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WHAT
IS A PENSION FUND/PROVIDENT FUND AND WHAT ARE THE
ADVANTAGES OF HAVING ONE?
A
pension fund is a vehicle to provide for the economic
security of retired people by means of a regular income,
i.e. a pension. A provident fund has similar objectives
except that the full benefit can be paid as a cash lump
sum. (A provident fund may also be structured so that the
benefit is paid as a pension which may be commuted for a
lump sum with the trustees' permission.)
For
both pension and provident funds, the joint contributions
of the employer and the employees are invested to build up
assets in advance of the benefits becoming due.
There
is no hard and fast rule as to which organisation should
have a pension fund and which should have a provident
fund.
The
advantages of pension and provident funds are:
-
Advance
funding by employers and employees in order to provide
retirement benefits
-
Creation
of a separate legal entity from the sponsoring
employer
-
Tax
concessions on contributions and benefit
-
Peace
of mind is given to both employer and employee
Attraction
and retention of staff is made easier
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WHAT
ARE
THE USUAL STANDARD PROVISIONS FOR FUND RULES?
All
rules
must be registered by the Registrar of Pension Funds and
as such are required to deal with certain issues as laid
down in the Pension Funds Act, Regulation 30. These are,
for example:
-
the
name of the fund, date of commencement and registered
office
-
the
object of the fund
-
the
requirements for membership of the fund and the
circumstances under which membership would
cease
-
the
calculation of contributions
-
the
conditions under which members or other persons may
become entitled to benefits
-
the
nature and extent of benefits
-
the
appointment, removal and powers of the fund's
"officers", including trustees
-
the
manner in which the fund may be terminated or
dissolved.
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the
method of settling disputes
-
the
manner in which the fund may be terminated or
dissolved
A
provident
fund is a fund set up by an employer for the benefit of
its employees. The object of this fund is to provide a
cash lump sum benefit for the members (employees) upon
their retirement, or to provide lump sum benefits for the
dependants of such members upon death of the members.
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WHAT
ARE THE MINIMUM AND MAXIMUM PERMITTED RETIREMENT AGES OF
RETIREMENT FUND?
In
terms of the Second Schedule to the Income Tax Act, the
lump sum benefits payable on retirement from a provident
fund, other than on the grounds of ill-health, prior to
the age of 55, will be taxed as a withdrawal benefit and
not as a retirement benefit. This age is thus a practical
minimum retirement age limitation for provident funds.
The
definition of "retirement annuity fund" in
section 1 of the Income Tax Act requires that the rules of
the retirement annuity fund must contain, amongst other
things, a rule stating that no member will become entitled
to the payment of an annuity after the age of 70, or
before the age of 55 (other than in the case of
ill-health), before the Commissioner will approve the
rules.
There
are none of the above restrictions placed on pension funds
in the Income Tax Act and the pension fund's retirement
age can therefore theoretically be any age.
There
is no reference in the Pension Funds Act regarding any age
limits
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IS
IT PERMISSIBLE TO HAVE A FUND WHERE ONLY EMPLOYEES
CONTRIBUTE?
While
not very common, it is possible and permissible to have a
fund where only the employees contribute. Neither the
Pension Funds Act nor the Income Tax Act has any provision
compelling the employer to contribute to the fund. Most
administrators will only consider the administration of
funds if they are linked to a fund where the employer
contributes, e.g. members contribute to a pension fund and
the employer contributes to a provident fund. The most
common type of retirement funds of where employees may
only contribute are retirement annuity funds.
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HOW
DOES SALARY SACRIFICE WORK?
Simply
put, salary sacrifice is the practice of reducing an
employee's cash salary and providing
some other benefit in its place, e.g. as a contribution to
a provident fund or medical aid scheme. Our courts have
held that salary sacrifice arrangements are perfectly
legal, that is, employers and employees are entitled to
structure salary packages as it suits them in order to
achieve maximum tax effectiveness.
The
following example will illustrate the concept of salary
sacrifice:
Assume
an employee earns a salary of R6 000 per month and is a
member of a provident fund. In terms of his/her contract
of employment the employee pays the monthly contributions
to the provident fund, which amounts to R600 per month.
