The Office of the Pension Funds Adjudicator (OPFA) has taken note of a High Court judgment that has been interpreted to mean the in duplum rule does not apply to late-payment interest on arrear retirement fund contributions.
The in duplum rule is a common law rule that protects debtors from being required to repay interest where the accrued interest is equal to the outstanding original debt. Simply put, the interest on a principal debt cannot be more than the principal outstanding debt.
“Unless the judgment is overruled, funds may claim late-payment interest on arrear contributions from participating employers, even where the interest exceeds the actual contributions owed,” law firm Norton Rose Fulbright commented.
It said the judgment is contrary to the policy articulated in the OFPA’s April 2023 newsletter.
An article about the application of the in duplum rule to arrear contributions concluded:
“It is important for the Adjudicator and funds to apply the in duplum rule, as these entities have a duty to be fair and impartial, not only to members of the fund but to the employers that participate in funds as well. In light of the in duplum rule, it cannot be considered fair for an employer to pay interest that exceeds its principal debt. Employers are encouraged to lodge complaints against funds that ignore this common law rule.”
Moonstone asked the Adjudicator, Muvhango Lukhaimane, to comment on the implications of the judgment.
“We have taken note of the judgment, and on the face of it, it appears that the in duplum rule does not apply,” she said.
However, she said, an issue in the court papers might be specific to a matter. Therefore, Lukhaimane said, her office is reviewing the papers filed, “to ensure that we may adopt this for general application”.
Her office will endeavour to issue a note by the end of October that will clarify the matter.
She pointed out that the judgment was handed down in August, after the publication of the newsletter.
Background to the High Court case
The first respondent, the Umzimkhulu Local Municipality in KwaZulu-Natal, failed from December 2013 to pay contributions and provide prescribed information to the Municipal Workers Retirement Fund, as required by section 13A(1) and (2) of the Pension Funds Act (PFA) and the fund’s rules.
In 2015, the fund instituted an application to compel the municipality to comply with its statutory obligations – in particular, the furnishing of prescribed minimum information in respect of its members.
The municipality opposed the application, but the fund succeeded in the litigation that followed. In April 2019, it obtained an order from the Supreme Court of Appeal (SCA) to be provided with the prescribed information.
In March 2022, the municipality furnished the minimum required information, which enabled the fund to quantify the arrear contributions. On 13 June 2022, the fund advised the municipality that the arrear contributions plus interest up to 31 October 2021 stood at R4 471 814.91.
The municipality paid R2 231 831.60. The balance of the contributions plus interest remained outstanding.
SCA order ‘changed the nature of the debt’
The fund sought an order from the High Court in Pietermaritzburg compelling the municipality to:
- pay the fund R2 239 991.34; and
- pay interest on the R2 239 991.34 calculated at the rate prescribed in section 13A(7) of the PFA from 31 October 2021 to the date of payment.
The municipality opposed the application. It contended that:
- The interest owed was not owed in terms of section 13A(7) of the PFA. The SCA’s judgment had changed the debt into one that accrued interest at the prescribed rate of interest in terms of the Prescribed Rate of Interest Act.
- It was entitled to a partial exemption from interest because of the delay in computing the debt.
- Whatever interest was due was limited to the capital portion of the debt by virtue of the in duplum
The Municipal Workers Retirement Fund argued that the payment of outstanding contributions is a statutory obligation prescribed by section 13A. The PFA prescribes the rate of interest, and the in duplum rule does not apply.
The interest claimed is regulated by law
The court held that the fund’s claim for interest is regulated by law and does not arise out of a contractual relationship. The PFA imposes liability for the payment of interest, stipulates the applicable rate of interest, and when it accrues. Therefore, it is not mora interest, and it is not interest regulated by the Prescribed Rate of Interest Act.
Judge Sidwell Mngadi said there was no merit in the municipality’s contention that a statutory obligation was converted into an obligation to pay a future judgment debt.
“The applicant [the fund] exercised a power given to it by statute. It is a creature of statute with no other power other than powers granted to it by statute. It exercised its powers to force the first respondent to comply with its statutory obligations. It had no power to convert its statutory power to something else,” Judge Mngadi said.
Conduct Standard 1
The municipality also submitted that the fund’s claim, framed in terms of regulation 33, should be dismissed because the regulation has been repealed.
Regulation 33 has been replaced by Conduct Standard 1 of 2022, which took effect on 20 February 2023.
Section 5(1) of the Conduct Standard states that compound interest on late payments or unpaid amounts:
- must be calculated from the first day following the expiration of the period in respect of which such amounts were payable until the date of receipt by the fund; and
- is prescribed to be the prime rate plus 2%.
The municipality argued that the lower interest rate prescribed in section 5(1) applied to the entire debt.
Judge Mngadi said this argument was without merit.
The court ordered the Umzimkhulu Municipality to pay the fund R2 239 991.34, plus interest on this amount calculated at the rate prescribed in section 13A(7) of the PFA from 31 October 2021 to the date of payment. The municipality was also ordered to pay the costs of the application.
