2 June 2009 by

The right to withhold pension funds

Highveld Steel and Vanadium Corporation Ltd v Oosthuizen (2008) JOL 22846 (SCA) 

Does a pension fund have the authority to withhold payment of pension benefits due to an employee, pending the outcome of any action instituted by the employer against the employee where the fund's own rules do not provides for this?

Oosthuizen, the employee, belonged to the employer's pension fund (the Fund). The employer instituted disciplinary proceedings against Oosthuizen on charges involving dishonesty, including theft. Oosthuizen pleaded guilty to some of the charges and was dismissed. Shortly after his dismissal, Oosthuizen attempted to withdraw his pension benefits from the Fund. However, on the employer's request, the Fund agreed not to pay out the benefits due to Oosthuizen. The employer intended to institute action against Oosthuizen for alleged damages suffered as a result of his misconduct and requested that the Fund withhold the benefits due to Oosthuizen until that action was finally determined, so that any judgment in the employer's favour could be executed against the benefit.

Section 37A(1) of the Pension Funds Act, 1956 provides that a benefit, or the right to a benefit, may not be reduced, transferred or otherwise ceded, and is also not capable of being attached in execution. However, this does not apply where a fund is entitled to make deductions from pension benefits. Section 37D(1)(b)(ii) allows a fund to deduct any amount due by a member to his employer, and pay that amount to the employer, as compensation for any damage caused to the employer as a result of any theft, fraud, dishonesty or misconduct on the part of the member. Such deduction occurs where the member has admitted liability for the amount claimed in writing, or where judgment has been obtained against the member.

Oosthuizen disputed the right of the Fund to withhold payment as he had not admitted liability of the amount claimed and nor was there a judgment against him. This matter made its way to the Supreme Court of Appeal (the SCA). The SCA held that Section 37D should be interpreted to include the power of a fund to withhold payment pending the outcome of instituted action but noted that Section 37D must not be interpreted solely for the employer's benefit - the facts of each case must also be considered.

The SCA clarified that pension benefits, which would otherwise be owing to an employee, can be withheld even absent an admission of liability by the employee or a judgment for the amount, as it is often the case that a judgment will only be forthcoming some time after the employee is dismissed for dishonesty. To insist on the presence of a judgment at the time the employee is dismissed in order for Section 37D to be operative would be absurd, as the section would then offer no protection to the employer. Often an employer merely suspects dishonesty on the part of an employee on the date of termination of employment, which results in the employee being paid out his pension benefits before a proper investigation can be launched, let alone a judgment obtained.

The SCA therefore confirmed that Section 37D must be interpreted to include the power of a fund to withhold pension benefits until final determination of any action pending against the employee.

A pension fund is entitled to this power even if its own rules are silent on the issue.

Faan Coetzee
Director, National Practice Head: Employment

Kerry Plots

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