OPINION | You’re retrenched, stranded or unpaid. What happens to your retirement savings?
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.