AN ASTOUNDING 149 of South Africa’s 257 municipalities are in arrears in paying over pension fund contributions, putting employees’ pensions at risk and underlining the huge governance problems at municipalities.
The introduction of the two-pot pension scheme has served to highlight the growing problem of arrears payments by municipalities. According to the Financial Sector Conduct Authority (FSCA), some municipal employees have been unable to receive their payouts because of the backlogs.
Municipal managers are not paying over pension payments despite the risk of huge penalties and personal fines running into millions of rand. Section 13A of the Pension Funds Act compels employers to make monthly contributions no later than the seventh day after the month for which a contribution is due.
The responsible individual, typically the municipal manager and potentially the CFO, can face a fine of up to R10 million or be jailed for up to 10 years for failing to pay over contributions.
However, despite 58% of municipalities being behind on at least one employee fund and it being illegal to withhold contributions, FSCA officials report only three arrests under Section 13A involving municipal authorities.
All but one Free State municipality
The problem of non-payment of pension fund contributions is big in both the private and the public sectors, and when a business is failing, pension fund payments can be put on hold. But the difference is that the national government's financial allocations to municipalities include provision for pension fund payments, suggesting that payment arrears are a consequence of poor governance, the deliberate diversion of funds, or possibly outright theft.
A comparison between arrears as of March 2024 and the previous year shows the problem has got worse in five out of SA’s nine provinces, and that the total arrears stand at R1,4-billion. FSCA officials estimate this has increased to about R1,6 billion today.
The provincial breakdown shows that all but one of the Free State municipalities are in arrears. The Free State also leads the way in the total value of arrears, with R840 million, with North-West second at just under R200 million.
Some of the arrears have been languishing for decades, with disputes emerging between municipalities and funds. Six arrears contributions are over 20 years old. But the age analysis of the arrears demonstrates that the issue exploded between two and four years ago, and has remained on the critical level over the past two years.
Takalani Lukhaimane, FSCA manager for retirement funds conduct supervision, said the problem has become so acute that the FSCA has been forced to create a division that just looks at section 13(a) issues.
It is currently estimated that the total non-compliance in both the public and private sectors as of December last year stands at about R5,2 billion, she said in an interview. That suggests municipal arrears are about a fifth of the total problem.
But Lukhaimane says what makes the situation with municipalities that much more frustrating is that they get an allocation from the government that includes the salaries they need to pay, and, consequently, the pension fund contributions required.
The FSCA does not have specific information on whether the arrears are linked to the employer contribution or the employee contribution. Most often, municipalities are matching employee contributions, usually both contributing 7,5% of an employee’s salary towards their pension funds. But Lukhaimane says they expect that in the vast majority of cases, it's the combined employer contribution and member contribution which is in arrears.
When pension fund contributors do fall into arrears, some pension funds have taken the civil law route to force the municipality to pay over the funds. But often municipalities are in a position to swap bank accounts, so attaching a specific municipal account can be illegally frustrated. Or municipalities agree to comply, but then a few months later, stop paying again.
Most but not all of the pension funds are defined contributions, but there are some dual funds, with one defined contribution and the other a defined benefit.
No bailouts
Keabetswe Tsuene, a specialist analyst for the FSCA, said the numbers showed particularly small municipalities are struggling. The province with the most arrears contributions is KwaZulu-Natal, even though the total amount is small.
The FSCA has had discussions with many of the municipalities to try to come to a solution, along with the South African Local Government Association (Salga) and the auditor-general’s office. Reasons for the non-payment are in a broad range and include governance problems. But some municipalities simply don’t prioritise pension payments over more immediate and pressing financial demands.
What is not going to happen are government bailouts. Lukhaimane says the issue has been discussed with the Treasury, and the response was a definitive “no”.
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