Summary: It is time for pension and provident funds to do what they can to mitigate financial hardship experienced by those of their members still employed but, as a result of the Covid-19 pandemic, are not earning their normal remuneration.
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, Parliament should amend the definition of the term ‘provident fund’ in the Income Tax Act and consider whether to provide in that act for the favourable tax treatment of special relief benefits.
A benefit referred to in this note as a ‘Special Relief Benefit’ is a benefit payable 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.
It is widely accepted that the impact of the Covid-19 lockdown on the economy, on thousands of businesses and on millions of employees and their dependants has been devastating and is likely to continue to be so for some time.
Government has announced a number of measures intended to minimise the adverse impact of the lockdown on businesses and their employees. These include-
- the COVID-19 Temporary Employer-Employee Relief Scheme (TERS); and
- the deferment of the payment of employee tax; and
- additional measures announced on 21 April 2020.
In its Communication 11 of 2020 the Financial Sector Conduct Authority (FSCA) has reminded funds subject to regulation in terms of the Pension Funds Act, 1956 (the PFA) that they are permitted to have rules that allow for the non-payment of contributions to pension funds and provident retirement funds (both referred to in this note as ‘pension funds’) during periods in which employees are temporarily laid off or are remunerated at rates lower than normal. While offering to process applications for the amendment of fund rules to allow for this on an urgent basis, the FSCA has urged funds to maintain risk benefit cover for the employees notwithstanding the reduction in, or non-payment of, contributions in the applicable period if such cover was provided in the ordinary course.
This, too, is an important measure 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.
Nonetheless, while these measures represent significant attempts to mitigate the financial distress likely to be experienced by employees, they are unlikely to be sufficient to replace the whole of their normal incomes for the whole of the periods during which they will not be earning their normal remuneration as a result of the lockdown.
Several fund administrators have reported receiving appeals from fund members for access to their retirement savings although, as they are still employed, they are not yet entitled to benefits from the funds in terms of their rules.
In the circumstances we have considered whether there is a basis on which a pension fund subject to regulation in terms of the PFA could 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.
These are our views:
- A pension fund may only pay the benefits provided for in its rules. If its rules do not now allow it to pay a Special Relief Benefit, it may not pay such a benefit unless and until its rules are amended to authorize it to do so.
- A board of a fund that does not have a rule authorizing it to pay a Special Relief Benefit to a member -
- may amend its rules to include such a rule provided that-
- the board complies with the rules of the fund relating to rule 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;
- should amend its rules to provide for the payment of Special Relief Benefits because-
- a pension fund is a vehicle for the delivery of state-subsidised social security benefits in partial compliance with the state’s duty in terms of section 27 of the Constitution and at considerable cost to the fiscus (in the form of the generous tax treatment of contributions, investment returns and benefits);
- and it would be inconsistent with the duty of a fund to treat its members fairly to expect them and their dependants to suffer serious financial hardship now with potentially long-term consequences just to maximise the value of the benefits that will become payable to them on termination of employment.
- The FSCA must approve a rule amendment if it is not inconsistent with the PFA and is not financially unsound. An amendment to provide for the payment of a Special Relief Benefit
- will not be inconsistent with the PFA because the payment of Special Relief Benefits is one of the kinds of business that the PFA specifically authorizes a fund to conduct (subject to its rules); and
- will not be financially unsound if the amendment also provides for the adjustment in the amount of the benefit payable to a member on termination of employment taking into account the amounts of any Special Relief Benefits paid to the member before then,
but the prescribed minimum benefit provisions in the PFA should be amended to allow for that adjustment.
- While the amendment of the rules of a ‘pension fund’ as defined in section 1 of the Income Tax Act, 1962 (the ITA) 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, the same is not true for an equivalent amendment to the rules of a ‘provident fund’ as defined in section 1 of the ITA. 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.
- Finally, 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 may need to address by legislative means.
This bulletin was prepared by partners Nigel Carman, Rosemary Hunter and Deanne Wood, as well as candidate attorney Johan Coertze.
If you would like a more detailed legal opinion on any aspect of this matter, please feel free to contact
Nicholas Ndlovu; or