The Pension Funds Act provides a method for employers to recover compensation for damages caused by the theft, dishonesty, fraud or misconduct of an employee. In certain circumstances the compensation is recovered from the pension benefits payable to the erring employee, upon his or her withdrawal from the fund. Employers and funds that implement these deductions should take careful note of recent case law that may have drastically changed the landscape of these deductions.

The first significant development in relation to these deductions concerns the nature of the misconduct that ultimately enables the deduction. The common understanding has always been that the conduct of the erring employee was required to constitute theft, fraud, or other dishonest misconduct (which would accordingly exclude pure negligence). This understanding arose from the High Court decision in 2009 of Moodley v Local Transitional Council of Scottburgh Umzinto North & Another where it was decided that the term “misconduct” as used in the Pension Funds Act had to be determined with reference to other specific words used, in particular “dishonesty”. The Gauteng High Court in the case of Kwachu Pension Fund & Another v Pension Funds Adjudicator & Another) recently issued a judgment which appears to extend the test developed in the Moodley case. The Gauteng court (in overturning the determination of the Pension Funds Adjudicator) concluded that “the actions of the member in retaining the employer’s vehicle after having undertaken to return same…falls squarely within the ambit of misconduct by the member”. There was no reference to dishonesty. This would appear to be a deviation from the conclusion reached in the Moodley decision in 2009, namely that misconduct must incorporate an element of dishonesty in order for the fund to be permitted to deduct monies from the member’s fund benefit and pay this over to the employer.

In another recent judgment by the same division of the High Court in Denel SOC Limited t/a Denel Aviation & Another v Klaas Madimetsa Mafalo & Another, the Judge ruled that the member had been unjustly enriched by a payroll error that resulted in him being overpaid by nearly R2 million. Although the Judge accepted the finding in the employer’s internal disciplinary proceedings that gross dishonesty had been committed, he refused to make a special costs order on this basis, but nevertheless permitted the deduction from the member’s pension benefits to repay some of the salary overpayment. It is surprising that the deduction was authorized in the absence of a court ruling that dishonest misconduct had been committed.

We eagerly await to see which approach is adopted in future when determining the ambit of misconduct in these withholding cases.