• Company Retirement Funds And Liquidation : What You Should Know
Articles:

Company Retirement Funds And Liquidation : What You Should Know

14 May 2019

Although company retirement funds whether Pension/Provident/Retirement Annuity Funds in South Africa are not compulsory, they play a very vital role in the lives of those who belong to them in enabling them to ensure that they can do something to secure themselves finances at retirement.

Besides the tax deduction (up to 27.5% of gross remuneration, subject to an annual maximum of R350 000) received on the contributions made, company retirement funds offer financial security and assistance in times of financial uncertainty in a company.

Looking the state of the South African economy from late 2018 to earlier this year we saw reports of companies downsizing such as Standard Bank or even closing their doors like in the case of Ndalo Media. Now for the employees who worked at those companies who were informed that their employment has come to an end, if they are like most South Africans who could not afford to save they would have been devastated. However, their situation is slightly different because their employer had a retirement fund.

Belonging to a retirement fund means that employees who have their services terminated as a result of changes within a company’s financial position, are able to submit claims to the relevant insurers and receive benefits that are due to them (subject to the relevant taxation). The payment of these benefits is then able to assist in supplementing their income whilst unemployed. Obviously, the amounts received would vary depending on the duration in which each employee was a member of the company retirement fund, however there would be compensation nonetheless. Take the example of Sarah and Thabo, both age 30, but will have very different outcomes in the retirement savings they have available.

 

 

Sarah

Thabo

Monthly Salary

R10000

R10000

Monthly contribution to Retirement Fund (10%)

R1000

R1000

Investment Return

12%

12%

Number of years contributing to retirement fund

5

15

Value at the end of the investment term

R89 393

R648 556

 

All retirement funds are heavily regulated entities which need to be registered with the Financial Sector Conduct Authority which have to adhere to Legislation such as the Pension Funds Act as well as the Income Tax Act. This is very important because in the event of a company experiencing financial difficulty, defaulting on contributions to their retirement fund is not an option.

Once registered, a retirement fund needs to adhere to all the Rules set out in the Fund. The matter of non-payment of contributions is dealt with severely by the Financial Sector Conduct Authority. In the unfortunate event of a company closing its doors and going into liquidation, employee’s retirement fund money is kept separate and remains invested in the Fund until such time that employees are able to claim. Companies who fall behind on contributions due to financial difficulty are still obliged to ensure that contributions to the retirement fund are kept up to date, up to the date when liquidation is applied for. In the case of Ndalo Media, they went into liquidation and were not up to date on contributions, so the staff are able to approach the Pension Funds Adjudicator who is then able to order the company to bring the contributions up to date including the payment of interest on the outstanding contributions.

The benefit of having a retirement fund as a company improves the value that employees perceive of their employer. A well-structured retirement and risk benefit fund tailored to suit the needs of a company has far reaching benefits. Coupled with the services of an intermediary which has extensive knowledge as well as experience within this space can assist companies who are going through financial difficulty with providing their employees with services such as financial counselling.

There have been cases where employees have been retrenched from a company and their retirement funds were able to assist in starting a business of their own enabling them to continue to generate an income. For some employees these benefits have helped them get out of indebted situations which allowed them to focus their attention and resources on other projects and interests.

Contributing to and being a member of a employer retirement fund is a great asset. The level of legislative protection provided, and the benefits of membership make it a ‘must have’ for all employees.