Non-payment of contributions now a criminal offence

By Kobus Hanekom, Head: Strategy, Governance and Compliance

The Financial Services Laws General Amendment Act, 2013, signed into law on 16 January 2014, amends Section 37 of the Pensions Funds Act. From the effective date, yet to be announced, it will make a failure to pay retirement fund contributions a criminal offence, liable on conviction to a fine not exceeding R10 million and or to imprisonment of up to 10 years.

In addition to criminalising the non-payment of contributions, the revised Section 13A(8) seeks to attach personal liability to the person responsible for not paying the contributions.

The revised Act stipulates that “Every director who is regularly involved in the management of the company’s overall financial affairs” will be personally liable for the payment of fund contributions. The new law will force retirement funds to take positive steps to ensure that requirements are met.

Funds will for example, have to request the employer to identify those who are personally responsible. Should the employer fail to do so, all the directors of the company will be personally liable. In the case of a closed corporation (CC) the members who are regularly involved in the management of the CC’s overall financial affairs will be liable.

In other firms, all the persons comprising the governing body of the employer who are regularly involved in the firm’s overall financial affairs, as the case may be, will be liable.

This new requirement constitutes a significant business risk for employers and their staff.

Temporary suspension as a solution
Most fund rules allow the employer to terminate the fund or in the case of an umbrella fund to terminate participation in the fund. To terminate the fund is a final and drastic measure, especially if the employer believes that the cash flow concerns are of no more than a temporary nature.

Smaller employers are more often exposed to periods of cash flow constraints of a temporary nature. Hence we developed and introduced a temporary suspension of participation arrangement for umbrella fund clients. The temporary suspension is less final and will therefore help the responsible person to manage the situation a little bit better. Such a temporary suspension will never the less have a significant direct impact on the members, and will have to be managed very carefully.
Is it the finance director’s job to make sure that the employer has the money to pay contributions?
People tend to agree that pension contributions should enjoy special protection. One of the reasons why previous measures failed is because once an employer is insolvent, deterrents in the form of additional fines and penalties have little effect. Identifying the director / officer that is responsible for non-payment and holding that person personally liable is bound to have much more success. This will be in addition to a charge for theft for deducting contributions from member’s salaries and failing to transfer them to a fund.

While we welcome the measure, we are concerned that all the implications have not yet been fully considered and clarified. It appears fairly clear that if it can be proved that the Finance director elected to buy raw material for a new project in preference to paying the retirement contributions he will be likely to be held directly responsible.

What, however, will the implications be for a finance director who cannot pay the contributions purely because there are insufficient funds in the company account? If the inability to pay constitutes a legal excuse, under exactly what circumstances will this be allowed?

We may speculate but ultimately we will have to wait and see how our courts interpret the amended section. In the interim trustees will have to make sure that the rules and the benefit structure best enable the parties to find creative new solutions for these very real challenges.