An employer can claim from a member’s retirement savings for losses suffered as a direct result of damages caused by that member, but many employers struggle to follow the legal process required to recover these losses. Fortunately, a formal process is in place to help employers recover some or all of their losses from members’ retirement savings.
An employer can claim from a member’s retirement savings for losses suffered as a direct result of damages caused by that member, but many employers struggle to follow the legal process required to recover these losses. Fortunately, a formal process is in place to help employers recover some or all of their losses from members’ retirement savings.
Helen Littlewood, Consulting Head: KZN at Sygnia Employee Benefits, explains what this means for trustees, employers and members.
Section 37A of the Pension Funds Act ("the Act") prohibits a member’s benefit from being reduced, ceded, transferred or attached by creditors. However, Section 37D of the Act permits certain deductions from a member's benefit – one of which is that an employer can claim compensation for loss or damages suffered as a direct result of a member's dishonesty, fraud, theft or misconduct (collectively referred to as "damages").
A framework for trustees is provided by the strict requirements derived from the Act and precedents established through the determinations of the Pension Funds Adjudicator ("PFA").
How does an employer claim for damages?
Nausheena Nackwa, Legal and Compliance Advisor at Sygnia Employee Benefits, confirms that the claim must be in respect of damages. Misconduct must be shown to exhibit an element of dishonesty that has resulted in loss to the employer – it is not enough for the employer to prove that the member did not follow a policy or procedure. The employer must show that the member acted intentionally and maliciously in a particular situation. For example, failure to pay back a study loan is a breach of contract but is not considered an act of dishonesty (or any other categories) in terms of the requirements for a deduction under Section 37D.
To lay a claim, the employer must obtain:
an admission of liability and acknowledgment of debt signed by the member ("AOL"); or
a judgment (civil or criminal) against the member in any court.
"It is important to understand the distinction between 'deduction from a benefit' and ‘withholding of a benefit' and the requirements that apply to each," says Nackwa.
Deductions
In the AOL, the member must acknowledge their indebtedness to the employer, agree on the amount to be deducted and paid to the employer, and include a detailed description of how the loss arose.
The written AOL must be completed and presented to the trustees to request a deduction from the member's benefit. The trustees of the fund will assess the AOL to determine its enforceability and, if satisfied, will make a deduction from the member’s benefit and pay this to the employer. However, if the trustees are not satisfied with the detail provided in the AOL and no supporting information has been provided by the employer, the trustees are under no obligation to give effect to the AOL and must release the benefit to the member.
Withholding
If the employer is unsuccessful in obtaining an enforceable AOL, legal proceedings against the member in a court of law may be instituted.
Shirdhi Baijnath, Senior Legal Advisor at Sygnia Asset Management, states that the employer must request the trustees of the fund to withhold the member's benefit pending finalisation of the legal proceedings. "Withholding a benefit" is not provided for in the Act, but a Supreme Court of Appeal decision held that Section 37D should be interpreted to include the power of a fund to withhold payment pending the outcome of the instituted action. It noted, however, that Section 37D must not be interpreted solely for the employer’s benefit and that the facts of each case must be considered. Withholding of a benefit is not an automatic right and is always at the discretion of the trustees.
Factors the trustees should consider include evidence of whether the employer:
has instituted legal proceedings against the member;
is actively pursuing the matter;
has a reasonable chance of success; and
is not responsible for any delays in the legal proceedings.
According to Littlewood, if the trustees are satisfied that the employer has a legitimate case, they may agree to withhold the benefit. However, the employer must provide substantial evidence at regular intervals for the trustees to continue withholding the benefit. For the trustees to determine whether the withholding is reasonable, the following documents must accompany the request to withhold a benefit:
South African Police Service ("SAPS") case number;
estimate of loss suffered (including cost of legal fees, if any);
disciplinary hearing proceedings, internal enquiries/notices of dismissal or other such supporting evidence that will enable the trustees to understand the conduct that caused the loss to the employer;
completed withdrawal claim form; and
continuous updates throughout the legal proceedings.
Nackwa notes that a criminal judgment or conviction is insufficient for the employer to be compensated. In terms of Section 300 of the Criminal Procedure Act, in addition to the conviction, the employer must request a compensation order for damages to be recovered from the member’s benefit. This must be highlighted to SAPS when proceedings are initiated.
What should an employer be aware of?
Accurate and timeous information should be provided to the trustees to enable them to consider the withholding request, as they have a duty to consider the rights of both the employer and the member. The employer must update the trustees on the matter regularly, as the withholding can continue only until the matter is concluded. According to Baijnath, if the employer is the cause of undue delays in finalising the investigation and/or the ensuing litigation, the trustees will review these circumstances objectively and consider whether any party is being unduly prejudiced. Importantly, the Act does not specify minimum or maximum time periods within which a benefit may be withheld – the PFA has held that, in some instances, withholding for a period of six (6) months was unreasonable, whereas withholding for two (2) years was reasonable in other instances pending the outcome of criminal proceedings. Each case is dealt with on its own merits, and the PFA has cautioned employers against abusing section 37D in the hope that evidence will surface in the future and has advised that proper oversight must be observed.
In practice, Littlewood says, the employer generally establishes that a member has committed dishonesty, fraud, theft or misconduct after they have left service and their benefit has been settled or is about to be settled by the administrator. It is imperative that the employer notify the administrator and, in turn, the trustees, as soon as they become aware of the member’s action – especially if the employer intends to recover an amount for damages caused against the member’s benefit.
What portion of the member’s benefit can be withheld?
The employer must quantify the loss it has suffered, as the fund cannot withhold an amount exceeding that which is claimed by the employer.
If the employer’s claim is equal to or exceeds the member’s benefit, the board of trustees may withhold the member’s entire benefit. If the employer’s claim is less than the member’s benefit, then only the amount claimed by the employer may be withheld, and the remainder of the member’s benefit will be paid to the member.
Notwithstanding the above, the Act allows for an employer to include legal costs in its claim that were or will be incurred. The employer should therefore provide the trustees with a reasonable estimate of legal costs.
Important points
Nackwa reiterates that there are a few important points to remember when dealing with these cases:
Notify the administrator as soon as possible about any claim that the employer may have against a member's benefit.
Any request for a deduction from a member’s benefit must be accompanied by:
a signed and completed AOL; or
a civil or criminal judgment (with a compensation order); and
a completed withdrawal claim form.
If a judgment has not been obtained, all supporting documents – including a case number and any other documents submitted to SAPS – must be sent to the board of trustees for their consideration to withhold the benefit.
The board of trustees must receive constant updates for the continued withholding of a benefit and will use their discretion when determining whether to withhold the member’s benefit.
An employer does not have an automatic right to "withholding". Employers often withhold the claim form to prevent the member from accessing their benefit, but this may count against their claim. Only a request made to the fund, together with a claim form and the necessary motivation for withholding, will enable the trustees to decide whether to withhold the benefit.
Section 37D ensures fair treatment of an employer's claim and a member's benefit by trustees of the retirement fund.
Should you require any further information, please contact:
Cher Leetjer, Head of Marketing on cleetjer@sygnia.co.za