Directors' personal liability for unpaid pension contributions: what employers need to know

In today’s challenging economic climate, many companies face financial distress and even insolvency. However, recent legal developments make it clear that financial hardship is no excuse for failing to meet statutory obligations, particularly the obligation to pay over retirement fund contributions deducted from employees' salaries.

This was the view of the Western Cape Division High Court in Engineering Industries Pension Fund v Installair (Pty) Ltd and Others (1633/2023) [2025] ZAWCHC 8 (16 January 2025), which confirmed that financial distress cannot shield employers from the consequences of non-compliance. This case underscores the legal duty of employers to comply with retirement fund obligations, and it highlights the potential for directors to be held personally liable for non-compliance.

Legal framework

The Pension Funds Act 24 of 1956 (the PFA) aims to protect the retirement savings and financial security of members by ensuring that contributions are properly deducted, managed, and remitted to the relevant fund.  It sets out clear employer obligations, including the timely and full payment of contributions, and holds directors personally liable in cases of non-compliance. This reinforces trust in the retirement system and ensures that employee benefits are protected, regardless of an employer’s financial challenges.

Section 13A of the PFA plays a critical role in ensuring compliance. Section 13A(1) requires employers to pay both employee and employer contributions in full and on time. It also obliges the principal officer of the fund to report instances of non-payment to the board. Where an employer fails to comply, directors may be held personally liable.

Accordingly, section 13A of the PFA and its subsections provide clear guidance on the establishment, implementation, and maintenance of effective compliance in respect of pension fund contributions.   Furthermore, the section creates a robust enforcement mechanism to ensure that financial distress cannot be used as a justification for withholding retirement fund contributions.

Case background

In brief, the facts of this case are that the Engineering Industries Pension Fund (the Fund) sought to recover outstanding pension and provident fund contributions from Installair (Pty) Ltd (the Company) for the period May 2020 to July 2020.  In addition, the Fund sought to hold the Company’s directors personally liable for the unpaid contributions.  The Fund relied on the provisions of: section 13A(1), which mandates employers to pay both employee and employer contributions to the retirement fund in full and on time; section 13A(7) which provides for the personal liability of individuals responsible for ensuring the employer’s compliance with its obligations; section 13A(8), which imposes personal liability on directors who are regularly involved in the management of the employer's financial affairs; and section 13A(9), which requires retirement funds to notify employers in writing of individuals who may be held personally liable, read with Regulation 33 (promulgated under the PFA but since repealed).

At the time of the application, the Company was in liquidation, and no relief was sought against it. Instead, the Fund pursued relief against the Company’s directors. The directors acknowledged that during the relevant period, the Company had deducted pension and provident fund contributions from employees’ salaries but failed to remit them to the Fund.  Instead, the amounts deducted were used to subsidise employee salaries, due to the Company’s financial distress.  The directors argued that the failure to pay was due to circumstances beyond their control and contended that they had not acted recklessly or negligently.

One director also claimed that section 13A(8) of the PFA should not apply to her, as she was not involved in the financial affairs of the Company. The directors further argued that liability under section 13(8) arises only where directors are unable to meet statutory obligations due to circumstances within their control and where there has been reckless or negligent conduct, which they denied.

The Court found that the directors were actively involved in managing the Company’s financial affairs and had clearly failed to meet their statutory obligations under the PFA.  The defences advanced were described as "far-fetched" and "untenable" and were summarily rejected. The Court accordingly held the directors personally liable for the unpaid contributions, ordering them to pay the outstanding amounts, together with accrued interest.  The Court also dismissed the argument that the Covid-19 pandemic justified the employer’s failure to remit contributions. Notably, the period in question (January to March 2020) preceded the national lockdown, which was only imposed on 26 March 2020.  As the Company was fully operational during this time, the pandemic could not be used as an excuse for non-compliance.  With no valid defence presented, the Court held the directors liable for the outstanding pension contributions. The Court also emphasised that a failure to issue an order in favour of vulnerable groups would constitute a dereliction of its constitutional duty.

The Court noted that the rise in withdrawal claims under the two-pot retirement system has highlighted persistent non-compliance with pension contribution obligations, a trend that threatens the financial security of retirees. This case serves as a strong reminder that enforcement of pension fund compliance is not only a legal obligation but a moral imperative to protect employee’s long-term financial interests.

Obiter findings of the Court

In Engineering Industries Pension Fund v Installair (Pty) Ltd supra, prior to delivering its findings on the directors’ liability, the Western Cape High Court highlighted the inherent challenges introduced by the two-pot retirement system and the practical implications of employers failing to remit pension contributions. The Court noted that such non-compliance has "cast a long shadow over this approach". The surge in withdrawal claims under the two-pot system has not only exposed serious gaps in employer compliance but also demonstrated that retirees, and those anticipating access to their retirement benefits ultimately bear the brunt of employer default.

The 'two pot impact' in this context refers to the dual consequences of non-compliance with pension fund contribution obligations. Firstly, when employers fail to remit the deducted contributions, the intended “pot” of funds meant to safeguard employees’ future financial security is compromised. This undermines retirement savings, reduces expected benefits, and erodes trust in the pension system. Secondly, the case reinforces that directors who are actively involved in a company’s financial affairs cannot rely on financial distress as a defence.

The law imposes personal liability for non-remittance of contributions, holding directors directly accountable, exposing them to financial, reputational, and legal consequences. Engineering Industries Pension Fund v Installair (Pty) Ltd is not the only case in which the Courts have taken a firm view on unpaid retirement fund contributions. In Mafoko Security Patrols Pty Ltd v Kheledi and Others (2023/036840; 2023/057409; 2023/085922; 2023/086107) [2025] ZAGPJHC 252 (7 March 2025), where the employer blatantly ignored the Pension Fund Adjudicator’s determinations to pay outstanding pension contributions, the Court upheld the Adjudicator's orders, confirming that the workers were entitled to the unpaid contributions and awarding costs. Furthermore, in National Fund for Municipal Workers v Tswaing Local Municipality & Another [PFA25/2020] (19 August 2020), the Financial Services Tribunal found that while section 13A of the PFA does provide for personal liability where contributions are unpaid, this liability is not primary, the employer remains primarily liable for the outstanding contributions.

Key takeaways for employers and retirement funds

In conclusion, employers, and particularly retirement funds, are urged to implement robust financial controls and regularly review compliance policies to ensure that all pension contributions are paid promptly and accurately, in accordance with the PFA and the rules of the relevant fund. This will go a long way in shielding directors and companies from severe legal penalties and reputational harm.

It bears emphasising that even in the face of financial difficulty, diverting retirement fund contributions for other uses is strictly prohibited. Directors cannot rely on financial distress as a defence to escape personal liability for unpaid contributions.

These cases underscore a crucial legal principle: employers cannot avoid their pension obligations through delay tactics or legal posturing. The courts have made it clear that accountability in fulfilling statutory duties is non-negotiable. Companies that ignore these obligations do so at their peril.

* Van Vuuren is a partner and Tshshonga is a trainee attorney at Webber Wentzel.

PERSONAL FINANCE