Saving for a rainy day
20 Sep 2016
Read more about the interview.
What happens when your employer closes down?
There are some events in life you can control. Such as the career you choose to embark on and to an extent, which employer you work for. Unfortunately, there are many events that you have no control over.
One of these instances is when your employer is forced to close down its business. This is a highly unsettling scenario for all employees and can be due to many causes, including an employer undergoing liquidation. As an employee, you are faced with urgent questions about your future and retirement. What happens to the money in my pension fund? Will I receive the money paid out in full? How long will it take to receive this money?
Boom or bust, make a plan.
Modern economies go through two broad cycles – a boom and a bust cycle. During a boom, Gross Domestic Product (GDP) figures increase, jobs are plentiful, new businesses open up and investors enjoy high returns from the market. This is an important time to save and plan for less prosperous times. During a bust, the almost exact opposite happens in an economy. Job rates are low, GDP growth stagnates or is even negative and many businesses go under. Once again, while in a position where you are gainfully employed, you should plan for the worst-case scenario and build a nest egg that will sustain you should you lose your job or your company close down.
The worst has happened, now what?
Once your employer closes down, it is important to remember that the money you’ve contributed towards your retirement fund belongs to you. This means that you have certain rights and claims that are guaranteed to you by South African law and even when your employer is liquidated, your money belongs to you. No matter how lengthy or convoluted the liquidation process is, eventually, you will receive your money.
Your employer’s liquidation will primarily be governed by the Insolvency Act and the Companies Act, while the fund also falls under certain sections of the Pension Fund Act. When your employer declares itself insolvent and the retirement fund or participation in an umbrella fund is to be closed, the following will occur:
The liquidation process is as follows:
- The fund administrator applies for a liquidator whose job it is to wind up the affairs of the fund and to distribute the money to the members. The appointment of the liquidator must be approved by the Registrar of Pension Funds.
- Once the liquidator has been approved, the assets of the fund are transferred to a money market fund to limit any exposure to market fluctuations during the liquidation process. This means that the money will retain its value during the liquidation process.
- The liquidator draws up a set of accounts that details the money available to be distributed to members and the amount each member will receive on the official liquidation date.
- Once the Registrar of Pension Funds has approved the accounts, it is open for public inspection at the offices of the fund, Financial Services Board and the magistrate’s court in the district where the fund is registered.
- Arrangements must be made for advertisements to be placed in the Government Gazette and an English and Afrikaans Newspaper circulating in the district in which the Fund's registered office is situated, advising members that the provisional accounts are available for inspection.
- Members may inspect the provisional accounts. If they have any factual proof that the accounts are incorrect, they may raise a written objection with the Registrar and the liquidator. Objections must be lodged within 14 days of the end of the period for which the accounts lie open for inspection.
- Any objections lodged will result in the suspension of the liquidation process and an investigation will be undertaken. If the accounts are amended, the process of inspection is repeated.
- If no objections are received, or once any objection has been dealt with to the satisfaction of the Registrar, the liquidator will then apply to the Registrar for permission to make payment.
- Once the Registrar has approved the payment, the liquidator will need to recalculate all of the individual values to take into account any interest earned in the money market account since the preliminary accounts were produced. Once this is done, tax directives are applied for and payment of the benefits made.
- Once all of the benefits have been distributed a set of final accounts, reflecting the actual gross amounts paid, are submitted to the Registrar and the funds legal registration is cancelled.
Please note that each liquidation case is unique and, depending on its complexities, can take between three months to over a year to settle.
It is also important to remember your employer’s assets and liabilities are
separate from the provident fund, and the company’s creditors
cannot access your retirement savings.
What happens if my employer did not pay my contributions to the fund?
This is a serious violation of section 13A of the Pension Fund Act that deals with payment of contributions to the Fund, and is now a criminal offence. For this type of non-compliance, Liberty Corporate’s Umbrella Fund Solutions* head Arno Loots explains, “Usually the Financial Director can get fines up to R10 million in their personal capacity, or even go to prison. And this is when the fund is on-going.” Once in the liquidation phase, the liquidator is empowered to negotiate “how many cents in the rand they can get in for the pension fund that is still outstanding.” The liquidator will investigate the fund account thoroughly and ensure that the fund received all of the contributions due to members.
Can I transfer the money easily?
Once the liquidation process is complete and the money can be released, you have four options.
- Receive your funds as a lump sum (net tax)
- Transfer your funds to your new employers pension or provident fund
- Transfer your funds to an alternative pension or provident preservation fund
- Transfer your funds to an alternative retirement annuity fund
As Loots notes, “The difficult part is getting the liquidation process completed. The transfer itself is a normal transaction.”
Some things cannot be controlled, but you can plan ahead and put yourself in a position where you can deal with this drastic change effectively. Loots feels there are three things to remember when dealing with the unfortunate event of your employer closing down. Firstly, make sure that you have a nest egg. Don’t rely on the pay out of your funds as the liquidation process can be quite lengthy. Secondly, when liquidation starts, make sure that you understand the process and communicate with your fund administrator. Lastly, make sure that you stay on top of the process as it progresses. When the accounts are shown publically, read through the information and raise any objections you may have.
*Liberty Corporate’s umbrella fund is the biggest umbrella fund in South Africa by member size.