Johannesburg - Cash-strapped employers are increasingly keeping deductions for employee benefits rather than paying them to retirement funds, the Institute of Retirement Funds (IRF) said on Monday.
This was a "totally unacceptable situation" said the IRF's president Shantha Padayachee.
Once companies were insolvent it was difficult for retirement funds to recover unpaid benefits as retirement funds were not regarded as secured but merely preferred creditors, she said.
"We are taking up the issue with the relevant authorities to bring about urgent preventative legislative reform," Padayachee said.
She said the economic downturn had taken its toll on pension funds.
"Extensive retrenchments or exits from funds has dissipated membership and the assets of those funds.
"Consequently members exiting at this time have received lower benefits than previous years due to lower fund returns."
She said administration costs had risen because of higher consumable costs in the recessionary environment, partly due to high inflation and the increased cost of implementing regulatory legislative reforms such as compulsory fund audits.
"These higher costs paired with low investment returns have resulted in a reduction in contributions towards retirement savings for members, while employers have been hard pressed to meet higher administrative charges due to budgetary and resource constraints and cost cutting and downsizing has become necessary."
The recession bites
Padayachee said the IRF was faced with a significant impact on retirement benefits and pension security.
Lump sums available to purchase annuities had been reduced in line with the market and annuity rates which determine how much pension can be acquired were not favourable, she added.
"The challenge for trustees, administrators and advisers therefore is to minimise the damage to members' interests.
"Rash decisions will worsen the situation.
Padayachee said "one-size-fits all advice" was not the solution but preservation of pension fund value was the cornerstone of a general strategy to deal with the situation.
"This implies that delaying retirement is arguably the best solution at this time, pending a return to greater profitability of the markets and consequently of pension fund investment performance."
She said a further aspect of this scenario was that trustee education had been brought centre stage.
"Trustees could no longer expect to depend entirely upon investment advisers and there has to be greater understanding on their part of market mechanisms, risks and returns and by implication, greater sophistication in their contribution to the interests of their funds."
Padayachee noted that the coming year would continue to test the pension fund sector at all levels.
"Tough times necessitated greater measures to conform to budgetary constraints and to implement risk management tools to minimise the negative impact of the economic downturn and other problems."
- Sapa