Dishonesty – Section 37D

Dishonesty – Section 37D

Provident Funds - Section 37D - Dishonesty by Employee

Practical application of section 37D (b) (ii) of the Pension Funds Act where a member has committed theft, fraud, dishonesty or misconduct.


Fund administrators are often requested by employers to deduct certain amounts owed to them by their employees from the benefits payable to such employees in terms of the rules of a pension or provident fund, or to withhold payment of a benefit indefinitely pending the outcome of legal proceedings. In some cases these requests relate to the deduction of ordinary personal loans, which of course is not allowed in terms of the Pension Funds Act. This article examines only one aspect of section 37D of the Pension Funds Act, namely the circumstances in which an employer may deduct from an employee’s retirement fund benefits the amount of damages suffered by him due to theft, fraud, dishonesty or misconduct committed by the employee. I will also make reference to two important cases determined by the Pension Funds Adjudicator in this regard.

Overview and practical application of section 37D (b) (ii)

Section 37D (b) (ii) of the Pension Funds Act allows for compensation in respect of damage caused to the employer by reason of a member’s theft, dishonesty, fraud or misconduct to be deducted from the benefit payable to the member in terms of the rules of the retirement fund. However, before this amount can be recovered, the member has to:

  • Either admit liability to the employer in writing, or
  • A judgment has to be obtained against the member in any court.

Section 37D (b) (ii) implies that the theft, fraud, dishonesty or misconduct should have been committed while the employee was still a member of the fund. Strictly speaking, contractual debts such as car loans or computer loans in respect of which the employee still owes a balance to the employer on the date of withdrawal from the fund do not fall within the ambit of section 37D (b) (ii). Accordingly such debts may not be deducted from the member’s benefits payable in terms of the rules of the fund and must instead be liquidated through other means, e.g. by the employer instituting civil proceedings against the member. Where debts are owed to the employer, typically the fund administrator would forward the withdrawal benefit to the employer for onward transmission to the employee in two cheques – the first cheque in the amount of the debt or damages and the second cheque in respect of the remaining balance. The member then endorses the first cheque to the employer in settlement of the debt or damages. Whilst this arrangement is a practical solution to the problem of outstanding debts owed by a withdrawing member, employers run the risk of the Adjudicator or the courts declaring the deduction unlawful if it does not fall within the ambit of section 37D, and more particularly section 37D(b)(ii). Thus, if a member disputes the amount of the debt or damages owing to the employer, he will be entirely within his right to refuse to endorse the first cheque and to demand full payment of the withdrawal benefit from the fund.

Meaning of the term “misconduct”

In the case of Moodley v Local Transitional Council of Scottburgh Umzinto North and Another the High Court dealt with the interpretation of section 37D (b) (ii) of the Pension Funds Act, more specifically the term “misconduct”. The question before the court was whether the misconduct the plaintiff had been convicted of in terms of his service conditions constituted misconduct as envisaged by the section. The court came to the conclusion that the meaning of the general word “misconduct” in section 37D (b) (ii) must be interpreted to mean dishonest conduct or at least involving an element of dishonesty. In other words, in terms of section 37D a fund may only deduct the amount for damages suffered by an employer from retirement fund benefits where such damages have been caused by reason of any theft, dishonesty, fraud or other misconduct involving an element of dishonesty.

Clarification of section 37d (b) (ii) through case law

In two prominent determinations of the Pension Funds Adjudicator, deductions made from retirement fund benefits in terms of section 37D (b) (ii) of the Pension Funds Act came under the spotlight. These determinations brought into sharp focus the strict requirements of the section and the difficulties encountered by funds with regard to the correct interpretation and implementation thereof.

Records v Barlow’s Pension Fund (PFA/GA/821/99) Facts of the case

In this case the complainant stole a large sum of money from the Barlow’s Pension Fund both before and after his early retirement from the fund. According to the evidence the complainant committed 8 counts of theft whilst still a member of the fund and 2 counts of theft after his retirement, and he was subsequently convicted on all 10 counts of theft by a magistrates’ court. The complainant signed an admission of liability, but only in respect of 4 of the 10 charges eventually laid against him, and of those charges 2 had taken place after the date of his retirement. The employer decided to pay the fund the amount stolen by the complainant on the basis of vicarious liability. Thereafter the fund ceased to pay the complainant his monthly pension and the employer sought to deduct the amounts stolen from the complainant’s actuarial reserve in the fund. The complainant sought an order from the Adjudicator reinstating his pension as well as back payment of amounts payable since the pension had been stopped, on the premise that there was no basis in law or in the rules of the fund to set-off his actuarial reserve value against the employer’s loss.

