Last year, Personal Finance reported that the Pension Funds Adjudicator upheld the right of five employees of Imperial Distribution to cash in their pension fund benefits after their division was transferred to another subsidiary in the Imperial Group. David Geral
, a director of employment law at Bowman Gilfillian, writes in this article that companies and pension fund trustees should take care to avoid poorly timed transfers of employees from one pension fund to another, because employees can lose out on investment returns and risk benefits, sometimes due to their own ill-informed choice.
When a business, or part of it, is transferred as a going concern, in terms of the Labour Relations Act (LRA) the employees engaged in that business automatically become the employees of the person buying that business. The LRA also provides that the buyer - that is, the new employer - is allowed to transfer its new employees to a new retirement fund, but that transfer, unlike the transfer of the employees, is not an automatic process.
Termination
The change from being a member of the old employer's retirement fund to becoming a member of the new employer's retirement fund can only take place by means of a procedure set out in the Pension Funds Act, commonly referred to as a section 14 transfer.
Almost invariably, the rules of a retirement fund provide that membership of the fund by an employee will terminate when that employee's employment terminates.
If the employee is engaged in a business which is sold as a going concern, in terms of the LRA's provisions that employee's employment with the old employer terminates automatically as soon as the business is transferred, and, as a result, that employee's membership of the old employer's retirement fund also ceases automatically at that time.
This was confirmed by the Supreme Court of Appeal in the recent case of Telkom versus Blom.
In that matter, Blom and some of his colleagues claimed their service with their old employer (Telkom) had terminated in terms of the rules of Telkom's pension fund, and that therefore they should be entitled to withdrawal benefits even though they were automatically taken up into the business of a new employer and were to become members of that new employer's pension fund.
The court agreed, and Blom and his colleagues became entitled to cash out their withdrawal benefits from the Telkom pension fund.
While most employees welcome access to that kind of cash windfall, the problem is that the benefit results in a tax liability.
Secondly, the employees obviously lose the benefit of any possible investment returns that they may have enjoyed in the seller's fund (although, of course, they would also avoid any negative performance in that fund).
Thirdly, if the seller's employment policy was to provide such benefits, employees could also lose out on group life assurance and death and disability benefits during the period until they become members of the buyer's retirement fund.
The trustees of the seller's retirement fund have a duty to ensure that adequate and appropriate information is communicated to the members of the fund informing them of their rights, benefits and duties in terms of the rules of the fund. Communicating to fund members the possibility that they could claim a withdrawal benefit and the possible consequences of doing so, would fall within the scope of the trustees' duty.
Timing the transfer
If the trustees want to avoid giving members of the fund the temptation to withdraw their benefits, or either of the parties to the transaction want to prevent withdrawals from the seller's fund, the timing of the section 14 transfer in relation to the business transfer becomes critical.
The sale of a business between the old employer and the new employer basically requires little more than those two parties' signature to an agreement.
However, the section 14 transfer requires the agreement of the boards of trustees of the two funds involved, as well as the approval of the Registrar of Pension Funds.
As employee benefits lawyers know all too well, the seller and buyer in the sale of business transaction often only begin to consider the arrangements for a section 14 transfer towards the end, or even after the completion of, the business sale transaction.
In many cases, the result is that, because of the time involved in obtaining approval for a section 14 transfer, that transfer of membership between the retirement funds can only take place some time after the employees have already transferred (automatically) from the old employer (the seller) to the new employer (the buyer).
Other provisions
The obvious way of avoiding these consequences is to start making the necessary arrangements at an early stage in the sale of business process so that the receiving fund is in a position to take transfer of the members at the effective date of the business transfer.
Another way is to ensure that the rules of the old employer's fund do not provide for automatic termination of membership when employment ceases, but rather contain appropriate provisions to cater for a transfer of members in the context of a sale of business - for example, by granting the trustees the discretion to extend membership for the period necessary to give effect to the section 14 transfer.
In real life, sellers' retirement funds seldom pay out withdrawal benefits in the circumstances discussed above, but generally only because the transferring employees are usually unaware of their entitlement to a withdrawal benefit, and do not claim it.
When they do, as was the case with Blom and his colleagues in the matter that eventually ended up before the Supreme Court of Appeal, it seems, according to the courts at least, that the fund must pay, with all of the negative consequences that that involves.
This was also the outcome in the case of the Imperial workers who complained to Vuyani Ngalwana, the Pension Funds Adjudicator.
Withdrawal benefits
The Pension Funds Act has an interesting definition of member, which has the effect that a person remains a member of a retirement fund until that person has received the benefits that are due to him or her.
Therefore, in cases where the seller's retirement fund does not pay out a withdrawal benefit that has accrued in favour of a transferring member, that transferring member remains a member of the seller's retirement fund until that benefit is paid.
The transfer in terms of section 14 from the seller's retirement fund to the buyer's fund does not amount to payment of an accrued withdrawal benefit. This should be of concern to the trustees of the seller's fund if there is any difference between the amount of a withdrawal benefit under the rules of that fund, and the amount transferred in terms of section 14, because then either the fund or the transferring member will be losing out.
If the two amounts are equal, the issue is slightly more academic, because even if the section 14 transfer does not equate to a payment by the seller's retirement fund of the benefit that has become due to the transferred employee, that former employee nevertheless has the benefit of the correct amount, the only difference being that the amount is not available as cash, but is tied up in the new fund for so long as the employee remains in the service of the new employer.
Human resources executives and retirement fund trustees should bear in mind these issues when they become aware of a potential sale or acquisition of a business, and in some cases even a sale of assets between two companies.
Employees who become aware of a mis-timed transaction are encouraged not to take advantage of the situation to lay their hands on a cash windfall in the form of a withdrawal benefit. Instead, they should seek appropriate financial advice or approach their employer or their retirement fund trustees for adequate and appropriate information.