The employee's tax and "take home pay" are
calculated as follows:
|
Salary
|
R6 000 |
|
Less: Employee's tax on R6 000 (say 32%)
|
R1
920 |
|
|
R4 080
|
|
Less: Contribution to provident fund
|
R 600
|
|
Take home pay |
R3 480 |
|
Should
the employer and employee enter into a valid and effective
salary sacrifice arrangement and intentionally amend the
employee's contract of employment so that the employer
pays the contributions and in return the employee's salary
is reduced to R5 400, then the employee's tax and
"take home pay" will be calculated as follows:
|
Salary
(after sacrifice) |
R5 400 |
|
Less:
Employee's tax on R5 400 (say 32%) |
R1 728
|
|
Take home pay |
R3 672
|
|
To
be valid, the salary sacrifice scheme must divest the
employee of his or her liability to pay any part of the
member's contribution to, say, a provident fund and to
shift liability for the total amount to the employer. This
will be achieved by having the employee sacrifice an
amount of his salary equal to the contribution that he was
no longer liable to pay, as illustrated in the example
above. Otherwise, i.e. if the amount sacrificed still
accrues to the employee after salary sacrifice has been
implemented, the South African Revenue Service may attack
the arrangement in terms of the anti-avoidance provisions
in section 103 of the Income Tax Act.
The
South African Revenue Service will permit a salary
sacrifice to be implemented at a non-increase time, even
if it results in a reduction of income, as long as the
necessary amendment to the affected employee's terms and
conditions of employment are agreed.
Such
an agreement need not be in writing to comply with legal
formalities. However, it is advisable for it to be written
down in order to record the terms accurately. It is
possible for an employer to use one agreement for all the
affected employees, as long as that agreement is binding
on and accepted by all the relevant parties. In the
agreement the employer must set out the commercial reasons
for the restructuring of packages.
Since
the amendment of an employee's contract of employment is
the most important requirement for a valid salary
sacrifice arrangement, it is important that such contract
is correctly worded to accurately reflect and confirm the
composition of the employee's total remuneration package.
The contract must set out all the key components of an
employee's package including:
-
his
or her gross remuneration
-
details
of the employer's contributions to medical aid,
pension and provident funds,
-
details
of the employee's leave and bonus entitlements and how
they are calculated, and fringe benefits.
It
is vital that the details and justification for fringe
benefits and any other allowances are carefully detailed
in the employee's contract of employment.
Apart
from the rules of the fund to which the salary sacrifice
relates, the employment contract is one of the documents
that the South African Revenue Service inspectors will
scrutinise should they perform an employees' tax review at
the workplace. Following these inspections it is not
unusual for the South African Revenue Service to levy an
employer with a bill for arrear employees' tax, penalties
and interest, where there is a lack of information or
incorrect wording in employment contracts and/or in the
rules of the fund. However, the employer has the right to
recover such additional employees' tax from his employees.
More
than one salary sacrifice can be implemented during the
employee's employment with regard to that particular
employee. However, the provisions of section 103 of the
Income Tax Act, which imposes penalties for schemes which
result in tax avoidance, should be kept in mind.
Where
an employer wishes to implement a salary sacrifice, it is
strongly recommended that professional assistance is
sought from a tax consultant regarding the correct
structure of the salary sacrifice.
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WHAT
HAPPENS IF CONTRIBUTIONS ARE NOT PAID TO THE FUND WITHIN
SEVEN DAYS OF THE END OF THE MONTH, AS IS REQUIRED IN
TERMS OF THE PENSION FUNDS ACT?
Section
13A of the Pension Funds Act, which deals with the payment
of contributions to pension funds, has been amended and
the revised section 13A was published in the Government
Gazette on the 2nd of April 2001. The revised section 13A
requires employers to pay over fund contributions to
administrators within seven days of the end of the month
for which they are due. Accompanying the contributions (or
within 15 days of month-end) must be an Initial
Contribution Statement which will contain specific
information, e.g. the fund's name and registration number,
employer's details and each member's details regarding the
contribution deducted and paid over.
Thereafter
a Subsequent Contribution Statement must be supplied which
will contain the same information as mentioned above or a
reconciliation with the statement of the previous period
showing, for example, changes in membership or member
emoluments, etc.
A
contact person at the administrator will report to the
principal officer or the fund's authorised person, who
will monitor this compliance for the fund, within 15 days
of the seven day period if the contributions have not been
received in full or where there is a discrepancy of more
than 2.5% of the total contributions payable for that
period.
The
principal officer or the fund's authorised person will
then have to submit a written report to the fund's
trustees within seven days of receipt of the report of the
employer's failure to furnish the fund with the Initial
Contribution Statement and the Subsequent Contribution
Statement and to pay the contributions to the
administrator within the prescribed seven day period. The
trustees must then inform the members of the fund as well
as the Registrar of Pension Funds.
