Plotting a phoney fund exit is no way out, says Liberty

10 September 2008 Liberty

Plotting a phoney retirement fund exit may look like the way out of a debt trap, but will only land employers and desperate salary-earners in even more trouble.

The warning comes from Liberty Corporate as consumer distress mounts and some over-committed breadwinners look for additional cash to pay off credit cards, housing loans and other debts.

Liberty administers more than 12 000 retirement schemes housing more than R40 billion in statutory savings. Liberty helps tailor retirement fund solutions for major corporates, SMEs, professional practices and entrepreneurs. The business is therefore close to trends in all areas of the pension environment.

“There are two big issues at the moment – the debt trap facing individual fund members and the skills crisis facing their employers,” says David Price, Liberty Corporate Executive.

“Bring the two together and you provide a new context for an old dodge – the fake resignation to create early access to a cash lump sum from the retirement fund.

“Those engaging in this sham risk jumping from the frying pan into the fire. Scrutiny of fund administration can be expected to be particularly intense at a time when the authorities are preparing to reform the pensions sector. They will come down hard on any ploy that perverts the core purpose of long-term, statutory saving.”

Liberty’s pension fund specialists caution clients not to become complicit in this type of scam. They admit, however, that bosses can be under a lot of pressure to ‘go along’.

Price explains: “Typically, the fund member approaches the employer or department head and says he is desperate for cash and needs his pension money. He says he can quit for real to access his pension money or can engage in a sham resignation. The fake exit seems to be the way to go as a skilled employee is ‘off the payroll’ only to come straight back on again.

“The rationale is that ‘no one gets hurt and no one needs to be any the wiser’, but this is not really true.

“An employer or departmental head may be desperate to retain skills and will try to be as accommodating as possible. But a ruse like this breaches the letter and spirit of the retirement fund rules and should not be contemplated.”

Employers are being naïve if they assume that keeping a formal letter of resignation on file in the HR department will be sufficient to satisfy an enquiry from the authorities. Seamless reinstatement from one month to the next exposes the sham.

Claiming that the dodge was an act of kindness to assist a desperate employee is no excuse.

The long-term repercussions can be severe as early access to pension monies puts a dent in potential investment build-up. The eventual consequence could be retirement in poverty, leaving the individual dependent on social grants – the exact scenario proper pension provision is meant to avoid.

Price adds: “In recent years, a key underlying theme has emerged in local and international efforts to strengthen pension fund administration and that is that a retirement fund is not a piggybank to be accessed at will by either the employer or the employee.

“It is a depository for long-term saving with the intention of creating adequate financial provision for later life.

“In the current regulatory environment, we can expect the authorities to come down hard on any ruse that undermines these basic principles.”

The Liberty specialists sympathise with employers trying to retain key skills, but believe other mechanisms for short-term financial relief should be examined; for example, company loans to distressed employees.

“A fake resignation is not the way forward,” says Price. “It merely postpones individual distress and creates even bigger problems in old age. Our advice is ‘explore sensible solutions; don’t engage in scams’.”

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