The scenario here is that an employer has acquired another company.  It was agreed with the acquired company that all new employees will particpate in the buyer’s pension fund while all existing staff as at date of acquisition will remain members of the ‘seller’s’ pension fund. The question arising is whether such an arrrangment is permissible.

To answer this question, there are 4 matters that need to be considered, namely the the Pension Funds Act, the Income Tax Act, the rules of the fund and the reassurance arrangement.

1. The Pension Funds Act – The Pension Funds Act does not provide any guidance on such a scenario other than requiring that a fund has a set of rules and complies with its rules. One would thus have to refer to the rules to determine whether the arrangement is consistent with the rules and by implication also with the Pension Funds Act.
2. The rules of the fund – Most pension fund rules would require that the employer and the fund must approve the participation of an employer. The acquired company should thus submit an application to the fund to participate in the fund. Most rules would have a definition of ‘eligible employee’. The implication of the definition is that once an employee falls into the defintion, the employee is obliged to participate and as long at he/ she does not fall into the definition the employee cannot participate. This definition may allow for different categories of employees; normally these are ‘as defined by the employer’, or may allow the fund to waive the participation requirement for a particular group of employees. In this scenario one category can be those members of the acquired company on date of acquisition and the second category could be all employees joining the acquired company after date of acquisition. This would meet the definition of eligible employee, and would thus be in compliance with the rules.
3. The Income Tax Act – This Act requires compulsory membership of all class or classes of persons specified in the person’s conditions of employment and would then support any such provision in the rules of the fund as referred to in 2. The requirement is that the two employee categories of the acquired company have been clearly defined by the employer and that membership of the two funds is strictly observed on the basis of the two categories.
4. The reassurance arrangement – The reassurance arrangement is typically based on what the rules provide and would typically only prohibit voluntary participation to avoid anti-selection, which the insurer’s risk ratings pre-suppose for any compulsory group scheme. If it were only a question of different classes participating in different funds, it is still compulsory participation per defined class of membership.

Conclusion:

The crux of the matter is the definition of ‘eligible employee’ and one needs to check whether this provides for the employer defining different membership categories or the rules providing for the trustees waiving the eligibility requirements for a particular group of employees. If so the above arrangment is permissble. To cover the fund, it is important that the admission of the acquired company on those terms is confirmed by way of a resolution. From the acquiring employer’s side it is advisable that the participation of the acquired company on the basis of the above arrangement is also confirmed by way of a resolution and that the relevant employees’ conditions of employment clearly define in which fund the employee participates.

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.