Employer guaranteed housing loans – a real-life scenario.

1. The employer’s housing loan scheme

The scenario in this article is that the employer offers housing loans to its employees under an employment policy. A local commercial bank provides the housing loans, and the employer provides a surety to the bank for a specified portion of the loan. The employee must complete an application form. The employee certifies that he has acquainted himself with the scheme’s rules and subjects himself to the scheme conditions.

The surety agreement between the bank and the employer requires the employer to pay the bank the value of the outstanding loan up to the value of the surety it gave when the employee’s service terminates. The rules contain a schedule of benefits that quantifies the withdrawal, retirement, death and disability benefits. The fund’s rules explicitly allow benefit deductions for compensating the employer regarding damage caused to the employer, medical aid and insurance premiums and any other purpose approved by the Registrar. The rules further authorise the fund to grant housing loan guarantees for the purpose referred to in PFA section 19(5)(a).

2. The Pension Funds Act on housing loans

The PFA section 37D(b)(i)(bb) states that the fund (of which the employee was a member) “… may 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 any amount for which the employer is liable under a guarantee furnished in respect of a loan by some other person (the bank in this scenario) to the member for any purpose referred to in section 19(5)(a) … 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.”

PFA section 37A prohibits the reduction, transfer, cession, pledge or hypothecation of the member’s benefit and protects the benefit from attachment or execution except as provided in this section. One of the exceptions is the deduction per section 37D(b)(i)(bb) cited above.

The PFA, therefore, requires that the benefit must be paid to the member and nobody but the member.

3. The employer, the member and NAMFISA’s position on the member’s complaint

Under the agreement with the bank, the employer was obliged to pay up the surety value. It approached the fund to deduct its surety payment from the member’s benefit. The member objected and complained to NAMFISA that he never expressly consented to the deduction from his benefit. NAMFISA advised the fund that it may not deduct the benefit because the rules have no explicit provision mandating the trustees to deduct the employer’s surety payment.

4. Must the rules authorise trustees to withhold the employer’s housing loan surety?

While sections 37A and 37B offer exceptional protection to members’ benefits, section 37A makes a few exceptions. It allows the following:

Deductions permitted by the Income Tax Act.

Deductions permitted by the Maintenance Act.

Deductions explicitly allowed by the PFA.

Section 28 (5) of the Maintenance Act stipulates, “Notwithstanding anything to the contrary contained in any law, any pension, annuity or compassionate allowance or other similar benefit is liable to be attached or subjected to execution under a warrant of execution or an order issued or made under this Part [Part VII – Enforcement of Maintenance Orders] to satisfy a maintenance order by the Maintenance Court. A maintenance order is insufficient for the attachment of a pension benefit. It requires a warrant of execution or an attachment order of a maintenance court.

Schedule 2 of the Income Tax Act requires the deduction of income tax on any benefit defined as gross income and for the tax debt of the member as instructed by NamRA under section 91.

The only permitted deductions under the PFA are provided in section 37D. Amongst the permissible deductions are housing loans. Sections 37D(a)(i) and (ii) deal with direct (fund granted) and indirect (fund guaranteed) loans. These sections do not apply to the scenario sketched in this article. Section 37D(b)(i)(aa) deals with housing loans granted by the employer. Section 37D(b)(i)(bb) deals with “any amount for which the employer is liable under a guarantee furnished in respect of a loan by some other person (the bank) 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;” In our scenario the employer was liable for its guarantee to the bank. Provided the bank made the loan for the purpose referred to in section 19(5)(a), section 37(D)(b)(i)(bb) allows the fund to deduct the employer’s surety payment. The section has no other precondition. Unlike section 19(5)(a), which says that loans may only be granted if the rules allow it, it does not require that the rules permit the deduction. This section also does not require the member to consent to the deduction, unlike in the case of a deduction for theft, fraud, dishonesty or misconduct without a court judgment. In our scenario, the rules permit housing loans but do not explicitly speak about benefit deductions for housing loans.

5. May the fund pay directly into the member’s loan account?

After NAMFISA advised the fund that it may not deduct the benefit, the question arose of whether the fund could pay the employer’s surety amount directly into the member’s housing loan account as it is the member’s account. The fact that a commercial bank maintains such an account of the member’s housing loan debt does not make the account the member’s property on which he can transact as he wishes. The account is merely the bank’s record of the member’s debt. Therefore, the fund paying the member’s benefit into his housing loan account does not constitute a payment to the member and would contravene section 37A.

6. Does section 19(5) impact the fund’s ability to withhold the employer’s surety payment?

Section 19(5) sets out the purposes for which a fund may grant a housing loan or guarantee and other obligatory terms and conditions where the fund would grant the loan or give a guarantee to the bank. It does not refer to Section 37D and is irrelevant to the fund’s ability to deduct under Section 37D. It also does not speak about an employer-granted housing loan or guarantee as iis the case in the scenario sketched in this article.