Fund rapped for not giving a member a hearing before deciding to withhold his withdrawal benefit

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The Deputy Pension Funds Adjudicator has ordered a retirement fund to pay a withdrawal benefit to a member who, along with two others, was criminally charged because of allegedly fraudulent conduct that cost the employer R4 million.

In his determination, Naheem Essop reprimanded the Fedex Express South Africa Retirement Fund for withholding the benefit without affording the member an opportunity to make representations to it as to why the benefit should not be paid.

The determination highlights the Adjudicator’s insistence that funds adhere to the requirement for procedural fairness when making decisions about withholding a benefit in terms of section 37D of the Pension Funds Act (PFA).

Background to the complaint

The fund’s administrator told the Adjudicator that the complainant, “AM”, resigned from Fedex Express South Africa (Pty) Ltd on 10 October 2022 following internal investigations into allegations of fraud against him and other employees.

The administrator said AM’s employment duties included clearing imported consignments. It was alleged that for at least a year AM misrepresented information about imported goods and used incorrect tariff codes and customs values. This conduct resulted in the underpayment of duties and value-added tax to the South African Revenue Service and the incorrect commodity codes being declared to Customs. The incorrect revenue declarations resulted in Fedex being fined and penalised.

The administrator said Fedex laid criminal charges against AM and two others as a result of its suffering a financial loss of R4m. Two cases were opened for fraud and contravention of the Customs and Excise Duties Act.

Fedex ask the administrator to withhold payment of AM’s withdrawal benefit, in terms of rule 31 of the fund’s rules. A resolution was signed by the trustees of the fund on 28 October 2022, and a further resolution was taken on 26 October 2023.

The administrator informed AM on 31 October 2023 of Fedex’s request to withhold his benefit. He filed a complaint with the Adjudicator the same day. AM submitted that because he was not found guilty of the charges against him, his withdrawal benefit must be paid out.

In a further submission on 7 March 2024, the administrator said a criminal case was instituted against AM and two others. Fedex had advised the fund that it was in the process of initiating civil proceedings against AM.

Procedural requirements and duties

The determination, handed down in March, said the procedures and duties of retirement fund boards when deciding whether to withhold a member’s benefit were articulated in SA Metal Group (Pty) Ltd v Jeftha and others and Highveld Steel and Vanadium Corporation Ltd v Oosthuizen. These include:

  • The board must carefully scrutinise the employer’s claims against a member’s benefit. This includes thoroughly evaluating the validity and strength of the employer’s claims.
  • The board must balance the competing interests of the employer and the member. This involves a fair and impartial consideration of both sides.
  • The member must be afforded an opportunity to present his or her case before the fund takes a decision.
  • The board must apply its mind appropriately, impartially, and in a balanced manner when deciding to withhold a benefit.
  • It is not enough for the board to be satisfied that the employer’s allegations, if true, would show damages from the member’s dishonest conduct. There must be more substantial grounds for withholding the benefit.
  • The board must avoid simply rubber-stamping the employer’s request to withhold the benefit without investigating the merits of the allegations and the potential financial prejudice to the member.

Essop said these requirements were not met in the matter at hand because the fund decided to withhold the benefit payment without affording AM an opportunity to make representations.

Furthermore, civil proceedings had not been instituted when the fund decided to withhold the benefit in October 2022. According to the administrator, the employer initiated civil proceedings in March 2024. The submissions indicated that Fedex relied solely on the pending criminal proceedings in respect of the withholding.

Essop drew attention to DSV Flexi Retirement Fund (Pension Section) v Pillay and Others, where the Financial Services Tribunal held that criminal proceedings alone are not sufficient to justify the withholding of a member’s benefit. In Fundsatwork Umbrella Provident Fund v Ngobeni and Another, the Tribunal held that a fund is not entitled to withhold payment because a criminal case has been opened, or even upon conviction.

The benefit accrued to AM when he elected to receive a withdrawal benefit. In terms of section 7C(2)(f) of the PFA, the fund owed him a fiduciary duty in respect of his accrued benefit.

“The fund failed in its duty by depriving the complainant of his right to his accrued benefit when it decided to withhold his benefit without hearing from him. In this matter, the board of the fund acted in breach of their fiduciary duties towards the complainant. It failed to comply with basic procedural requirements before exercising its discretion to withhold,” Essop said.

Furthermore, the fund’s rules require there must be legal action undertaken by the employer, and there are currently no such legal proceedings.

Essop said funds are required to act in a manner whereby their impartiality cannot be doubted in matters concerning the withholding of benefits. This is because the fund owes a fiduciary duty towards both the member and the employer.

“It is therefore of concern to the Adjudicator when, in matters such as these, the fund’s administrator submits a response on behalf of both the fund and the employer. The immediate perception created is that the fund’s impartiality has been compromised,” he said.

Essop ordered the fund to pay AM’s withdrawal benefit, including investment returns, calculated from 10 October 2022 to the date of payment, within six weeks of the determination.