Should
this failure to pay the full contributions continue for 90
days, the principal officer or the person authorised by
the fund must report the matter in detail, within 14 days
of the expiration of the 90 day period, to the
Attorney-General, i.e. the South African Police Services,
and inform the Registrar of Pension Funds accordingly.
The
Registrar has the discretion to inform the Commissioner
for the South African Revenue Service of any
non-compliance with section 13A of the Pension Funds Act.
To
make matters worse, compound interest will be payable on
late payments or unpaid amounts of contributions at the
maximum Usury Act rate that is applicable. The interest
will constitute investment income for the fund.
Section
13A further provides that should the employer wish to
amend the rules of the fund to reduce, suspend or
discontinue contributions, it cannot do so with
retrospective effect and it will still be liable for the
contributions before the date the resolution was taken to
amend the rules.
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DOES
THE EMPLOYER
HAVE A FIDUCIARY DUTY TOWARD THE FUND?
The
employer owes the fund a fiduciary duty. This is because
the employer has, by establishing a fund, entered into an
agreement with his employees to help provide for their
retirement and because the contributions paid to the fund
constitute fund assets.
The
most important fiduciary duty the employer owes to the
fund is the duty to act in good faith, care and diligence.
This duty should be exercised when setting up the fund,
appointing trustees, ensuring that eligible employees join
the fund, etc.
There
is also a duty to co-operate fully with the trustees and
administrators of the fund and to ensure that the fund is
properly managed. The employer may not place pressure on
the trustees in an attempt to influence
decision-making.
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CAN
THE EMPLOYER USE FUND ASSETS AS SECURITY FOR LOANS?
It
is not possible for an employer to use the assets of the
fund as security for business loans, because the fund is a
separate legal entity and does not belong to the employer
or the business. Similarly, fund assets may not be used as
security for personal loans.
Fund
assets can however be used to grant housing loans to fund
members, to redeem existing housing loans or to purchase a
dwelling or make alterations. A fund may not stand surety
for a member's loan (section 19 of the Pension Funds Act),
unless it is a housing loan.
Funds
operated by life insurers cannot make funds available for
the purposes of housing loans, as assets must be invested
in policies of insurance for the fund to remain audit
exempt. Thus there are no cash assets to lend to the
members. In these cases the fund will, however, be able to
stand surety for a housing loan granted to a member by a
third party.
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WHO
CAN SIGN DOCUMENTATION RELATING TO A FUND?
All
documentation must be signed by the principal officer and
one other authorised person. If a board of trustees has
been appointed then the chairperson, the principal officer
and one other trustee must sign amendment documents etc.
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IS
A RETIREMENT FUND REQUIRED TO HAVE A BOARD OF TRUSTEES?
In
terms of section 7A of the Pension Funds Act, every
Umbrella or freestanding fund shall appoint a board of
management to run the affairs of the fund. The members of
this board will be trustees.
At
least four trustees must be appointed and members have the
right to elect at least 50% of these trustees. A fund may
apply for exemption from appointing a full board if it
will be "too expensive or inconvenient" to do
so. In this instance, members will still have the right to
elect at least 50% of whatever number of trustees is
appointed.
Umbrella
funds and retirement annuity funds may apply for exemption
from appointing member elected trustees. In this
instance, these funds will have an independent trustee
sitting on the board of trustees.
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WHAT
IS A FIDUCIARY DUTY?
A
fiduciary duty is usually referred to in the context of a
trust, where the trustees are controlling the assets of
the trust for the benefit of the beneficiaries of the
trust.
In
the context of a retirement fund, the trustees' fiduciary
duties are the duties conferred upon the trustees which
require the trustees to exercise their powers for the
benefit of the retirement fund and in such a manner as to
always act in the best interest of the retirement
fund.
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WHAT
ARE THE FIDUCIARY DUTIES OF TRUSTEES?
The
object of a board of trustees and the statutory duties of
trustees are stated in sections 7C and 7D of the Pension
Funds Act respectively.
In
terms of subsections 7C (1) and (2):
(1)
the object of a board shall be to direct, control and
oversee the operations of a fund in accordance with the
applicable laws and the rules of the fund.
(2)
In pursuing its object the board shall -
(a) take all reasonable steps to ensure that the
interests of members in terms of the rules of
the fund and the provisions of this Act are
protected at all times, especially in the event of an
amalgamation or transfer of any business contemplated in
section 14, splitting of a fund, termination or reduction
of contributions to a fund by an employer, increase of
contributions members and withdrawal of an employer who
participates in a fund;
(b)
act with due care, diligence and good faith;
(c) avoid conflicts of interest;
(d)
act with impartiality in respect of all members and
beneficiaries.
