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The in duplum rule does not apply to late payment interest on arrear pension fund contributions owed by participating employers

18 September 2023 Ntokozo Ngubane, Norton Rose Fulbright

Since 2020, most retirement funds have been faced with a situation where participating employers have failed to comply with section 13A of the Pension Funds Act, 1956 (PFA), by either underpaying employer or member contributions or not paying at all. The non-payment of contributions attracts late payment interest in terms of section 13(7) of the PFA.

It is against this background that the Financial Sector Conduct Authority (FSCA) repealed Regulation 33, which governed payment of pension fund contributions and replaced it with Conduct Standard 1 of 2022. The Conduct Standard places an obligation on retirement funds to actively seek to recover outstanding contributions (plus the applicable interest) and to collect accurate contribution data from participating employers.

On 10 August 2023, the KwaZulu-Natal High Court of South Africa considered the maximum amount of interest that can be claimed and reiterated that the obligation to deduct contributions and late payment interest on contributions is regulated by the PFA.  The court was called to consider the application of the in duplum rule to interest on arrear contributions. The in duplum rule is a common law rule available to debtors, protecting such persons from being required to repay interest where the accrued interest equals to the outstanding original debt. The court held that the in duplum rule does not apply to interest arising from short- or non-payment of contributions.

The facts of this case are as follows:

  1. The participating employer failed to comply with section 13A(1) and (2) of the PFA, and to remit employer and member contributions from December 2013 and to deliver the prescribed information to the Municipal Workers Retirement Fund (Fund).
  2. In 2015, the Fund instituted an application seeking compliance from the participating employer with the provisions of section 13A.
  3. In March 2022, the participating employer furnished the Fund with the relevant information which enabled the Fund to quantify the quantum of the arrear contributions up to March 2021.
  4. In June 2022, the Fund advised the participating employees that the outstanding arrear contributions plus interest up to 31 October 2021 amounted to R 4 471 814.90. The participating employer paid the outstanding contributions in the amount of R 2 231 831.60. The balance of the contributions plus interest remained outstanding.
  5. The participating employer opposed the application made by the Fund on the basis that:
    • The interest which accrued on the outstanding contributions had become “a debt” that accumulated interest at the prescribed rate of interest in terms of the Prescribed Rate of Interest Act, 1975 (PRIA) and was subject to the in duplum rule;
    • It was entitled to a partial exemption from interest based on the delay in the Fund computing the debt; and
    • Whatever interest is due, it is limited to the capital portion of the debt which is R 2 231 823.60 by virtue of the in duplum rule.
  6. The Fund argued that payment of outstanding contributions on a monthly basis is a statutory obligation prescribed by section 13A. The PFA prescribes the rate of interest and the in duplum rule has no application.

The question before the court was whether the in duplum rule must be applied to interest arising from non-payment of arrear contributions under the PFA. If yes, whether the calculation of the interest fell within the purview of section 1(1) of PRIA?

The court considered the above arguments and held that a claim for interest on outstanding contributions is statutorily regulated. The PFA imposes liability for the payment of interest, the rate of interest applicable and when the same accrues. The payment of interest on outstanding pension fund contributions is not mora interest contemplated under PRIA. Therefore, the court held that there was no merit in the participating employer’s submission that a statutory obligation was converted to an obligation to pay a debt which triggered the provisions of PRIA.

This judgment is contrary to the position of the Pension Funds Adjudicator recorded in the 2023 Quarterly Digest where it was stated that funds must apply the in duplum rule  to arrear contributions, because retirement funds have a duty to be fair and impartial not only to members but to employers, in that it cannot be fair for an employer to pay interest that exceeds the principal debt. Additionally it encouraged employers to lodge complaints against funds that ignore the common law in duplum rule.

Unless the judgment is overruled, funds may claim late payment interest on arrear contributions from participating employers, even where the interest exceeds the actual contributions owed. In line with the PFA and the Conduct Standards issued by the FSCA, it is necessary for funds to actively seek to recover outstanding contributions, and where applicable late payment of interest, in order to avoid a situation where the fund is unable to service the risk benefits premiums to insurers or, for defined contribution funds, where members end up losing investment returns on the contributions.

First published by: Financial Institutions Legal Snapshot

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