The impact of COVID-19 on group retirement funds
With week two of lockdown upon us, everyone is truly starting to feel the punch of isolation and for many, if not most, questions around job security and future financial wellness is stirring. Fortunately, the Financial Sector Conduct Authority (FSCA) has introduced various initiatives that will provide relief to financially distressed employers and employees.
Ensuring your financial wellness is our top priority and keeping you abreast of new developments in the employee benefits space is a close second, which is why we have summarised the effects of COVID-19 on pension and provident funds. If you have any questions regarding your employee benefits and how it’s impacted by the coronavirus pandemic, please don’t hesitate to contact Cornerstone Employee Benefits on today.
In a recent communication released by the FSCA, it reminds funds of the provisions of Section 13A of the Pension Funds Act of 1956 and provides allowance for the submission of urgent rule amendments. If an employer is unable to pay employees in full due to the impact of the lockdown period, there are ways to mitigate any losses:
Considering employers’ ability to pay all employees
Should an employer be unable to continue payment of full salaries to employees and to continue the payment of contributions without interruption to the retirement fund, then it is important to determine if employees would be able to continue paying member contributions on a reduced package. Depending on the ability to pay employees, there are different scenarios to manage contributions due to the retirement fund.
What do the fund rules say?
The employer must engage the trustees to be clear on what the rules of the fund provide for where consideration must be given to changing pensionable salary, contribution levels or both.
Most rules provide for:
- temporary absence from work (with or without pay
- a break in service (in instances where employees are not working)
- postponement of contribution payments
- reduction of pensionable service (for employees who are working reduced hours or short-time)
Based on the above, the rules would generally dictate whether or not:
- contributions would be maintained on the full pensionable salary (prior to lower level of earnings), or
- contributions would be based on the new lower pensionable salary (this could impact the level of insured risk benefits), or
- whether or not the employee contribution is payable.
If an employer elects to reduce the employees’ pensionable salaries, this would have a corresponding impact on the insured risk benefits. Employers considering this approach could consider reducing the pensionable salary for contribution purposes but retain a risk salary upon which the premium is based and ensure that cover, at previously accepted levels, remains in place. This would need to be stipulated in the rules of the fund.
What if the rules do not provide for reducing or suspending contributions?
Where the fund does not have a rule in place, the FSCA has stated that the fund should then urgently submit a rule amendment to them following engagement with the employer, its employees and the board of trustees of the fund.
The employer would be required to submit a formal request to the board of trustees regarding either the suspension or reduction of contributions for consideration by the board.
Ensure clear communication to members
Members must be informed in writing of the employer’s request to reduce or suspend contributions, and of the proposed amendment within 30 days of receipt of the request or decision. Because of the potential financial impact this can have on members ‘retirement fund growth, it is important that communication is clear and precise.
What are the tax implications?
The South African Revenue Service has said it will not jeopardise the income tax approval status of the retirement fund concerned.
Employers and trustees must ensure that all consequences are considered before implementing any final decisions. The Department of Small Business Development is providing financial and non-financial assistance to small and medium businesses affected by the impact of the COVID-19 outbreak.
The Minister of Employment and Labour, Thembelani Nxesi, announced special measures which have been put in place to aid businesses. The UIF will compensate affected workers through a “National Disaster Benefit”. The benefit would constitute a “temporary lay-off” benefit during the countrywide lockdown and is de-linked from the UIF’s normal benefit structure.
***This article was adapted from “Lifeline for employers experiencing financial difficulty as a result of COVID-19 pandemic” by Vickie Lange, head of Best Practice at Alexander Forbes. Published 1 April 2020. Original article here