Although the Pension Funds Act of 1965 normally prevents employers from depriving their employees of their retirement benefits, it is still possible if the employee causes damage to the employer.

Typically, pension benefits are accessible to employees as soon as they are entitled to them, such as when the employee is fired, reaches retirement or when the relevant retirement fund is terminated.

However, according to section 37D(1)(b)(ii) of the Act, a retirement fund may deduct from a member’s retirement benefit any amount that the employee owes to the employer at retirement or when the retirement fund terminates.

This can, however, only occur if the employee has caused financial damage to the employee via theft, fraud, dishonesty or dishonest misconduct, which the employee has admitted to in writing or the employer has obtained a judgment.

“At this point, employers need to be vigilant and quick. It is easy to see that employees will be very reluctant to provide written admission to the employer entitling the withholding or deduction of retirement benefits,” Kenneth Coster, Nicolette van Vuuren and Eugene Chaphi from Webber Wentzel said.

“In our experience, employers may still be in the process of investigating the loss it has suffered when the employee is dismissed, resulting in a delay in obtaining a judgment against the employee.”

If the employee gets access to their retirement benefits, it is unlikely that the employer will get those monies back.

The experts looked at the case Highveld Steel & Vanadium Corporation Limited v Oosthuizen 2009(4) SA 1 (SCA) (the Highveld case), where an employee was fired on charges of bribery, theft, fraud, and dishonesty and attempted to take out their retirement fund benefit.

However, Highveld asked the retirement fund to withhold those benefits pending legal action taken against the employee. The court had to decide if the retirement fund could withhold the retirement benefit.

The court noted that section 37D(1)(b)(ii) of the ACT was intended to protect the employer’s right to recover funds misappropriated by an employee, adding that an employer would struggle to obtain a judgment against an employee before their firing due to delays in the justice system.

“That makes it difficult for an employer to enforce an award made in its favour by the time judgment is obtained against the employee,” the experts said.

“The court concluded that, to give effect to the purpose of section 37D(1)(b)(ii) as described above, its wording must be interpreted purposively to include the power and discretion to withhold payment of a member’s retirement benefits pending a judgment being obtained or acknowledgement by the member of liability.”

The court said that a fund’s trustees must weigh the rights of the employers to compensation and the employee who may be proven innocent and need access to their pension benefits.

Despite the Highveld case confirming that an employer can request a retirement fund by withholding the benefits to an employee who has committed a financial crime pending a judgment against the employee, some requirements still need to be met:

• The employee must have caused damage to the employer;

• The damages must have been caused as a result of the employee’s theft, fraud, dishonest misconduct or dishonesty;

• The employee must have ceased to be a member of the relevant retirement fund;

• The employee must either have admitted liability to the employer in writing OR the employer must have commenced proceedings against the employee to recover the damages the employee has caused to the employer. In this regard, the following conditions would apply:
  • The employer must have a prima facie case against the employee, together with a right to recover the losses it has suffered
  • the losses suffered by the employer must be directly attributable to the employee’s dishonest conduct;
  • The employee must be allowed to state their case in writing to the retirement fund;
  • the amount that the employer requests be withheld cannot exceed the amount for which the employer is holding the employee liable;
  •  there cannot be unreasonable delays by the employer in instituting proceedings against the employee; and
  • The employer should keep the retirement fund updated on all progress in its case.

“Whilst the Highveld case provides some relaxation to retirement funds, employers would be well-advised to institute proceedings against the employee as soon as possible and actively to pursue such claim,” the experts said

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