Safeguarding retirement funds from fraudulent savings pot withdrawals

Nyashadzashe Mandimika

Fraudsters are nothing new in the retirement fund industry. The Two-Pot System has recently been introduced and it allows members to withdraw a portion of their retirement savings while still being employed. This is known as the savings withdrawal benefit.

Because a withdrawal can be made every year and need not involve the employer, we are likely to see a surge in fraudulent activities as cyber and other criminals attempt to withdraw from members’ Savings Pots. It flows then that funds should be aware of the risks involved with this savings withdrawal and ensure that the fund and its administrator take steps to protect the members’ benefits from any potential fraud.

The Board of Trustees has a fiduciary duty to act with due care, diligence and good faith. The Trustees are also required to protect the interests of the members of the fund. This means that the fund is required to take all reasonable steps to protect the benefit of the members of the fund. Unfortunately, retirement fund benefits are attractive to fraudsters who may see the new Two-Pot System as a lucrative opportunity. In some cases, fraudsters may successfully withdraw the member’s savings withdrawal benefit and the member may only discover this when it is too late.

Should this occur, a member may claim against the fund and even approach the Pension Fund Adjudicator or a court to hold the fund liable. In Mpambani v Municipal Gratuity Fund, the member had been imprisoned. During his imprisonment, his withdrawal benefit had been claimed unlawfully and paid to a third party who had been corresponding with the fund using an email address in the member’s name. The Adjudicator found that a fund has a fiduciary duty to exercise its functions with care, due diligence and good faith. The Adjudicator ordered the fund to place the member in the position he would have been in had the fund not paid the benefit to the incorrect person.

With this in mind, what practical steps can Trustees take to avoid paying the benefit to a fraudster instead of the member? We recommend that proper checks and procedures should be in place to ensure that when a savings withdrawal benefit is paid, this is paid to the member. We recommend that funds:

1. Interrogate the procedures to be followed by an administrator when a savings withdrawal instruction is received from a member;
2. Require that administrators thoroughly verify a member’s details when a withdrawal instruction is received;
3. Review the Service Level Agreements with administrators to ensure that the Fund is indemnified if the administrator acts negligently, resulting in fraudulent savings withdrawal payouts.
4. Enquire whether the fidelity insurance of the fund protects the fund in the event of fraud by an unknown third party.