Ways em­bat­tled em­ploy­ers can tar­get your con­tri­bu­tions and ben­e­fits

Weekend Argus (Saturday Edition) - - GOODWINES -

An em­ployer can­not “willy-nilly” cut your ben­e­fits, re­duce your pay, stop pay­ing con­tri­bu­tions to your re­tire­ment fund or close your re­tire­ment fund, says John An­der­son, the head of na­tional con­sult­ing strat­egy at re­tire­ment fund ad­min­is­tra­tor Alexan­der Forbes. In most cases, labour law is likely to ap­ply, re­quir­ing ne­go­ti­a­tion and agree­ment. And then there are the laws af­fect­ing re­tire­ment funds and the rules of your re­tire­ment fund.

There are nu­mer­ous op­tions a trou­bled em­ployer may con­sider, all of which have dif­fer­ent con­sid­er­a­tions. Th­ese in­clude:

An­der­son says the trans­fer of mem­bers to a re­tire­ment an­nu­ity fund may be a quicker and cheaper op­tion, with sub­se­quent dereg­is­tra­tion, in­stead of the more com­plex liq­ui­da­tion, of the orig­i­nal fund. This op­tion would prob­a­bly re­quire rule changes. In this case, preser­va­tion funds would not be an op­tion, be­cause the fund would not be in liq­ui­da­tion.

He says you should seek fi­nan­cial ad­vice if your fund is ter­mi­nated, be­cause you will need to rein­vest your re­tire­ment sav­ings. An­der­son says con­tri­bu­tions can­not be sus­pended, dis­con­tin­ued or re­duced ret­ro­spec­tively. This means the ear­li­est that em­ploy­ers may re­duce con­tri­bu­tions is the date of the res­o­lu­tion by the trustees to do so. Even in this in­stance, your trustees may im­ple­ment the re­duc­tion only once the rule amend­ment has been reg­is­tered and ap­proved by the Reg­is­trar of Pen­sion Funds and South African Rev­enue Ser­vice (SARS).

A way that con­tri­bu­tions can be re­duced without a rule change is to change the pen­sion­able salary taken into ac­count for pur­poses of cal­cu­lat­ing con­tri­bu­tions. Usu­ally, the fund rules will al­low this to be done by ap­proval of the trustees and/or the em­ployer, and no rule amend­ment will be nec­es­sary.

An­der­son says em­ploy­ers and trustees should con­sider whether or not to put a time limit on the lower rate of con­tri­bu­tions – for ex­am­ple, for a year. At the end of the pe­riod the con­tri­bu­tion rate can be re­assessed, tak­ing ac­count of your em­ployer’s fi­nan­cial po­si­tion. This may pro­tect mem­bers to some ex­tent as the is­sue re­mains on the ta­ble and is reg­u­larly as­sessed. The rules for re­duc­ing con­tri­bu­tions would ap­ply here, but An­der­son says a de­ci­sion would also have to be made on the fol­low­ing: The pe­riod of sus­pen­sion; How fund ex­penses, such as ad­min­is­tra­tion, con­sult­ing, ac­tu­ar­ial, and au­dit fees, will be paid;

The pos­si­bil­ity that at least con­tri­bu­tions to fund risk ben­e­fits and/or ex­penses could con­tinue; and

Con­sid­er­a­tion of rule amend­ments for a type of paid-up mem­ber­ship.

An­der­son says the Fi­nan­cial Ser­vices Board (FSB) may also raise other is­sues to pro­tect mem­bers. Where the em­ployer works ac­cord­ing to a to­tal cost-to-com­pany struc­ture, any changes to con­tri­bu­tions may re­sult in your to­tal cost-to-com­pany hav­ing to be re­struc­tured and your tax po­si­tion re­assessed. In the case of a de­fined ben­e­fit (DB) fund, where the ben­e­fit (pen­sion) is “guar­an­teed”, a rule amend­ment is re­quired to al­low for a re­duc­tion in ben­e­fits for a mem­ber and/or a mem­ber de­pen­dant.

“This should ideally be done prospec­tively so that ac­crued rights are not af­fected. If it is done with a ret­ro­spec­tive ef­fec­tive date, it may be nec­es­sary to deal dif­fer­ently with ac­crued rights in the rule amend­ment or pro­vide a state­ment re­gard­ing ac­crued rights to the FSB when sub­mit­ting the rule amend­ment,” An­der­son says.

He says the FSB has set out a num­ber of re­quire­ments that it would want ful­filled be­fore a re­duc­tion of ben­e­fits can take place. Th­ese in­clude com­mu­ni­ca­tion with mem­bers, pro­vid­ing rea­sons for the re­duc­tion and the pro­tec­tion of ac­crued rights.

Many DB fund rules de­fine av­er­age pen­sion­able salary at re­tire­ment as the high­est av­er­age over the last (usu­ally) 10 years. In th­ese cases, a re­duc­tion in salary is catered for, al­though it is very im­por­tant that the ad­min­is­tra­tor cal­cu­lates the ben­e­fit cor­rectly, since the high­est av­er­age may then not be the lat­est av­er­age but rather one from a few months (or years) ago.

An­der­son says in cases where em­ploy­ers do not want a re­duced salary to af­fect a re­tir­ing mem­ber’s pen­sion, it is pos­si­ble for the ad­di­tional cost (that is, the value of the pen­sion as if no salary re­duc­tion had taken place ver­sus the value ac­cord­ing to the rules based on the lower salary) to be paid for via the em­ployer sur­plus ac­count (if any) or by a once-off con­tri­bu­tion by the em­ployer.

He says it would be prefer­able for a rule amend­ment to en­sure that the with­drawal ben­e­fit in re­spect of the ac­crued ser­vice is un­af­fected by the re­duc­tion in salary. (The rules of most funds would need to be amended to al­low for this.) Freez­ing pen­sions is some­thing nor­mally re­stricted to DB funds. Freez­ing means that the ac­crual of re­tire­ment ben­e­fits stops (is frozen) at a point in time. There are dif­fer­ent types of freezes, with terms such as hard or cold freezes, soft or warm freezes and par­tial freezes.

An­der­son says hard freezes are ba­si­cally those that stop the ac­crual of fu­ture ben­e­fits for all em­ploy­ees and par­tic­i­pants in the fund from a cer­tain date. So, in a DB fund, no fu­ture or fur­ther ac­crual of ben­e­fits takes place for any­one on the fund, and the amount the em­ployee has ac­crued is cal­cu­lated (vested) at a cer­tain date and then paid at re­tire­ment (ei­ther with fund re­turn or a for­mula al­low­ing for fu­ture es­ca­la­tion, de­pend­ing on what is con­tained in the rules or the pro­vi­sions of a rule amend­ment to al­low for this).

Soft/warm/par­tial freezes re­fer to less dras­tic steps such as:

Al­low­ing cer­tain mem­bers, such as older em­ploy­ees, to con­tinue ac­cru­ing ben­e­fits;

Putting new em­ploy­ees onto a dif­fer­ent ac­crual ba­sis;

Not pro­vid­ing ben­e­fits at all for new em­ploy­ees; or

Al­low­ing ben­e­fits to ac­crue but only at the salary ap­pli­ca­ble at the time of the freeze (so no salary in­creases are al­lowed).

The idea is to keep the fund in op­er­a­tion but to freeze ben­e­fits. In that way, the fund can be “un­frozen” at a later date.

But An­der­son warns that the freeze op­tion should be taken with cau­tion, as there could be labour law con­se­quences, mainly as a re­sult of di­rect/in­di­rect dis­crim­i­na­tion among fund mem­bers.

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