/ 14 October 2016

​#SarsWars: NPA ignores pension fund rules

Key figures: Finance Minister Pravin Gordhan
Key figures: Finance Minister Pravin Gordhan

The finance minister is facing charges for apparently following a standard administrative procedure — charges that many experts believe will not hold up in court — but when the news broke on Tuesday the rand went into free-fall and wiped R50-billion off the value of the country’s major banks.

The charge sheet in the case the National Prosecuting Authority (NPA) has brought against Pravin Gordhan puts a value of R1.1-million on the alleged transgression he and his co-accused, Ivan Pillay and Oupa Magashula, will face in the courts on November 2.

The charge sheet alleges that Pillay, who was permitted to take early retirement in 2010, did not pay the cost of cashing in his pension early to the Government Employee Pension Fund (GEPF), which was done by his employer, the South African Revenue Service. This was authorised by Magashula, then the Sars commissioner, and Gordhan, the finance minister at that time.

Hence the charges of fraud against the three. They face alternative charges of theft.

According to the charge sheet, Gordhan is accused of “unlawfully, falsely and with the intent to defraud” when allegedly pretending that Sars was liable to pay about R1.1-million to the GEPF on behalf of Pillay. The charge sheet claims the amount was payable by Pillay as he took early retirement for his own reasons.

But the rules of the GEPF are clear: it is common practice for the employer, the state, to make good the shortfall. The GEPF 2016 Members’ Guide says employers are obliged to pay the liability on behalf of employees.

It also says members can opt for early retirement and, “where the employer granted permission for your early retirement, your benefits will not be scaled down. However, your employer will pay an additional liability.”

The employer’s additional liability is so common that it’s a sizeable item in the fund’s balance sheet. In the GEPF’s 2014-2015 annual report, R1.3-billion in employer contributions are receivable. These result from decisions by employers to afford members who are leaving enhanced benefits, as per section 17.4 of the Government Employees Pension Law 21 of 1996, as amended, such as voluntary severance packages and early retirement, without scaling down benefits.

Also on the balance sheet is income received, which shows R100-million earned in interest from additional employer contributions related to early retirement.

The GEPF, in response to Mail & Guardian questions, said, according to the GEP law and fund rules, which apply to all members of the fund, a member can retire at any time after his or her 55th birthday and before he or she turns 60 when the written permission of an employer to this effect is received by the fund. Pillay was 56 when he applied for early retirement. Pillay first joined Sars in 1999.

“The legislation provides for an executive authority to allow for an employee to go on early retirement, and concomitantly the GEP Law requires that actions taken by the employer which places an additional financial obligation on the fund must be made good by the employer,” the GEPF said.

The fund said it plays no role in the decision to approve or disapprove the early retirement of an employee: “It is a matter between the employee and his or her employer and, where required, the executive authority.”

Financial services experts say, for defined benefit funds such as the GEPF, it is normal procedure in the case of early retirement for the member to receive their full pension and the employer is obliged to foot the additional liability when there is a shortfall. The shortfall can result from a number of issues and not just because of early retirement.

When approached this week, the NPA declined to comment.

“With a charge of fraud, the general public will assume he [Gordhan] is accused of getting money under the table,” said Jan de Lange, a labour law practitioner for the SA Labour Guide. “But, in fact, it [the charges against Gordhan] means he misrepresented the facts somewhere along the line — with intent, which is very important.”

Gordhan faces another count of fraud for his role in extending Pillay’s contract at a later stage, but one year before the contract expired.

For Gordhan, there appears to have been no financial gain from approving Pillay’s retiring and rehiring on contract.

Several legal experts, quoted in the public domain, have expressed scepticism that the NPA will be able to make any of the charges stick.

In a statement, the treasury said: “It is quite clear that these legal proceedings are contaminated by abuse for political ends.”

Gordhan further asked South Africans to question whose interests were being served by this.

But the NPA head, Shaun Abrahams, has insisted the NPA only pursues matters when it is confident it has a good chance of winning.

The South African economy has become a casualty in this war. When Abrahams began speaking at a press conference on Tuesday morning, the rand began to fall. By the time he was finished detailing what appear to be at best flimsy charges against the finance minister, the rand had sunk from 13.90 against the dollar to 14.20. By Wednesday afternoon it had reached 14.40.

The news also saw the South African 10-year bond yield — the benchmark bond — rise from 8.74 to 8.93, indicating more risk and meaning that public institutions seeking to raise money in the market would have to pay higher interest rates.

But, on Wednesday, these indicators improved slightly after Abrahams said he would review the charges if Gordhan made representations to him to do so.

Wayne McCurrie of Ashburton Investments said on social media, if the charges are part of a successful bid to remove Gordhan from office, the true pain of the matter would be felt. “If Gordhan is forced out of office, South Africa will most likely go into recession as [the] rand truly collapses, interest rates rise, inflation rises etc,” he tweeted.

Peter Attard Montalto, emerging markets analyst at Nomura, said the markets are still “grossly underestimating political risk and its macro implications in South Africa. Nomura analysts expect the rand could go to 17 to the dollar by year-end,” he said in a note.

“Ultimately, we see the political and policy uncertainty continuing through to end-2017, holding back growth, job creation and especially domestic private sector investment, given Zumxit [President Jacob Zuma’s removal from office] seems highly unlikely and regardless of what occurs around national treasury,” Attard Montalto said.

“However, clearly, if today’s [Tuesday] events turned into a reshuffle and a real degradation of the national treasury as an institution, it would have much larger and longer-lasting negative impacts on the economy.”