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Pension-backed housing loans offered by commercial banks are based on an agreement between the bank, the fund and the employer. The primary responsibilities of the parties are as follows:

The employer is required to

  • assist the employee in completing 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 the employee’s service.

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 refunded 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 being paid out without deducting the outstanding housing loan. The fund bears this risk!

There can be several 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 the fund’s book entry, it is utterly dependent on manual intervention. A member’s details may have changed, either through marriage or because the member has two different identity documents, which is not unusual, or the fund incorrectly recorded the identification number allocated by the bank.

Another risk often overlooked in ignorance of the legal prerequisites is that the Labour Act is pretty prescriptive and restrictive regarding when an employer may make deductions from an employee’s salary and how much it may deduct if anything. Thus, The fund may happily agree with the bank and the employer only to find that the employer is legally prevented from making the required deductions from members’ salaries.

If 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 attempt to recover the shortfall from the exited member. The prospect of success then depends on the fund’s agreement with the member and what recourse it offers the fund for such an instance. In our experience, funds mostly do not enter into a separate agreement with their members who borrow for housing purposes and rely on the documents the bank has compiled regarding 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 accommodating in considering requests to better protect the funds’ 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 in 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. RFS 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 RFS.

 

 

 

 

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