when the Pension Funds Act was first framed. Now their coexistence causes confusion:
• S14 transfers
In practice, this section of the Act has created massive problems when attempting to reconcile it with s18 of the Bill of Rights on freedom of association. The Registrar has made great strides in trying to correct matters through PF120 and establishment of a department to deal with transfer approvals. Directive number 6, issued by notice in the Government Gazette, more recently seeks to clarify the procedures to be followed for s14 transfers.
However, and again due to lack of precision, this piece of follow-up falls short of ensuring that there is a common understanding and a common practice. It might be due to the drafters ignoring the impact of the other legislation. Thus the following practices endure:
(a) Employers take decisions to transfer their members and their assets to other approved funds without adequate explanation or freedom of choice being offered to their employees who are members of an existing fund;
(b) Employers do not allow proper freedom of choice i.e. practices have evolved where employers simply transfer employees to the fund of the employer’s preference whilst the employee is still employed. This leads to huge administrative problems because contributions cease and the existing fund is unaware that the member has left. The appropriate course of action is to have joint presentations from both funds and allow employees the freedom to choose the fund they think will provide them with the best financial package. Naturally, in such a case the employer 42 Today’s Trustee December 2013/February 2014 is attempting to avoid following the correct procedure for fear that the employees will choose the fund that is not preferred by the employer;
(c) Large administrators/insurers avoid joint presentations by competing funds to the members themselves. They fear that, if both funds present and members are allowed the freedom to choose, the choice might not be in their favour. This unfair to members because, on a cost-to-company basis, employers’ contributions to funds constitute employees’ deferrred pay;
(d) Large administrators sometimes entice employers by marketing reduced contribution rates. It can be argued that their acceptance constitutes unfair labour practice and contravenes s25 of the Bill of Rights (in this instance, the member’s right not to be arbitrarily deprived of property by way of the lessened contribution i.e. to the member’s deferred pay);
(e) Employers wanting to discourage employees from joining the fund of the employee’s choice often discriminate against the employees who are already members of the “unfavoured” fund by increasing employer contributions for employees who are members of the “favoured” fund;
Greybe . . . get real
(f) An employer offers its employees the choice. But once the choice has been exercised in a fair and democratic process, the employer recants because it is unhappy with the decision. This can be hugely prejudicial to members if inferior benefits become payable after the effective date of their options.
• Amalgamations and liquidations
This is another avenue open for abuse by employers. It arises when there’s a company takeover and s197 of the Labour Relations Act (which requires that parties to the amalgamation consider the benefits enjoyed by the employees before the final agreement is completed) is not taken into account at all.
In such cases it’s the norm that the most influential party in the amalgamation takes a decision that all employees must become members of its fund. This decision in itself is not the problem. Rather, the problem is that the employer doesn’t follow the proper s14 procedures and simply transfers the employees. When the employer meets with objections from members of the previous fund and its trustees, the employer is seen to resort to intimidation and discrimination.
Liquidations are not really a problem on due process. However, they are a problem when an employer deliberately liquidates a company solely to avoid bankruptcy, It then start a new company but, on liquidation of the old, it offers employees cash payouts from the retirement fund while the new company offers no retirement fund. This is to the detriment of the employee’s retirement benefit.
• Election of trustees
With the advent of umbrella funds, this aspect of the Pension Funds Act needs to be reviewed. As it stands, fund members have the right to elect half of funds’ boards. For this right not to be similarly extended into umbrella structures would be an arbitrary deprivation, contravening the Constitution.