Edition: Mar - May 2014

Be warned

Employers and directors, even in their personal capacities, now face criminal penalties if they donít pay company contributions to their retirement funds. Kobus Hanekom* offers timely advice and a temporary solution.

Hanekom . . . adjustment period

Far-reaching legislation has been introduced that makes non-payment of retirement fund contributions by employers a criminal offence. It is now punishable by a fine of up to R10 million and/or imprisonment of up to 10 years.

Moreover, company directors can also be held personally liable for non-payment.

This is in terms of the Financial Services Laws Amendment Act 2013. It became law in January.

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 wasn’t so easy to hold the employer or a director liable in their personal capacity and recover the losses suffered by the fund members.

The revised Act stipulates that “every director who is regularly involved in the management of the company’s 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. If they don’t, all the directors will be personally liable. In the case of a close corporation, liability will rest with the members who are regularly involved in the close corporation’s financial affairs. In other firms, it will rest with members of the governing body who are involved in the firm’s finances.

At Simeka, agree that pension contributions should enjoy special protection. One of the reasons that 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.

We are concerned, however, that all the implications of the legislation have not yet been fully considered. For example, what will be the implications for financial directors who cannot pay the contributions purely because there are insufficient funds in the company account?

And if inability to pay will constitute a legal excuse, under what circumstances will employers and directors be excused? We may speculate, but ultimately we’ll have to wait and see how our courts will interpret these rules.

Creative solutions are required by retirement funds to assist employers to manage the business risk posed by the new legislation. The Sanlam Umbrella Fund has already taken measures in this regard.

We have amended our rules and introduced a temporary suspension of the participation arrangement for participating employers. It offers finance directors a six-month window period to manage the situation a little better.

The fund rules previously allowed only for employers to terminate participation in the fund. This is a final and drastic measure, especially if the employer believes its 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. It’s also to assist employers in adjusting to these new risks and navigating ways through them.

But temporary suspension will still have a significant impact on fund members. That’s why it will need to be managed very carefully.

* Kobus Hanekom is Head: Strategy, Governance & Compliance at Simeka Consultants& Actuaries as well as Principal Officer of the Sanlam Umbrella Fund.