Friday | 15 May | 2020
Solidarity Research Institute & Solidarity Financial Services
The devastating effect that Covid-19 is having on the finances of individuals and companies has been widely discussed for some time already. Since the announcement of the lockdown on 23 March 2020, a number of institutions such as banks, other credit providers, insurance companies and mobile phone companies have introduced various credit and payment relief options. The advantages and disadvantages of these options have also been widely speculated on, but the fact remains that some individuals and companies will suffer (or are suffering already) a partial or complete loss of income for a while, and therefore have no other alternative than to consider utilising these credit and payment relief options.
The Financial Sector Conduct Authority (FSCA) (hereinafter “the conduct authority”) in a communication of 26 March 2020 also announced its proposals for contribution relief options in terms of section 13A of the Pension Funds Act 24 of 1956 (hereinafter “the Act”), for employers of members of pension funds (hereinafter “funds”).
What does section 13A of the Act entail?
In terms of section 13A the employer of pension fund members is obliged (in accordance with the rules and regulations of the particular fund) to pay over to the fund, in full, the contribution deducted from the employee’s salary (i.e., the employee’s pension fund contribution) as well as the contribution (if any) payable by the employer. These contributions may not be paid over any later than seven days after the end of a month.
Most funds have existing rules in place for employers who are experiencing financial difficulties, and also encourage employees to apply these rules where necessary. Rules include:
- Provision for temporary absence from work (with or without remuneration).
- Provision for cases of a temporary break in service (where employees for some reason or another are unable to work).
- Suspension of contribution payments, and/or reduction of pensionable service (in respect of employees who are working reduced hours).
It is important to note that not all funds have the same rules in place and that employers need to consult the agreement between themselves and their fund in order to ascertain which rules (if any) will apply to them during Covid-19.
What does the conduct authority’s letter 11 of 2020 entail?
According to this communication the conduct authority is aware of the financial challenges brought about by Covid-19. They are also aware that there are employers and employees that are unable to pay over (in full or even just partly) the monthly section 13A contributions to their funds.
In light of this the conduct authority has decided to issue rules for employers that are unable to pay the full or any pension fund contributions on behalf of their employees to their pension funds – in terms of section 13A of the Act.
What do these rules entail?
- In the event that funds have rules in place for the suspension or reduction of contributions as discussed above:
- Following formal requests by employers, the boards of funds are required to consider such requests and apply the relevant rule(s), given the particular circumstances of the employer.
- Funds should seek to ensure that the risk benefit premiums are paid in full in order to ensure that the fund risk benefits will continue.
- In the event that funds do not have rules in place for the suspension or reduction:
- In this event funds need to urgently submit appropriate rule amendments to the conduct authority following negotiations with their members (employers).
- Registration of the rule: The date on which these rule amendments will come into effect should be determined on the base of the agreement reached between the fund and the employer. Given the current circumstances, funds will only receive a letter and an unstamped version of the rule amendment from the conduct authority. Funds will receive the stamped version of the rule amendment once business has resumed as usual.
- Funds should note that no other rules (or rule amendments) than those outlined above are to form part of the submission to the conduct authority.
- Funds are to submit amendments to the conduct authority as a matter of urgency.
Funds are expected to keep a record of all their members that are suspending or reducing contributions because of the pandemic. These records will have to be produced upon request by the conduct authority.
Funds are furthermore also obliged to inform affected members within 30 days of the request submitted by their employers to reduce or suspend contributions.
Tax implications that the reduction or suspension of contributions will have for employees
In general, contributions to pension funds, provident funds or retirement annuities may be deducted from an individual’s taxable income in full, but limited to the lessor of (1) an amount of R350 000 annually; (2) 27,5% of the individual’s taxable income or (3) the normal taxable income of individuals excluding taxable capital gains.
In the event of the employer contributing to the pension fund exclusively for the benefit of the employee, this may result in a taxable fringe benefit.
Where an employee is contributing to a pension fund, pension deductions are already taken into account in calculating employees’ tax in terms of the pay as you earn system (PAYE). In the event that the employee reduces or suspends contributions as a result of a loss of income, it would however mean that the available deductions that employees have for contributions to retirement funds will no longer be available, leading to higher taxable income (remuneration), and thus more PAYE for the period in which contributions were reduced or suspended.
There will however still be a significant cash flow benefit for the employees, as they will not need to make any contributions during the period when contributions are suspended or reduced.
When the suspension or reduction of contributions is lifted, employees may be required to make good on their past unpaid contributions. Provided that this does not result in their contributions exceeding the above-mentioned limits, they will still be entitled to the relevant tax deductions, and employers may take such contributions into account in determining the employee’s remuneration for PAYE purposes.
Impact on cover for employees if contributions are reduced or suspended
What will the implication be for an employee/individual’s cover if they suspend their contributions?
First, it is important to understand what the purpose of insurance is. The main aim of any form of insurance is to transfer risk from the insured to an insurer in exchange for an insurance premium.
The employer will have to look at the rules of the fund and engage in discussions with the fund for a reduction in contributions – this will be first prize, since the contributions may be able to finance a form of cover.
Should this not be possible and all contributions are suspended, then there will be no benefits. Thus upon an employee’s death in this case there will be no death cover since there would have been no payment toward this.
What will the impact be on an employee/individual’s pension payout upon retirement if he or she should take a payment holiday now?
There are many implications such as tax benefits enjoyed in advance, but the core impact is time spent out of the market. Once a holiday period is taken, from an investment perspective the member loses out on the length of time that the funds would have been invested in the market. The biggest effect will be on younger members.
The best way to illustrate this impact is by means of an example:
Annual earnings: R240 000
Pensionable salary: R156 000 (R240 000*65%)
Retirement age: 63
Contributions to the scheme: 19.5% of pensionable salary
Annual contribution: R30 420 (R156 000* 19.5%)
Monthly contribution: R2 535 (R30 420 / 12)
Long-term average growth factor: 9%
Effect if full yearly amount is invested until age 63: R522 677
Effect if one month is missed: R479 120
Thus at retirement the person will be R43 557 less well off (note that this is future value).
Will it be possible for contributions to be broken down into insurance benefits and investments?
The employer will have to look at the rules of the fund and engage in discussions with the fund for changes in contributions, but in most cases it will indeed be possible given the rules of the particular fund.
Comprehensive schemes have an investment component (e.g. income protection, death cover and critical illness cover).
The deduction that a member sees on their salary slip is for the financing of both their investment and risk benefits.
Should the employer need to reduce contributions, it will be in the member’s interest to retain at least the risk benefits.
 “Funds” are pension funds or provident funds as defined in the Income Tax Act 58 of 1962.
* All information was correct at the time of publication.