One of the single biggest problems in the retirement fund industry is employers who steal the retirement savings of their employees, most often low-paid employees who are unsophisticated in the ways of investment finance.
How this happens is that employers deduct retirement fund contributions from their employees and then do not hand the money over to the retirement fund. They simply keep the money.
The result is that fund members do not have accumulated savings at retirement and, after two months of no contributions being paid over to their retirement fund, they lose their group life assurance cover against death and disability.
There are reporting procedures that should be followed when employers don't pay up - for example, reporting them to the Financial Services Board (FSB). But, in the end, it is the justice system that must take action.
This can take months, if not years ... or it is just not done and the employers get away with it.
Most of this theft takes place in the context of umbrella retirement funds, because it is difficult for members of these retirement savings structures to know if their money is being stolen.
With only a few exceptions, the link between the umbrella fund and its participants is essentially between the employer (called a participating employer) and the umbrella fund administrators (fund sponsors), with an intermediary sometimes also playing a role.
The reason for this is that there is no legal requirement for members to be represented at any level.
Members of umbrella retirement funds simply do not have the right to elect trustees to run their funds or even to have any input on the decisions an employer may make on their behalf. So, with no elected trustees, there is no proper process for reporting back to members. Members hear what employers want them to hear.
Some umbrella funds, however, do have processes in place to inform members of the non-payment of their contributions, but these are few and far between. Most members and their dependants find out they have been swindled only when a benefit is due but is not paid. Altogether, there are about 600 umbrella funds with about 35 000 participating employers.
So, against this background, it is good to see that every now and then one of these callous employers does not get away with stealing from its employees.
Recently the then Pension Funds Adjudicator, Vuyani Ngalwana, ruled that a recalcitrant employer, Securitywise, had to pay the benefits due from a fund in the case of an employee whose retirement fund deductions were not paid over to the Private Security Sector Provident Fund.
Not only was the company ordered to pay the benefit but it was also ordered to add 15.5 percent in interest to the benefit and to pay another 20 percent of the benefit due as a penalty to the fund itself.
What is worrying is that there are 304 complaints before the adjudicator relating to this umbrella fund.
The good news for members is that, earlier this month, a Port Elizabeth security company employer, Joseph Gilbert Williams, was sentenced to an effective four years in prison on 623 counts of theft arising out of the non-payment of pension fund contributions to the Private Security Sector Provident Fund.
This should serve as a warning to any other thieving employer.
Many employers may get away with the theft, but the chances are that the roulette wheel of fate may come up with their number and then it is a state-sponsored holiday for them.
The problem for Williams is that his holiday is not going to be free. The court also ordered that he hand over more than R500 000 to fund members and their fund.
The South African Police Service and the courts are to be complimented on the action they took against Williams. Also to be complimented is the administration company, NBC, that administers the Private Security Sector Provident Fund. After receiving complaints from members and dependants about benefits that had not been paid to them, NBC ensured that the culprit was prosecuted.
It has, however, taken from February 2003 to the present for justice to find Williams.
There are other solutions to this problem. They include:
- Giving the regulator (the FSB) greater powers to take action.
- Compulsory representation for members. Every participating employer of an umbrella fund should be forced to establish a committee at employer level and at least 50 percent of the committee members should be elected by the fund members. The umbrella fund administrators, in turn, should be obliged to report any non-payment of contributions to all members of this committee.
There are plans afoot to change the legislation to do just this, but, in the meantime, umbrella fund sponsors should insist that these structures are put in place.
A few years ago, Personal Finance exposed how Sanlam was telling employers with standalone retirement funds to sign up for its Wizard umbrella retirement fund because the employers would then not have to deal with member-elected fund trustees.
Shortly after the Personal Finance exposé, Wizard was hived off into a black-empowerment company, Simeka. Wizard is now being brought back on board at Sanlam.
The interesting thing is that Sanlam has another umbrella fund which is operated by its subsidiary Sanlam Umbrella Fund Administrators (Sufa).
This fund is streets ahead of many other umbrella funds because it insists on things such as member representation. There are other funds that do likewise.
David Gluckman, the chief executive at Simeka, says the plan is to merge Sufa and Wizard into a single umbrella fund on the basis of the best interests of members and best business practice.
Personal Finance will be watching this with interest.
Members of all umbrella funds should also insist on some sort of representation to protect themselves from employers with ill-intent.