In February 2021, the Financial Services Tribunal (“FST”) in L.S Ngqengelele v Afrisam South Africa (Pty) Ltd considered the question of when a fund may withhold and deduct money from a member’s benefit in accordance with section 37D(1)(b)(ii) of the Pension Funds Act (“PFA”).

Section 37D(1)(b)(ii) of the PFA, allows a fund to deduct from a members benefit, on withdrawal of the member, an amount due by the member to his or her employer under specified circumstances. The amount must be owed to the employer as compensation for the recovery of any damage caused to the employer by reason of theft, dishonesty, fraud or misconduct by the member and:

  1. the member must have acknowledged liability in writing; or
  2. a judgment must have been obtained against the member in any court and money may be withheld during any pending legal proceedings against the member.

One of the objects of the section is to protect the employer’s right to recover money misappropriated by its employees during their tenure of employment.

The facts of the case were that:

  1. The applicant, was employed by Afrisam and by virtue of his employment, he became a member of NMG Employee Benefits (Pty) Ltd (“Fund”);
  2. His employment was terminated by Afrisam when he was charged with fraud. He admitted to the charges and signed a confession and admission of indebtedness, in the amount of R 124 977.01 to Afrisam. He undertook to repay the amounts in instalments from his salary of R 22 907, his accumulated leave and Fund credit;
  3. It transpired that his salary and accumulated leave were less than the amount he undertook to pay, which left a deficit of an amount of R 105 875.10 to be recovered from his Fund credit.
  4. In the circumstances, Afrisam requested the Fund to invoke the provisions of section 37D(1)(b)(ii)(aa) and withhold the applicant’s withdrawal benefit. The Fund did so.

The applicant filed a complaint with the Office of the pension funds adjudicator (“Adjudicator”) and on 21 August 2020, the Adjudicator delivered a determination which stated that the applicant was entitled to the payment of his benefit minus the amount due in terms of the acknowledgment of debt. However, a pertinent factor that was not disclosed before the Adjudicator was that, the applicant had been convicted on the charges fraud and sentenced to three years imprisonment in the magistrate court

Mr Ngqengelele dissatisfied by the determination, filed an application for reconsideration before the FST which was premised on the following:

  • Firstly, that the magistrate in sentencing him set aside the acknowledgement of debt and same is no longer binding on him and Afrisam, as employer even though the acknowledgement of debt was governed by the PFA; and
  • Secondly, that he felt that the acknowledgement was obtained under duress.

The Tribunal noted that the transcript of the judgment established that the applicant’s first ground for reconsideration was untrue and in any event judicial officers hearing a criminal case cannot set aside agreements or rule on an entitlement under the PFA. In addition, the Tribunal held that, a mere allegation of duress does not prove anything. As such, the acknowledgement of indebtedness remained binding. Accordingly, the application was dismissed.

Therefore, trustees of pension funds when faced with a request for withholding of member benefits, should satisfy themselves of the loss suffered by the employer and the value of the benefits held by the Fund on behalf of the member and the legal basis for the deductions. By conducting this exercise, the trustees will have to exercise discretion and balance any competing factors. The withholding of benefits by any Fund should not be approved simply at the behest of the employer.

When trustees receive requests from the employers, they should not accept the request to withhold benefits without conducting their own due diligence on whether the circumstances surrounding the request fall within the ambit of section 37D(1)(b)(ii).