In
terms of Section 7D of the Pension Funds Act, the duties
of a board shall be to:
(a) ensure that proper registers, books and records
of the operations of the fund are kept, inclusive of
proper minutes of all resolutions passed by the board;
(b) ensure that proper control systems are employed
by or on behalf of the board;
(c) ensure that adequate and appropriate
information is communicated to the members of the fund
informing them of their rights, benefits and duties in
terms of the rules of the fund;
(d)
take all reasonable steps to ensure that contributions are
paid timeously to the fund in accordance with the Pension Funds Act;
(e) obtain expert advice on matters where board
members may lack sufficient expertise;
(f) ensure that the rules and the operation and
administration of the fund comply with the Pension
Funds Act, the Financial Institutions (Protection of
Funds) Act, and all other applicable laws.
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WHAT
IS THE PROCEDURE THAT MUST BE FOLLOWED WHEN A FUND OR
PARTICIPATION IN A FUND IS LIQUIDATED?
In
terms of section 28 of the Pension Funds Act a liquidator
must be appointed, either in the manner directed by the
rules or, failing such a provision, by the trustees
managing the business of the fund. Although the Act is not
prescriptive as to the appointment, it is subject to the
Registrar's approval. The liquidator will, from the date
of appointment, for the purposes of the Act be deemed to
be the person managing the business of the fund.
The
liquidator will, as soon as possible, deposit with the
Registrar the following:
(a)
A preliminary revenue account and balance sheet signed and
certified as correct, showing the assets and liabilities
of the fund at the commencement of the liquidation.
(b)
A document setting out the manner in which the assets will
be realised and the liabilities discharged including
any liabilities in respect of members.
In
the case of a defined benefit fund or a privately
administered fund, the Registrar may require a report by
an independent valuator in respect of the preliminary
account and balance sheet.
The
preliminary account, balance sheet and report (if any)
will lie open for inspection by interested persons for a
period of 30 days at the Registrar's office and at the
fund's registered office.
In
addition, a notice must be published in one English and
one Afrikaans newspaper, or any other official language,
if deemed necessary in the circumstances, circulating in
the district where the fund's
registered
office is located, stating the period during which, and
places at which the preliminary account will lie open for
inspection. Objections must be made in writing to the
Registrar within a period of 14 days.
In
terms of section 28(7A), the Registrar may, on
application, and in circumstances which justify an
exemption, exempt a fund from the requirement that:
-
the
preliminary account must lie open for inspection for a
period of 30 days and
-
a
notice be published calling for objections, which will
mean that the retirement fund's liquidation
will
be expedited.
In
terms of section 28(12A), the Registrar may, on good cause
shown, authorise the liquidator to make payment of any
amounts to the members and beneficiaries of the fund
before submission of the final accounts and report (if
any). This may assist fund members who are in dire
financial straits when the retirement fund is liquidated.
In
terms of the Registrar's prescribed conditions, he will
not grant permission unless:
(a)
preliminary accounts and report (if any), or any other
information acceptable to the Registrar, have been
deposited with the Registrar; and
(b) the payment to be made to the member of the
fund concerned does not exceed the lesser of:
If
no objections are lodged, the liquidator may finalise the
liquidation.
If
objections are lodged, the Registrar may direct that the
preliminary account be amended or give such other
directions as seen fit. The Registrar's direction must be
posted by the liquidator to members and interested parties
within 14 days. Any aggrieved party must make application
to the High Court within 28 days.
After
completion of the liquidation, the liquidator must within
30 days lodge with the Registrar the final account
together with the final balance sheet signed and certified
as correct.
If
the Registrar is satisfied that the revenue account and
balance sheet are correct, and that the liquidation has
been completed, the registration of the fund will be
cancelled.
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WHAT
HAPPENS TO THE FUND IF THE EMPLOYER'S BUSINESS IS SOLD OR
LIQUIDATED?
Neither
case has an impact on the fund because the fund is a
separate legal entity. The fund can be taken over by the
new owners, continue on a paid-up basis (if the employer
ceases to employ the members) or be terminated. When the
business is sold, the fund can continue on its own under
the new owners or it can be amalgamated with the fund of
the new employer. Amalgamation is not however, a legal
requirement. If the business is sold as an ongoing concern
and the employees continue to be employed the fund will
continue. In this case members would not be able to
withdraw heir shares of fund as their employment has been
continued.
