Last week we reported that employees of the troubled newspaper ThisDay lost their group life and disability benefits due to the failure of their employer to pay pension fund contributions over to the umbrella funds.
Group life and disability benefits are normally equal to about two or three times your annual pensionable salary. This is a lot of money and can determine the financial stability of a family if the breadwinner dies or becomes disabled.
I raise this issue for a number of reasons. The main reason being to again reinforce the importance of life assurance, both group life and disability assurance, as well as individual risk assurance. Risk assurance is far more important than investments.
At the weekend I was working on a Personal Finance magazine article about whether to invest directly in shares or in unit trust funds. I asked numerous people in the financial services industry for their views.
Donny Bruce, the segment marketer for Old Mutual Unit Trusts, prefaced his remarks by saying, "It is advisable that only those with disposable income should consider investing in unit trusts. Investors need to be sure they have adequate life cover, disability cover, medical scheme cover and have catered for their retirement needs."
This is very sound advice. There are sadly too many people who have not made adequate provision for their dependants in the event of their death or disability.
The financial services industry is partly to blame for this sad state of affairs, because most life companies concentrate on investment products these days (probably because they generate better profits), while selling risk life assurance is often sidelined.
To highlight the importance of risk life assurance (as opposed to investment life assurance), Personal Finance has again teamed up with Discovery Life to present Life Focus, an annual seminar on life assurance.
Discovery Life does not sell investments products, but concentrates on selling insurance against death and disability. This means the company really focuses on risk life assurance .
The Life Focus seminars take place in Johannesburg on Monday and in Cape Town on Tuesday, and there are still places left if you wish to attend.
Ask yourself a simple question: "Can my assets less my liabilities, plus any life assurance, provide the capital that would be required to pay for my and my family's upkeep if I am disabled tomorrow; and for my family's upkeep if I die tomorrow?"
If you can not answer that question, get a financial adviser in immediately to do the calculations for you and then take out the appropriate amount of risk life insurance.
Only source of savings
At the annual convention of the Actuarial Society of South Africa this week, Jan Mahlangu, the retirement co-ordinator for the Congress of South African Trade Unions, said the only savings that most people have is what is in their retirement funds. He might have added that the only life assurance many people have is the group life and disability assurance that comes as part of the package of most retirement funds.
It is for these reasons that the experience of ThisDay's employees is significant. And, unfortunately, ThisDay is not an isolated case. Other employers are deducting pension fund contributions from employees and not paying them over to the fund - and worse.
There are also many people who use group life assurance as the core of their life insurance, adding individual policies to make up any shortfall.
Most of us are blissfully unaware that if our employer fails to make timely contributions to our fund, on our behalf, in most cases the assurance benefits fall away within 15 days of the first of the month.
When the administrator of ThisDay's umbrella retirement funds reported the non-payment of contributions to the Financial Services Board (FSB) and the office of the attorney-general, their response could be described as carefree or nonchalant.
This is not good enough. If errant employers see that they are able to get away with what fundamentally can amount to fraud, more will do so.
Action must be swift and tough. If the legislation is not strong enough to enable this, then it must be toughened up. If not, the credibility of the entire pension fund industry will be undermined to the disadvantage of all.
In the case of ThisDay, the FSB has given Personal Finance the assurance that action will be taken to recover the money. Hopefully it will succeed.
But, as with all life assurance, the responsibility lies with you to ensure you are properly covered. This means that you must be sure that you are also keeping an eye on your employer, if you are a member of any employer-sponsored fund or umbrella fund.
The ThisDay employees who have lost their group life and disability benefits were members of two open umbrella retirement funds.
An open umbrella fund is a fund to which numerous employers can sign up on behalf of their employees, as opposed to a fund that is managed for one employer group only.
Chris Bösenburg, a retirement fund consultant, quite correctly pointed out that this problem is not restricted to umbrella funds, but can also occur with segregated employer funds.
Bösenburg says if your employer uses your retirement fund to "obtain a loan" it could face tough punitive action, including having to pay high interest on the outstanding amount.
If the contributions due are less than R10 000, interest of 22 percent is added from the end of the month in which the salary deduction was made, and if the contributions due are more than R10 000, the interest charged is 19 percent.
In terms of the Pension Funds Act, your employer must pay the total contributions to the fund administrator at the end of the month. But, the FSB allows seven days grace for payment of contributions before interest is payable.
Bösenburg says the rules of your fund may, in rare circumstances, specify a different date by which contributions must be paid.
A problem, he says, is that many employers regard the seventh of the following month as the due date and make no effort to pay by month end. The trustees of your fund must make sure that contributions are paid at the start of the new month and not seven days into the new month.
Bösenburg says the interest your fund loses as a result of ongoing delays in payment during your working life "will not be insignificant".
Another problem, Bösenburg says, is that some administrators or investment managers only permit investment at the beginning of the month.
So, if your pension fund contribution is only paid on the seventh, it will not be invested in the fund's portfolio, potentially earning a higher return, but rather in an interest-bearing account which is taxed at 18 percent.
The administrator of your fund is obliged to report non-payment of contributions, or any shortfall in contributions, to your fund trustees. The trustees, in turn, must then instruct the administrator to inform you and other members of the fund that contributions are outstanding.
Your trustees have the discretion as to when this report must be made. However, your trustees have a fiduciary duty to make sure that you are notified within a reasonable period. A "reasonable period" is not defined, but you should expect it to be weeks rather than months.
If contributions have not been made in 90 days following the deadline for payment (the first of the month), the administrator must report the matter to the Director of Public Prosecutions within 14 days. Your administrator must simultaneously advise the Registrar of Pension Funds, at the FSB.
Your fund administrator should also report a contravention of the Pension Funds Act "with specific reference to the employer in default" to the Commercial Branch of the South African Police Service, nearest to the fund's registered address.
Ultimately, it is up to you, as a member of a retirement fund, to protect your interests by ensuring that your trustees do their duties and follow the law. Your trustees, in turn, must ensure that the administrator of your fund acts accordingly at all times.