In the last week the Financial Services Conduct Authority (FSCA) warned that many distressed employers will default on their employees’ contributions to retirement funds, as a direct consequence of the COVID-19 pandemic’s negative impact on businesses and the economy.
“Many South African companies may close their doors or face economic hardship as an unfortunate reality of this difficult economic time, forcing them to let employees go. Besides the emotional turmoil that employees face of not knowing if their next salary will be paid and the impact on their families, many don’t receive answers on whether their pensions are safe,” says Saleem Sonday, head of group savings at Allan Gray.
While the FSCA reminded employers and employees that most funds have existing rules for distressed employers and members, including relief measures for employees (such as a postponement of payment contributions), Sonday says that there have been some alarming cases in the recent past where distressed companies simply did not pay their employees’ retirement contributions into funds on their behalf, and acted unethically by not informing them.
“Companies need to be ethical, transparent and open with their employees about the financial position of the business, especially if it is in trouble. This is a difficult time for many and by not approaching the situation in this manner, employers jeopardise the livelihoods of many families.”
He says that the business environment for smaller businesses is already tough, making the burden from the Coronavirus health crisis especially stressful. Statistics SA in late 2019 released data that shows business liquidations increased by 53.1% between April 2018 and April 2019. In addition, the number of insolvencies increased by 30.1% between March 2018 and March 2019. Furthermore, the country’s unemployment rate is currently sitting at a very high 29%.
If an employer is unable to pay contributions into a retirement fund on an employee’s behalf, the company needs to apply for a reduction or suspension and the fund needs to inform its members within 30 days.
“If you are in the unfortunate circumstance of being an employee at a place of work where the future is uncertain and part of a company retirement savings scheme, you deserve to know whether your savings are protected,” says Sonday.
What happens to your money if you are in a workplace retirement savings scheme?
If you belong to Group Retirement Annuity (RA), which sees your employer administering contributions to your retirement annuity on your behalf as a condition of your employment, your retirement savings are essentially in your name. Your investment will continue regardless of your employer’s status.
“If your employer notifies you that contributions will cease, you can set up a debit order in your personal capacity,” he adds, noting that if your contributions are paid with after-tax money, you may be due tax back at the end of the tax year.
Umbrella pension and provident funds, which club together multiple businesses in a single fund with standardised rules and a single board of trustees, are also separate legal entities, and your investment is therefore protected if you employer goes out of business.
“Although your membership in an umbrella fund is linked to your employer who pays the contributions on your behalf, your contributions belong to you. During this tough period there are three mechanisms that your employer can explore: (i) Temporary member suspension without pay (no salary means no contributions), (ii) Reduce pensionable salaries; this will, in turn, reduce members’ monthly contributions (subject to the rules of the fund), (iii) Request temporary suspension of retirement contributions for the employer group,” he explains.
“If the worse happens and your employer shuts down, or is placed into business rescue, and can no longer honour the commitments of the umbrella fund, you will usually be given the option of either taking a withdrawal with high tax implications, preserving in the fund or transferring to another preservation fund,” says Sonday.
Sonday goes on to explain that as an employee contributing to a retirement fund, it is your responsibility to keep an eye on your statements from your provider to make sure your employer is paying over your contributions. For any contributions not paid over to the fund your employer will be legally liable for these and will need to pay, with interest.
Accessing your savings
The shock of losing your job if your employer goes out of business can understandably cause one to make rash, emotionally charged decisions. Of course, your immediate financial security is paramount.
“While it can be difficult to consider the future when faced with immediate uncertainty looming, withdrawing from your retirement savings, if your product allows you access, should be your last resort. If you really have no other option, try to withdraw only a small portion and increase your contributions once you start working again,” Sonday says, adding that if you contribute to a retirement annuity, while you won’t be able to access your investment, you will be able to pause contributions, without penalty.
“At times like these when we face immense uncertainty, it is very hard to think about next week, let alone the distant future. However, it is important to try and find the headspace for some rational thinking and to try to preserve your long-term goals,” he concludes.