Permissible Deductions from Pension Benefits under Section 37D(b) of the Pension Funds Act

1 15 JULY 2022 CIRCULAR : PF/CIR/01/2022 TO : THE PRINCIPAL OFFICERS AND TRUSTEES OF ALL REGISTERED PENSION FUND ORGANIZATIONS EFFECTIVE DATE : 15 JULY 2022 SUBJECT : DEDUCTIONS A FUND MAY MAKE FROM A PENSION BENEFIT UNDER SECTION 37D(b) OF THE PENSION FUNDS ACT, 1956 (ACT NO. 24 OF 1956)

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1. INTRODUCTION 1.1. This Circular is issued by virtue of the functions and powers of the Namibia Financial Institutions Supervisory Authority and those of its Chief Executive Officer in his capacity as the Registrar of Pension Funds (“the Registrar”) in terms of the Pension Funds Act, 1956 (Act No. 24 of 1956) (“the Act”), read with the Namibia Financial Institutions Supervisory Authority Act, 2001 (Act No. 3 of 2001) and is applicable to all registered pension fund organizations (“Funds”) under the Act. 1.2. The purpose of this Circular is to provide the Registrar’s position in respect of permissible deductions under section 37D(b) of the Act. 1.3. Circular PI/PF/03/2005 dated 12 September 2005, relating to interpretation of deductions a fund may make from a pension benefit under section 37D(b)(ii)(aa; bb), is hereby revoked and replaced with this Circular PF/CIR/01/2022.

2 2. THE CURRENT PRACTICES The Registrar has observed: 2.1. The practice whereby some Funds make deductions from a member’s pension benefit, at the request of the employer, in respect of any amount due by a member to his employer in regard to a housing loan or a guarantee for housing loan furnished by the employer notwithstanding that the Fund rules does not provide for this kind of deduction. 2.2. The practice whereby some Funds, at the request of the employer, withhold the member’s pension benefit on account of: 2.2.1. The member having admitted potential liability to the employer however such admission of liability does not relate to the incidents covered by section 37D(b)(ii)(aa). 2.2.2. The employer having instituted a criminal case or civil claim against the member for the loss suffered as a result of alleged theft or dishonesty or fraud or misconduct by the member but in the absence of judgment against the member having been obtained by the employer in a court as required by section 37D(b)(ii)(bb). 2.3. Lastly, the practice whereby Funds delay the payment of the member’s pension benefits and, in some instances, it has been noted that the delay is deliberatively intended to afford the employer ample time to institute a civil claim or criminal charge against the member. 3. THE LAW 3.1. In terms of paragraphs (a) and (b) of the definition of “rules” in section 1 of the Act, the term ““rules” mean the rules of the fund and includes the act, charter, deed of settlement, memorandum of association, or other documents by which the fund is

3 constituted; and the articles of association or other rules for the conduct of the business of the fund. 3.2. In terms of section 5 of the Act, once registered as a pension fund organization under the Act, a Fund becomes a juristic person capable of suing and being sued in its name and doing all such things as may be necessary for or incidental to the exercise of its powers or the performance of its functions in terms of its approved rules. 3.3. Section 13 of the Act stipulates that: “Subject to the provisions of this Act, the rules of a registered fund shall be binding on the fund and the members, shareholders and officers thereof, and on any person who claims under the rules or whose claim is derived from a person so claiming.” 3.4. Section 19(5)(a) of the Act permits a Fund, if its rules so permit, to grant housing loans to members and or to furnish guarantees in respect of housing loans granted to members of the Fund by third parties. 3.5. Section 37A(1) of the Act prohibits the reduction, transfer, cession, pledge, hypothecation, attachment or execution under a judgement or order of a court of law, of a benefit provided for in the rules of a Fund, or right to such benefit or right in respect of contributions made by or on behalf of a member, except to the extent specifically permitted in terms of the Act, Income Tax Act, 1981 (Act No. 24 of 1981) and the Maintenance Act, 2003 (Act No. 9 of 2003). 3.6. Section 37D of the Act specifies the deductions that are permitted in terms of the Act. Section 37D(b) of the Act stipulates as follows: “A registered fund may - …