Principles established by the Adjudicator

In his preliminary determination the Adjudicator inter alia expounded on what is needed to satisfy the requirements of section 37D (b) (ii) as follows: 

  1. Where a member has caused damage to an employer by reason of any theft, dishonesty, fraud or misconduct contemplated in section 37D(b)(ii), no deductions can be made from the benefits payable in terms of the rules unless there is a court judgment or a written admission of liability. These must be in respect of the compensation due as a result of the damage caused to the employer. 
  2. The member’s written admission of liability must be clear and should specifically allow for deductions to be made in respect of a wrongdoing or delict committed by the member. Thus, an admission of a contractual liability, for example in respect of an ordinary loan granted to the member by the fund or the employer, is not sufficient. 
  3. The judgment by “any court” must relate to either of the following
    • A civil judgment sounding in money, i.e. a judgment made consequent to a civil action and granted by the court at the end of a civil process; or
    • A compensatory order granted by a criminal court in terms of section 300 of the Criminal Procedure Act, specifically allowing compensation to the employer for loss suffered. The compensatory order is a separate or ancillary order that may be issued by the same criminal court that convicted the accused.
  1. The reference to “any court” in section 37D (b) (ii) relates to courts that made awards of compensation. The Adjudicator held that in this case the criminal court had not made an award of compensation and thus no judgment had been obtained in respect of compensation for the damages caused to the employer as a result of the complainant’s theft. Therefore the criminal judgment obtained by the employer in this case did not meet the requirements of section 37D (b) (ii). 
  2. As a result the fund was only entitled to deduct those amounts in respect of which the complainant had admitted liability in writing, and which had been stolen as at the date of the complainant’s retirement, i.e. only the 2 counts of theft committed whilst the complainant was a member of the fund were covered by the admission. 
  3. With regard to the 2 counts of theft which were committed after the complainant’s retirement, the Adjudicator held that his written admission of these were not entirely in respect of “amounts due by a member to his employer on the date of his retirement” as required by section 37D. Therefore, the employer required a court judgment or a further written admission in respect of the 8 remaining counts of theft to meet the requirements of section 37D, in order to deduct the complainant’s full actuarial reserve. 
  4. Regarding the balance of the amount owing to the employer which was not covered by the complainant’s admission, the Adjudicator noted that the employer was entitled to obtain judgment in a civil court, or review or appeal the decision of the magistrate not to grant a section 300 compensatory order.

Appanna v Kelvinator Group Services of SA Provident Fund (PFA/GA/475/99/LS) In this case the question for the Adjudicator’s determination was whether or not the fund could withhold the complainant’s withdrawal benefit pending the outcome of criminal proceedings against her. The Adjudicator held that the purpose of section 37D (b) (ii) is clearly to protect the employer’s right to recover any losses incurred as a result of an employee’s theft, dishonesty, fraud or misconduct. In order to give effect to this purpose, the provision for this deduction should be interpreted to implicitly include the right to withhold payment of the benefit pending the determination or acknowledgment of liability. Nonetheless, despite the implicit right granted by section 37D (b) (ii), the rules of the fund must permit the withholding of benefits pending determination of liability. The rule must, however, be qualified to:

  1. Extend some protection to the member from suffering prejudice during the period the benefit is withheld;
  2. Limit the right to withhold, to the value of the employer’s claim; and
  3. Prevent the fund from withholding the benefit indefinitely.

Court proceedings invariably take a long time, and if the fund was not permitted to withhold the employee’s benefit in the interim, by the time legal proceedings were finalised, the employee might no longer be in a position to pay the employer’s claim. As a result the protection of the employer’s property against an employee’s misconduct would be rendered ineffective. The Adjudicator ordered the fund to amend its rules accordingly.

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