May a pension fund withhold payment to a member pending a criminal investigation against the member?

It happens all too often that an employer has to dismiss an employee as a result of theft. In most instances employers would also institute legal action against the ex-employee in an attempt to recover the damages caused. Employers are, however, never quite sure whether the ex-employee would have sufficient funds to pay the damages claim, should the employer succeed in its claim.

Fortunately, the legislature foresaw this issue and made provision for an interim safeguard in instances such as these. In terms of Section 37D(1)(b)(ii)(bb) of the Pension Funds Act (the Act) a fund may deduct any amount that a member owes his or her employer as compensation for any damage caused to his or her employer as a result of any theft, dishonesty, fraud or misconduct by the member, and in respect of which judgment has been obtained against the member in any court, from any benefit payable to the member, and pay such amount to the employer instead.


The interpretation of Section 37D(1)(b)(ii)(bb) has, however, been subject to various court cases and disputes referred to the Financial Services Tribunal.


Until the judgment in Highveld Steel and Vanadium Corporation Ltd v Oosthuizen (hereafter Highveld), there had been uncertainty as to whether a pension fund was entitled to withhold payment in cases where the employer had not yet obtained judgment against the employee.


If a literal approach to Section 37D(1)(b)(ii)(bb) is to be followed it would seem as if a benefit may only be withheld when and if the member has admitted liability in writing to the employer, or judgment has been obtained against the member for the damages incurred.


However, employers frequently argue that the protection of an employer against loss occasioned by employees’ acts of dishonesty, as provided for in Section 37D(1)(b)(ii)(bb), would be thwarted if an employee could simply circumvent the section by resigning and claiming immediate payment of his benefits upon discovery of his criminal conduct and, immediately after receiving payment, do away with it in an attempt to protect the benefit from execution, should the claim against him be successful.


The crux of the matter therefore lies in determining whether the legislature wished for this loophole to exist, or whether the section should be interpreted purposively so as to protect the employer’s interests and give effect to the purpose of the section as envisioned by the legislator.


For that reason it was proposed in the Highveld case that Section 37D(1)(b)(ii)(bb) cannot be interpreted in isolation, and that it must be read with Section 37A(1) of the Act, which contains provisions of general application prohibiting the reduction, transfer or execution of pension benefits.


It was subsequently held in Highveld that when Section 37D(1)(b)(ii)(bb) is interpreted  together with Section 37A(1), it is clear that the purpose of the section is to protect an employer’s right to recover money misappropriated from it. The wording of section 37D(1)(b)(ii)(bb) must therefore be interpreted to include the power to withhold payment of a member’s benefits pending determination or acknowledgment of the member’s liability.


The reality, however, is that when a purposive interpretation of section 37D(1)(b)(ii)(bb) is followed, an employee subsequently found innocent would have been prejudiced while the fund withheld his/her pension benefit.


Therefore, in exercising its discretion afforded by section 37D(1)(b)(ii)(bb), a pension fund must act with care and reasonableness. In this regard the court held in Highveld as follows:


“Considering the potential prejudice to an employee who may urgently need to access his pension benefits and who is in due course found innocent, it is necessary that pension funds exercise their discretion with care and in the process balance the competing interests with due regard to the strength of the employer’s claim. They may also impose conditions on employees to do justice to the case.”


Furthermore, in South African Broadcasting Corporation SOC Ltd v South African Broadcasting Corporation Pension Fund and Others (hereafter SABC), which approved of the Highveld approach in interpreting section 37D(1)(b)(ii)(bb) purposively, the court held that if an employer can prove prima facie that the employee might be liable for damages and that the employer has a prima facie right to recover the losses it incurred is directly attributable to the employee’s behaviour, the pension fund may withhold payment in terms of Section 37D(1)(b)(ii).


Pension funds should, however, be aware that the discretion afforded to them must be exercised with due diligence and take into account various different factors. In Tleane v The Pension Fund Adjudicator and Others, the Appeal Board of the Financial Services Tribunal cautioned pension funds and held that the withholding of a pension benefit is unjust, oppressive and inequitable where the actions by the fund cannot be sustained even under a liberal and purposive interpretation of Section 37D(1)(b)(ii).


The appeal board held that a material factor to be taken into account in making a value judgement is the nature of the decision and its effect on the applicant. The competing interests of the employer and the employee need to be taken into account with specific regard to the strength of the employer’s claim against the applicant’s prejudice.


©VDT Attorneys


June 4, 2020

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