Factors For Consideration By Trustees When Withholding A Member’s Pension Fund Benefits – Employee Benefits & Compensation

Various court decisions have established parameters regarding
the withholding of a member’s benefit by a pension fund, under
section 37D(1)(b)(ii) of the Pension Funds Act 24, 1956
(“the Act“). In the recent judgment of
Gammon v University of Johannesburg Pension Fund, the
Pension Funds Adjudicator had to determine whether the UJ pension
fund board had complied with its duties before deciding to withhold
an employee’s benefit in terms of section
37D(1)(b)(ii) after the member was dismissed from his
employment due to gross negligence in the performance of his
duties. Additionally, whether the board of the fund correctly
exercised its discretion with care and, in the process, balanced
the competing interests of the member and his employer, having
regard to the strength of the employer’s claim for damages
against the former employee.

In terms of section 7C(2)(a) of the Act, the board of a fund
must take all reasonable steps to ensure that the interests of
members in terms of the rules of the fund and the provisions of the
Act are protected and observed. The general rule is that a
member’s pension fund benefits are not executable. There are,
however, limited exceptions to this rule.

Section 37D of the Act outlines instances when a fund may
withhold or deduct an amount from a member’s pension fund
benefit. The most contested of these instances is in terms of
section 37D(1)(b)(ii), which allows a fund to withhold
and/or deduct any amount due to a member in favour of the employer
for compensation in respect of damages caused to the employer by
the member’s theft, dishonesty, fraud, or misconduct.

In this case, the member was dismissed by his employer for gross
negligence. It also transpired following ongoing investigations
that there was possibly fraud or theft too. Before his dismissal,
the employer conducted an investigation resulting in a disciplinary
hearing with the employee, who was subsequently found guilty of
gross misconduct and dismissed.

The member contended that section 37D(1)(b)(ii) should
not apply as the employer had not made out a prima facie
case against him in respect of damages that he allegedly caused
arose due to his alleged theft, dishonesty, fraud, or
misconduct.

Certain conditions must exist for the fund to withhold or deduct
an amount from a member’s pension benefits:

• Firstly, the fund’s rules must allow for withholding a
  member’s benefits. In Municipal Employees Pension Fund v
  Mongwaketse, the court held that if a fund’s rules do not
  afford it the legal power or capacity to act, any purported act by
  the fund is ultra vires and accordingly, null and void.
  Simply put, its actions are invalid. Although a plain reading of
  section 37D(1)(b)(ii) does not provide specifically for
  the withholding of a member’s pension fund benefits, the court
  in the case of Highveld Steel and Vanadium Corporation Ltd v
  Oosthuizen (“Highveld matter“) held
  that such an interpretation would render the protection afforded to
  the employer by section 37D(1)(b) meaningless, a result
  which plainly cannot have been intended by the Legislature. To give
  effect to the manifest purpose of the section, its wording must be
  interpreted purposively to include the power to withhold payment of
  a member’s pension benefits pending the determination or
  acknowledgement of such member’s liability.




• Secondly, a fund must investigate and consider both sides
  before deciding whether to withhold the pension fund benefit. The
  process of balancing the competing interests is achieved by
  assessing the potential harm that the employee will suffer if
  benefits are withheld or deducted, as compared with, or balanced
  against the potential harm to the employer if the remedy is
  denied.




• Thirdly, the board of the fund must scrutinise claims made
  against employees’ benefits and weigh the competing interests
  of the parties after allowing the member to place his case properly
  before the fund. It is not sufficient for the board to consider
  only the evidence placed before it by the employer which, if true,
  would show damages arising from dishonest conduct by the employee,
  to meet the test set by the Supreme Court of Appeal in the
  Highveld What is required is for the fund to invite the
  member to comment on the case put up by the employer. If the member
  has a cogent answer, it will be more difficult for the fund to
  accede to the employer’s request.

In the case of criminal prosecution of the member, it is
essential to remember the ruling in DSV Flexi Retirement Fund
(Pension Section) v Pillay and Others, where the final
decision affirmed that the mere institution of criminal proceedings
against a member is not a sufficient reason to withhold their
benefit.

The Pension Fund Adjudicator dismissed the member’s
complaint as she was satisfied that the fund procedurally
considered the matter fairly. She affirmed that she was not
required to pronounce on the merits of the matter, i.e. whether the
member had committed theft, an act of dishonesty, fraud, or
misconduct. Her remit was to determine whether the process followed
by the fund passed muster.

The fundamental principles of this decision are:

• A pension fund may validly withhold a member’s benefits
  provided it has considered the matter with procedural fairness and
  allowed each party to make representations.




• A pension fund may not simply withhold a member’s benefit
  at the employer’s behest but must investigate the matter to
  ensure both parties are heard, which is a fundamental principle of
  our law — the audi alteram partem




• Additionally, employers should note that simply initiating
  criminal proceedings is insufficient to justify a pension fund
  withholding a member’s benefits.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.