Furloughs, salary reductions and reduced contributions – how COVID-19 could impact your provident fund

Provident funds are one of the most important savings mechanisms for most fully employed South Africans, accumulating a nest egg that is meant to sustain an employee when they retire. The ease and simplicity of contributing to a provident fund as an employee means that, over several years, many people build up retirement savings sometimes without even realising it. It’s easy to ‘forget’ about one’s provident fund – the contributions are deducted from your pay before it reaches your bank account, and oftentimes it’s a case of not missing what you never had.

However, as the economic impact of COVID-19 and its resulting lockdown grows by the day, furloughs and reduced salaries/working hours are becoming increasingly commonplace. What impact does this have on an employee’s provident fund contributions? And, if you’re really battling financially, can you suspend your contributions for a period?

Walter van der Merwe, Chief Executive of Fedgroup Life, answers some key questions around this.

1. Question: If you are contributing to a provident fund via your employer, is it possible/legal to pause your payments temporarily, and resume them at a later date?

Answer: The Financial Sector Conduct Authority (FSCA) has recognised that employers and employees who are financially distressed, in light of the unprecedented financial challenges that COVID-19 presents, may impact employers’ and employees’ ability to pay their contributions.

As such, if employees are not able to work during the lockdown period, and are not paid in respect of that period, then no contribution will be payable to the fund by either the employer or the employee. Similarly, if remuneration is reduced, both parties’ contributions to an employee’s provident fund would also be reduced.

The rules of a provident fund also provide for a period of absence, such that no or reduced contributions are payable when employees are absent from work. An employer seeking relief from its contribution payment obligations should get in touch with their fund administrator and make this request in writing. If the request is granted, the employer must communicate this contribution holiday to affected employees. Trustees are required to have evidence that employers have communicated this to affected employees.

2. Q: Are there any rules that apply to the relaxation of Section 13A of the Pension Funds Act?

A: Section 13A (3) of the Pension Funds Act provides that the full contributions payable to the fund in terms of the rules are payable by no later than seven days after the end of the month for which such contributions are due and payable.

Section 13A of the Act requires employers participating in funds to pay full contributions in respect of their employees/members of the fund within the stipulated time-frame. However, most funds have rules that make provision for temporary absence from work (with or without pay) or a break in service (in instances where employees are not working) and/or postponement of contribution payments and/or reduction of pensionable service (in respect of employees who are working reduced hours).

3. Q: When would provident fund contributions resume, if they are paused for a period?

A: Employers will resume their contributions when the company is operational again and able to pay employees their salaries. While the employee is absent from work and contributions are paused, the employer will only have to pay the contributions required by the fund to provide for the costs of the fund’s administration and premiums payable for death and permanent disability cover provided through the fund.

4. Q: Should employers be offering provident fund contribution ‘pauses’ during the pandemic?

A: Absolutely, based on the financial distress that the employer is experiencing. It is better to suspend the contributions for a period to ensure that the company doesn’t fail. When the employer is operational again at a later date, they can resume contributions to the fund.

5. Q: Would you recommend that people use this option and pause their provident fund contributions? (If so, in what cases would it be recommended, and if not, why not?)

A: I would recommend that contributions are suspended to ensure that the company does not fail. If the company should fail, employees not only lose their fund contributions but their livelihoods too.

6. Q: Some companies are reducing staff salaries during or as a result of the impact of lockdown on their businesses (eg, asking staff to work four instead of five days a week, resulting in a 20% cut). How would this impact provident fund contributions?

A: Contributions to the fund by both the employer and employee will be reduced proportionately, meaning that contributions will also reduce by 20%.

7. Q: Some companies are temporarily retrenching staff, to allow them to collect UIF benefits during the pandemic. The idea behind this is, of course, that companies will re-employ furloughed staff when they can. How would this affect a furloughed employee’s provident fund contributions?

A: The options that normally apply to employees still apply. This means that they will be able to withdraw their retirement savings or leave them in the fund – ie, preserving their retirement savings (which is always the recommended option) or transferring the monies to another fund.

Should they be re-employed at their company, they would re-join the fund and start contributing to the fund as they did previously.