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WHAT
HAPPENS IF THE ADMINISTRATOR OF THE FUND IS CHANGED?
Often
members ask to have their benefits paid out if the
administrator is changed. This is not allowed as the fund
continues and the change of administrator makes no change
to the compulsory nature of the fund. Members can only
withdraw their share of fund on resignation, dismissal,
retrenchment or retirement or death.
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WHAT
PROTECTION AGAINST INSOLVENCY IS THERE GOR THE EMPLOYER OR
THE MEMBER OF A FUND?
As
the fund is a separate legal entity capable of owning its
own assets, fund assets are separate from both the assets
of the employer and the members. Fund assets cannot be
appropriated for the benefit of creditors if either the
employer or the members become insolvent.
Retirement
benefits to which a member is entitled may not be taken
into account in determining the value of the estate for
insolvency purposes. This effectively protects retirement
benefits within the fund. There are however a few
exceptions to this rule, for example:
(a)
any amounts due in respect of a housing loan granted to
the member by the fund or for which the fund stood
guarantee;
(b)
any amounts due in respect of damages caused to an
employer due to the member's theft, dishonesty, fraud or
misconduct; In this case a police case would have to be
opened or the employee would have to admit in writing
their liability.
(c)
any amounts due in respect of arrear contributions which
the employer deducted from the member's salary, but failed
to pay over to the administrator / fund;
(d)
any amounts due to the South African Revenue Service in
terms of the provision of the Income Tax Act.
However,
if a lump sum payment in terms of a provident fund or a
commuted portion of a pension fund benefit has been
received by the member prior to insolvency, this money
will not be protected and will be available for
distribution to creditors on that member's insolvency.
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WHEN
AND HOW DOES SECTION 14 OF THE PENSION FUND ACT APPLY?
Section
14 provides that no transaction involving, amongst others,
the amalgamation or transfer of the business carried on by
a registered fund with any other person (whether or not
that other person is a registered fund) shall be of any
force or effect, unless the Registrar certifies that all
the provisions of section 14 have been complied with.
Examples
of an amalgamation or transfer of the business of the fund
would be where the employer is taken over by or merges
with another employer, or where a fund converts from a
defined benefit to a defined contribution fund, or where
the administrator is changed and the fund effectively
moves from one umbrella scheme to another.
In
terms of section 14(1) the Registrar must be satisfied
that the scheme complies with the following requirements:
(a)
That the scheme for the proposed transfer has been
submitted to the Registrar, including actuarial
statements;
(b)
That the Registrar has been furnished with additional
particulars or a special report by a valuator, or such
information as he may deem necessary for the purposes of
this section;
(c)
That the scheme of transfer is fair and equitable;
(d)
That the scheme of transfer accords full recognition to:
-
members'
rights,
-
members'
reasonable benefit expectations in terms of the rules
of the fund, and
-
any
additional benefits, the payment of which has become
established practice.
(e)
That the registered fund which will continue to exist,
will be able to meet the requirements of the Pension Funds
Act and will remain in a sound financial condition, or in
the case of a fund which is not in a sound condition, that
it will be able to attain such a condition within a
reasonable period of time.
(f)
That the rules of both the transferor and the transferee
fund, being the parties to the transaction, have been
carried out and complied with, or that they will be
carried out in terms of the said scheme of transfer.
Once
the Registrar is satisfied that the aforementioned
requirements have been complied with, he will forward a
certificate to that effect to the principal officer of
both the transferor and the transferee fund.
Whenever
there is a transfer or amalgamation between different
funds, the assets and liabilities vest in and become
binding upon the fund to which they are transferred, i.e.
the transferee
fund.
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DOES
A CHANGE IN THE COMPANY NAME MEAN A CHANGE IN THE FUND
NAME?
The
fund name does not necessarily have to change when the
company name changes, but it is wise to change the name,
as it can become confusing if the names of the fund and
the company are different.
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WHY
DO WE PAY FSB LEVIES?
The
functions of the Financial Services Board are to supervise
and exercise statutory control in terms of relevant law
over the activities of financial institutions and to
advise the Minister of Finance on matters concerning
financial institutions.
The
activities of the Financial Services Board are financed by
fees charged and levies imposed on financial institutions.
The Financial Services Board can set its own fees and
determine the levies payable. Part of these levies are
used to finance the office of the Pension Funds
Adjudicator, amongst other things.
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