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Pension Benefits – Permissible deductions where fraud is alleged

A recent determination by the Financial Services Tribunal concerned the PFA’s order to release withdrawal benefits to employees. The employer challenged this decision as it originally withheld the benefits based on a disciplinary inquiry into allegations of soliciting and taking bribes against the two employees.

What does the Pension Fund Act say?

Section 37D(1)(b) of the Pension Fund Act provides that a registered fund may deduct any amount due by a member to his employer on the date of his retirement or on which he ceases to be a member of the fund, in respect of compensation (including any legal costs recoverable from the member in respect of any damage caused to the employer by reason of any theft, dishonesty, fraud or misconduct by the member) and in respect of which –

The member has in writing admitted liability to the employer; or
Judgement has been obtained against the member in any court from any benefit payable in respect of the member or a beneficiary in terms of the rules of the fund.

The employer’s rationale for withholding benefits

The specific pension fund had agreed to withhold their two employees’ benefits pending the determination of both the civil and criminal proceedings instituted by the applicant against them. In the civil proceedings, the employers claimed for the recovery of losses it suffered as a result of their alleged corrupt activities.

It was specifically highlighted that it is the objective of section 37D(1)(b)(ii) of the Act to protect the employer’s right to pursue the recovery of money misappropriated by its employees. Although that section provides for withholding of benefits where judgment has been obtained, it is settled law that the section includes the power to withhold payment of a member’s pension benefits pending the determination or acknowledgement of such member’s liability.

The original reasoning of the PFA

The pressing issues in dispute concerned the PFA’s finding that the loss and damages suffered by the applicant (the employer) was not the “type of damages” contemplated under the Pension Funds Act, which underpins the questioned decision. In this specific case the employers had to appoint a forensic investigator, whose services cost more than a million Rand.

The PFA, in interpreting section 37D(1)(b)(ii) was of the view that the employer had to demonstrate actual financial loss. In these instances it found that the employer suffered no financial loss. More particularly the PFA stated:

“There is no doubt that the alleged conduct by the complainant amounts to fraud and dishonesty. However section 37D(1)(b)(ii) of the Act does not apply in this instance as there is no evidence of financial loss suffered by the third respondent as a result of the complainant’s alleged conduct. Section 37D(1)(b)(ii) of the Act is there to protect the third respondent’s patrimonial from diminution by the complainant’s misconduct and to allow an appropriate set off against the retirement benefit.”

Tribunal findings

The employer pointed out that “compensation” should not be construed as actual financial loss and extends beyond legal costs. The costs of the forensic investigation certainly constituted “loss” incurred by them.

The Tribunal was of the view that there were issues the PFA was required to contemplate upon consideration of all the material facts which were not placed before her previously.

It was also noted that the extent of the loss was not properly ventilated by the Fund. In particular, whether the costs incurred in respect of the forensic investigation were justified and whether such expenditure constitutes a “loss” in terms of the Act.

The Tribunal remitted the matter to the PFA for reconsideration in order to make an informed decision. It should seek representations from both the applicants and the Fund on the aforesaid issues as part of its reconsideration.

Click here to download the Tribunal Case.

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