In terms of section 96 (2) of the Companies Act, 2004, “A company must not make any payment in whatever form to its shareholders if there are reasonable grounds for believing that – (a) the company is, or would after the payment be, unable to pay its debts as they become due in the ordinary course of business; or (b) the consolidated assets of the company fairly valued would after the payment be less that the consolidated liabilities of the company.”

Section 429 of the Companies Act holds directors personally liable, in the event of winding up or judicial management of a company, for any delinquency, including breach of faith or trust or carrying on business recklessly or committing an offence under the law of insolvency, to restore property and to compensate the company in the event of having conducted the business fraudulently. Section 431 goes further to apply criminal provisions to insolvency contraventions while section 432 provides for the prosecution of a director.

So as an officer or director of a company, breach of faith or trust, carrying on business recklessly or committing an offence under the law of insolvency can have serious consequences.

But what is the relevance of this for pension funds and pension fund trustees? Well it is common knowledge that a number of SOE’s are struggling to survive, having been used to budgetary support by government which has been cut or reduced substantially as the result of government’s financial predicament. It has been reported in the media that as the result of the reduction of the government subsidy some SOEs are failing to meet their contractual liability towards their retirement fund.

So what happens if an employer stops contributing to its retirement fund as required in terms of the rules of the fund? Firstly, the assets of the fund do not grow by the contributions that would have been paid. Secondly, the liabilities of the fund, more specifically members’ fund credits, will continue to grow as if contributions had continued as provided by the rules. Evidently, the fund will be accumulating a shortfall equal to the contributions that should have been paid but were not paid by the employer, unless the fund has reserves that may be used to fund this shortfall in terms of the rules of the fund.

Where a fund has reserves that may be applied to fund such contribution shortfall, it may have a grace period, but the principle is that the liabilities of the fund will exceed the assets of the fund. Where the fund does not have any reserves to be applied another concern for members will be that the fund cannot pay its service providers including the insurance companies supposed to provide life and disability cover. This may lead to the service providers suspending their services to the fund and members being without life and disability cover. This may have serious consequence for those leading the organisation, certainly under the Companies Act as elaborated above.

While it is not uncommon for directors’ being held liable in their personal capacity for any breach of faith or trust or carrying on business recklessly or committing an offence under the law of insolvency, it seems that neither in Namibia nor in SA have any of these principles been tested yet with regard to retirement funds. However, the distinctions drawn between retirement funds and companies become ever less pronounced. As we know the NAMCODE and King IV are nowadays commonly applied to both types of legal entity.

It therefore cannot be a foregone conclusion that trustees may not be held liable in the same way as company directors and officer can be held liable under the Companies Act.

Trustees whose funds are in the situation where an employer no longer meets its obligations to make contributions to the fund as provided by the fund’s rules must be cognisant of the potential risk they may face should members challenge their performance in this regard. Where the employer does not contribute at all, the rules may already provide that no contributions will be allocated to members’ fund credits and death and disability benefits will be suspended. This of course constitutes a reduction of benefits with consequences under the Labour Act. Often the employer may also not make the full contributions but only partial contributions in contravention of the rules. If the rules do not provide for this, they may be amended to provide that the amount received shall first be appropriated to pay the service providers and the balance, after providing for insurance premiums calculated on a proportionally reduced pensionable salary, to be allocated to each member in proportion to their pensionable salary. It will be appropriate for the employer to be responsible for paying interest on any outstanding contributions. Trustees should also consider terminating the fund in order to avoid a situation where early leavers receive their full benefit while the last remaining members have to carry the shortfall.

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.