The cost of not remitting Pension Contributions

The recent reports in the media that industrial strikes are on the rise due to employers failing to remit pension contributions to fund administrators should not be taken lightly. It is reported that Blantyre District Labour Office receives numerous complaints from employees that monthly deducted pension contributions are not remitted to fund administrators. This is a serious setback to pension reforms and without immediate regulatory intervention they will not yield their intended purpose-financial security for workers during post-retirement life.

A Pension scheme plays an instrumental role in workers life for it replaces earned income when an employee retires and this cannot be over-emphasised. The government of Malawi, through the Pensions Act 2011, has made pension mandatory. Under this act, all formal employers are mandated to enrol their employees on a pension arrangement. Employees are expected to contribute a minimum rate of 5% while employers 10% of the employee’s monthly gross salary. The employer is responsible to ensure that these contributions are remitted on time towards the pension fund. Besides pension, employers are obligated to put their employees on Group Life Assurance cover. This is an insurance policy whereby in the event of death of an employee, the nominated beneficiaries receive lump sum benefits, a minimum of one times annual pensionable emoluments of the deceased.

Through an investment manager, pension funds are invested immediately in asset classes like equities, government securities, corporate bonds, real estate and mutual funds. This is done to ensure that scheme members’ funds grow as investment returns are credited to their accounts at the end of the financial year. This suffice to say that if employers are not paying out contributions on time, scheme members are delayed or denied their entitlement to bonuses. Apparently, the corollary is that their money does not grow faster resulting into low pension incomes after retirement.

It must also be noted that failure to remit pension contributions on time monumentally disadvantages withdrawn members when they want to access their funds. As per Section 65 of the Pensions Act, if an employee stays 6 months without employment, after being dismissed or resigned, they can access their pension. In the event where an employer was not making contributions, the pension administrator cannot pay the ex-member unless all contributions are up to date. It might take longer for the employer to pay the arrears and the delayed payment may put the pension administration company in bad reputation. Employers with outstanding contributions sometimes settle arrears due to pressure from withdrawn members who want to access their money. When this situation frequently occurs, the members suffer as they get lesser benefits (without full interests) as compared to what they would get in normal circumstances.

Pensions provides protection to dependents when the breadwinner of the family dies. When employers are not remitting payments, in the event of death of a scheme member, the pension administrator cannot pay death benefits to the nominated beneficiaries when the scheme has arrears. The administrators have to ensure that before making any payment, all contributions plus investment returns were allocated to the member accounts. The delay in settling the death claim makes the beneficiaries suffer financially and emotionally.

Employers should also be aware that delaying pension contributions attracts penalties from the Regulator, the Reserve Bank of Malawi. Under Section 61 of the Pensions Act, employers are required to make payments within 14 days after deductions from the monthly payroll. Such penalties become even an extra liability to the employer and it is therefore advisable to always pay on time.

In the long run, however, it is the country that loses when employers are not fulfilling this obligation. As I have already alluded to, pension funds play an important role in the economy as pension savings are channelled into investments in financial assets like real estate thereby contributing towards infrastructure development. Thus employers should take pension not just as legal mandate but a multi-faced arrangement that has direct impact on them, employees and their dependents, and the economy.

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