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Pension backed housing loans offered by commercial banks are typically based on an agreement between the bank the fund and the employer. The main responsibilities of the parties are as follows:
The employer is required to

  • assist the employee to complete the documentation required by the bank;
  • ascertain that the application is consistent with section 19(5) of the Pension Funds Act;
  • deduct the monthly loan repayment from the employee’s salary;
  • pay over to the bank its employees’ monthly loan repayments;
  • inform the bank of the termination of service of the employee.

The bank is required to

  • ascertain the affordability of the loan to the employee;
  • disburse the loan amount approved;
  • account for interest and loan repayments.

The fund is required to

  • ascertain that the loan applied for does not exceed the maximum loan as agreed between the parties;
  • record the fact that the member has taken a loan on the member’s record;
  • obtain the outstanding loan balance from the bank at the member’s date of exit when it is informed of the member’s exit from the fund;
  • pay the outstanding loan balance to the bank upon a member’s exit.

Since pension funds typically outsource the administration of their fund, the fund’s obligations in terms of the agreement with the bank and the employer will have to be transferred to the fund’s administrator.

The meticulous reader might already have realised from the above exposition that the fund is obliged to repay the outstanding loan balance to the bank. But what if there is a shortfall between the amount repaid to the bank and the member’s available capital? There are a few reasons for a possible shortfall, such as negative returns on the pension fund investment, arrears tax deducted from the benefit or the benefit having been paid out without having deducted the outstanding housing loan. This risk is borne by the fund!

There can be a number of reasons for the failure to have deducted the outstanding housing loan balance from the member’s benefit. The member record may not have shown this member to have had a loan. Since such entry on a member’s record is not the result of a ‘book entry’ by the fund, it is utterly dependant on manual intervention. A member’s details may have changed, either through marriage or because the member has two different identity documents, not such an unusual occurrence, or the identification number allocated by the bank was incorrectly recorded by the fund.

Another risk often overlooked in ignorance of the legal pre-requisites, is the fact that the Labour Act is pretty prescriptive and restrictive with regard to when an employer may make deductions from an employee’s salary and how much it may deduct, if anything. The fund may thus have happily entered into an agreement with the bank and the employer only to find that the employer is legally prevented from making the required deductions from members’ salary.

In an event where the fund incurred a loss because of a shortfall between the outstanding loan balance it was required to pay over to the bank and the available capital, the fund would have to make an attempt to recover the shortfall from the exited member. The prospect of success then depends on what agreement the fund has with the member and what recourse it offers the fund for such instance. In our experience, funds mostly do not enter into a separate agreement with their members who borrow for housing purposes and are reliant on the documents the bank has compiled in terms of the housing loan scheme. These documents are typically only concerned about the bank’s interests and offer little respite to the fund. Banks have also not been accommodative at all to fund’s requests for better protection of their interests.

Funds that grant pension backed housing loans are advised to ascertain that repayment deductions are permissible in terms of the Labour Act and to consider entering into a separate agreement with borrowers that will afford funds the necessary recourse for the event of a member or former member not repaying the outstanding housing loan balance.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

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