Are your retirement savings safe in the lockdown?

Many companies that have run into financial difficulties and those whose staff are on unpaid leave, short-time or reduced salaries as a result of the coronavirus lockdown, are looking to suspend or reduce contributions to company-sponsored pension and provident funds. 

If your employer implements such a measure it will compromise your retirement savings and the pension you will derive from it, but it may be better than the company having to close its doors or retrench its staff. 

It may also be a trade-off for you, as an employee who wants to increase your take-home pay if your pay has been cut.

Whatever happens to your employer, however, remember that the money you have already saved in your fund is safe. 

Your retirement fund is a separate legal entity and your savings in it cannot be accessed by your employer regardless of what decisions are made about future contributions to the fund. 

Your savings in pension and provident funds, including umbrella pension and provident funds will also be protected if your employer goes out of business, Saleem Sonday, head of group savings at Allan Gray, says. Umbrella funds are single funds for multiple businesses with standardised rules and a professional board of trustees.

An company that is still functioning is legally obliged to keep paying contributions to your fund. The only exception is when the rules of your fund allow your employer or you to reduce or suspend contributions, when your employer has made an agreement with you do so and the trustees have agreed to allow this, Sonday says.

The Financial Sector Conduct Authority (FSCA) has promised to assist funds which do not have such rules to get these in place quickly.

Muvhango Lukhaimane, the Pension Funds Adjudicator, says while the relief for employers is welcome, it is important that the trustees approving payment holidays remember their duty of care or fiduciary responsibilities to the members and funds. 

Trustees should check if the employer is indeed in financial difficulty by looking at its financial statements, setting a timeframe for the concession and/or a plan to catch up on the contributions after the contribution holiday, she says.  

The adjudicator’s office is aware that some employers that are not in financial distress may also, wrongly, want to use this opportunity, she says. 

If your company does reduce or suspend its contributions to the fund, both it and the fund should inform you.

Your employer should also inform you whether it is paying your group life and disability insurance premiums because if these are not paid, your group life cover will lapse which could have a devastating effect on families who need to claim.

The FSCA, insurers and administrators have all appealed to employers not to let group life cover lapse.  

Sonday says there have been some alarming cases in the recent past where distressed companies have not paid their employees’ retirement contributions and have failed to inform employees.

Employers who do so jeopardise the livelihoods of many families, he says.

Lukhaimane has chided many funds that have failed to help members recover outstanding contributions from employers and pension lawyers have had some successes when attaching the assets of company directors and even municipalities.  

Sonday says you should keep an eye on your fund statements to ensure your employer is paying over your contributions. 

If you or your employer suspend your contributions for a while, it could affect the tax you pay on your earnings because you will no longer enjoy the tax deduction.

If your employer stops paying contributions for you into a group retirement annuity (RA), the fund is in your name and you can continue to contribute as long as you are able and claim the tax back at tax year end, Sonday says.

However, if your employer shuts down or is placed in business rescue, you have the option to either withdraw your savings – which has high tax implications – or preserve your savings, either in the fund or by transferring the money to another fund, Sonday says.

He says while losing your job is a shock that can cause you to make emotionally charged decisions, withdrawing a small portion of your pension or provident fund should be a last resort. 

If you have been investing in a retirement annuity, you will not have access to your funds before age 55 unless you retire early due to ill-health.

Andrew Crawford, retirement fund consultant at Seshego Benefit Consulting, says if your employer temporarily stops contributing to your retirement fund, it will lower your final savings amount and the impact will depend on the amount not paid, your investment returns and your years to retirement.

The impact will be greatest on younger members who will miss out on the compounding growth on those contributions for many years to come. The impact for older members closer to retirement will be closer to the amounts not contributed, he says.

Remember, however, that most South Africans are drastically underfunded for retirement and if you are one of them, you should only compromise your retirement savings if you or your employer have no other choice. 

Before you stop saving for your future, reduce your expenses by cutting out anything that is not essential. 

Remember that right now your savings may be showing a big loss – but that is because financial markets everywhere are showing large losses. If you have a way to go to retirement, your investments should recover and may even derive some benefit from this big dip if you continue to save.