Pension fund arrears, poisonings, data gathered – and then?

Important information regarding two critical sectors has come to light over the past few months. The state, after being forced to discover insights into these sectors, needs to figure out what to actually do with that information.

In the aftermath of the introduction of the two-pot system which enables savers to access a part of their retirement savings earlier, the revelation that some employers have not been paying dues to pension fund administrators shocked many observers.

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In the arrangement between employers, employees and administrators, employers collect contributions from employees and pass them over to fund administrators who then invest it for the future benefit of employees.

The complexity of the retirement system means that administrators enjoy significant levels of trust from employees who merely hope that when retirement date comes, they are in a better position financially. In a system where the defined contribution model dominates, the relationship is essentially a matter of hope and trust.

Employers are the conduits who are trusted by employees to pass over contributions to administrators. In some cases, arrangements between the employer and the fund administrators are cast in stone and signing up the employment contract binds one to direct their contributions to the chosen administrator. This makes the point of interrogating the ongoing arrangements quite moot for some employees – to their occasional detriment.

According to the Financial Sector Conduct Authority (FSCA), over 2 330 entities were found to have arrear contributions in December 2023. This means that such entities have employees from whom deductions were made yet such deductions were not paid over to the relevant funds.

Included in this list were 149 of the country’s 257 municipalities, representing a 58% arrear rate for municipalities.

The sum of missing contributions according to the FSCA amounted to over R5 billion, with municipalities accounting for R1.4 billion of that total.

The primary problem with such a high prevalence of arrear contributions is that it represents a breach of trust of the employment relationship where employees assume that their funds are being passed on to the funds. This is due to the fact that even in a co-contribution model where the employer pays part of the contributions, the employee is still sacrificing cash flow on an ongoing basis with the hope that it is being directed towards their long-term savings. Discovering much later that this has not materialised has an acute impact on the value of each employee’s savings.

The bigger picture

Secondly, the model of retirement savings is a direct intervention in the country’s poor savings culture and the need to balance the burden of running a social security system.

If more citizens are able to fund their own way in post-retirement as a result of savings accumulated through their working lives, the state’s resources can be dedicated to those who never had the chance to work or save anything.

Undermining this principle through a failure to make contributions then has implications for the country’s social security planning.

What was most surprising about the disclosures regarding missing contributions was the high number of municipalities that are truant contributors.

Unlike other small businesses whose incomes may fluctuate, and staff numbers may vary, municipalities have a more stable income stream and hence failures to pay contributions need to be viewed in serious light.

The possibility of funds being redirected to other uses looms large as a factor – but just like the tendency to delay payments to suppliers and other state entities like Eskom, the national government cannot afford to turn a blind eye to these practices.

When Eskom is not paid by municipalities, the burden of covering the costs either has to be distributed among those who pay through higher tariffs, or service provision is undercut.

When small businesses are not paid on time, their viability and the country’s own commitment to spreading the procurement pie are severely undermined. When pension contributions are not passed over and simply go missing, it is the state that will ultimately have to cover the gap for the affected employees.

Ironically, one of the reasons the two-pot system was introduced was to reduce the incidence of savers withdrawing from funds prematurely in order to cover emergency costs. Premature withdrawals erode the value of retirement savings and deny savers the benefits associated with the compounding effects of long-term saving.

The idea that the same employees can still face the risk of income poverty in retirement due to the truancy of municipal administrators, is a strange twist that must be addressed decisively.

The simple question that emerges is what exactly the state will do with this information in order to ensure that long-term principles are not undermined.

Spaza shop poisonings

A second accidental discovery in recent months is the registration and compliance gap that exists in the spaza shop environment.

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The rise in foodborne illnesses in the last part of 2024 and the numerous deaths associated with it galvanised the state into action about understanding the size and shape of the spaza shop market.

The initial intention was to register all spaza shops within three weeks in order to understand where the market is and who is involved in it. Unsurprisingly, this was not possible.

A combination of confusion and poor competence meant the process was slow and erratic. The fact that the registration could not be completed is itself reflective of the poor ability of municipal systems to address issues that are critical to communities.

When the registration process is finally completed, it might give us insights into the spaza shop industry, its compliance patterns, its value chains and employment profile, and the health issues inherent in the sector.

Whether the state will then do anything with that information will be the litmus test for the utility of the information collection process.

If – just like in relation to arrear contributions – the state receives the information and then hopes someone will eventually do something about it, the issues that led to the information discovery process itself will simply mutate in another form.

The problem with such issues is that they tend to escalate over time and the costs of finally addressing them becomes even more onerous – not just for the state but ultimately for all of us.

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