4 (b) deduct any amount due by a member to his employer on the date of his retirement or on which he ceases to be a member of the fund, in respect of – (i) (aa) a loan granted by the employer to the member for any purpose referred to in section 19(5)(a); or (bb) any amount for which the employer is liable under a guarantee furnished in respect of a loan by some other person to the member for any purpose referred to in section 19(5)(a), to an amount not exceeding the amount which in terms of the Income Tax Act, 1962, may be taken by a member or beneficiary as a lump sum benefit as defined in the Second Schedule to that Act; or (ii) compensation (including any legal costs recoverable from the member in a matter contemplated in subparagraph (bb)) in respect of any damage caused to the employer by reason of any theft, dishonesty, fraud or misconduct by the member, and in respect of which – (aa) the member has in writing admitted liability to the employer; or (bb) judgment has been obtained against the member in any court, including a magistrate’s court, from any benefit payable in respect of the member or a beneficiary in terms of the rules of the fund, and pay such amount to the employer concerned” 4. THE REGISTRAR’S POSITION 4.1. Fund rules are the founding documents of Funds; and thus, they are central to the existence and purpose of the Fund. Moreover, a Fund must be administered in accordance with the provision of the approved Fund rules. Accordingly, Trustees of a Fund may only exercise such powers as conferred on them by the Fund rules.

5 Any Fund action or decision that is done outside the Fund rules will be ultra vires and void. 4.2. Pension benefits are not reducible, transferable or executable save as outlined in sections 37A and 37D of the Act. 4.3. A Fund can only make a deduction envisaged in section 37D if such deduction is expressly provided for in the Fund rules. If the deductions envisaged in section 37D are not permitted by the Fund rules, any purported deduction by the Fund is ultra vires and void. 4.4. A Fund may exercise its discretion to deduct from a member’s pension benefit in respect of the housing loan or in respect of guaranteed for housing loan furnished to the member by the employer where the Fund rules permits such deductions. 4.5. Where a Fund has been requested by the employer to deduct pension benefits due to the member on the basis of compensation envisaged in section 37D(b)(ii)(aa) and (bb) of the Act, the Fund must ensure that the following requirements are met before a deduction is done namely; 4.5.1. an amount must be due by a member of a Fund to his or her employer; 4.5.2. amount must be due at the date of retirement or on which the member ceases to be a member of the Fund; 4.5.3. amount must be in respect of compensation payable; 4.5.4. the compensation must be in respect of any damage caused to the employer; 4.5.5. damage caused to the employer must be by reason of theft, dishonesty, fraud or misconduct by the member; 4.5.6. the member must have admitted liability in writing to the employer in respect of the compensation for delictual damages caused to the employer; or the employer must have obtained a judgement in a court in respect of compensation.

6 4.6. If the above requirements are met, a Fund may, if its Fund rules so permit, deduct in terms of section 37D(b)(ii)(aa) and (bb) of the Act the amount due by the member to the employer from the member’s pension benefit payable in terms of the Fund rules and pay it to the employer. 4.7. Subparagraph (bb) of section 37D(b)(ii) of the Act presupposes that due process has been followed before a deduction can be made from the member’s pension benefit. The requirements for deduction pursuant to section 37D(b)(ii)(bb) is not that, legal proceedings must have been instituted, but rather that court judgement must have been obtained by the employer before the Fund may deduct from a member’s pension benefit. 4.8. The practice of withholding member’s pension benefit on the basis of a pending criminal charge or civil claim (legal proceedings) instituted by the employer against the member, for compensation for alleged damage caused to the employer by reason of theft, dishonesty, fraud or misconduct by the member without prior court judgement does not meet the requirements of section 37D(b)(ii)(bb), thus, the withholding of member’s benefits on such basis, is not permitted. 4.9. Funds must ensure that members’ pension benefits are paid out within the shortest possible timeframe to prevent any prejudice to the member or beneficiaries, as the case may be. 4.10. When requested by an employer to withhold or make deductions from a member’s pension benefit, the Fund has a discretion and in exercising its discretion the Fund must weigh up all relevant factors, to determine whether or not to agree to withhold or deduct from the pension benefit. The employer has no automatic entitlement in this regard. Trustees of a Fund that simply accedes to the employer’s request without considering the matter properly will not have exercised their discretion properly and accordingly will be in breach of their duty of good faith to the member or beneficiaries.

7 4.11. Trustees of a Fund owe a fiduciary duty to the Fund and to its members and other beneficiaries and are cautioned to remain cognisant of such duty at all times. Moreover, the actions and decisions of the Trustees of a Fund must be within the powers conferred upon them in terms of the Fund rules. The Registrar therefore requires full cooperation and support in this process by all Funds and stakeholders at large. Should you require more clarity on this Directive, kindly contact the Manager of the Pension Funds and Friendly Societies Division at telephone number 061-290 5000. KENNETH S. MATOMOLA REGISTRAR OF PENSION FUNDS