The Covid-19 pandemic is making the 2008 financial crash look like a dress rehearsal for the real thing, leaving millions across the world asking how they’re going to keep up retirement fund contributions while their salary is shrinking, or done a Houdini and disappeared completely.
When it comes to retirement funds in South Africa, the Pensions Funds Act (PFA) compels employers to deduct contributions and pay these over to the retirement fund. Don’t panic! There are a few viable options to you with provide financial relief.
Bear in mind that not all retirement funds are governed by the same rules, but if you’re part of a reputable fund that’s well managed, you should be offered these three options.
1. Reduce the fund salary
The fund salary – the pensionable salary or retirement funding income – is determined by the employer and declared to your retirement fund on a monthly basis (if a risk salary is not declared). Contributions, risk premiums and benefits are based on the fund salary. Therefore, your employer could reduce the fund salary, which will reduce employer and/or employee contributions to your fund.
If your employer is offering this option, make sure you fully understand how a reduction in contributions will impact your retirement savings and risk benefits. This should be clearly communicated by your employer and your retirement fund.
2. Temporary absence
If you’re on unpaid leave and not rendering any service to your employer for an indefinite period – as many are during lockdown – most funds allow for you to be classified as a temporarily absent member.
This means no contributions will go into your retirement savings for however long you are temporarily absent. However, your employer may still be liable to pay risk premiums, which means you are at least covered for risk benefits and any fund expenses, such as consulting and administration fees.
For members seconded abroad and who many now be stranded in a foreign country due to the cancellation of flights, it is imperative that the insurer of the risk benefits is advised of the details. The insurer will then assess whether the member can remain covered under the risk policies.
Here’s the really important bit: if you or your employer misuses this option, your employer could fall foul of the law. Essentially, you cannot use this option if you are rendering any service to your employer, regardless of whether you’re being paid for that service (in full or partially), or not being remunerated at all. A temporary leave of absence is strictly for employees who are not able to work due to unpaid leave, secondment or other clearly defined circumstances, such as maternity leave.
3. Reduction or suspension of contributions
The PFA allows employers to either reduce or completely suspend employees’ contributions.
But beware: there is a big difference between reduction and suspension here. When suspending contributions, your employer will no longer be making any payments to the fund, and this includes risk premiums and fund expenses. Whereas with a reduction your employer will continue payments, and this may include some or no contributions to your retirement savings along with risk premiums and fund expenses.
It is therefore crucial for you to find out how a suspension or a reduction will affect your retirement savings and/or risk benefits for death, disability and so forth.
It’s equally important to note that this a temporary relief option (contributions may not be reduced or suspended indefinitely), and that your employer can only offer this option if they follow a set legal process that must be approved by the Financial Sector Conduct Authority (FSCA).
Job loss options
What happens if your employer becomes another victim of Covid-19 and has to retrench or, worse, go into liquidation?
If the fund is well managed, you should be given three broad options: preserve your retirement savings (leaving it as is until you reach retirement age and are allowed to withdraw); transfer it to a preservation fund; take an early withdrawal, which has heavy tax implications.
The options depend on a number of factors: whether the employer is voluntarily or involuntary retrenching staff; whether you have elected to resign before your employer goes into liquidation; or if your employer has entered into liquidation.
It’s best to discuss your options with your funds retirement benefits counsellor and to then obtain financial advice from a certified financial planner.
Hold trustees to account
In South Africa, retirement funds – whether a private fund or an umbrella retirement fund – are separate legal entities to your employer. It is therefore up to the trustees to manage the fund within the set rules of that fund and within the legal framework (the PFA).
While we do expect that trustees and employers will act in your best interest, it is your right to ask questions and receive clear, detailed answers. Exercise that right.
* Duane Naicker, Head of Sygnia Umbrella Retirement Funds. Views expressed are his own.