Ways embattled employers can target your contributions and benefits
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.