Section 37c issues arising from the case law

The distribution of death benefits in terms of section 37C of the Pension Funds Act is often tricky terrain for pension fund trustees. This article highlights some interesting issues arising from recent case law around s37C and is based on a presentation done by the writer at the 2019 Pension Lawyers Association conference.

INVESTIGATIONS AND PAYMENTS

Section 37C investigations can be lengthy and complex. The case of Dobie NO v National Technikon Retirement Pension Fund clarified that the 12-month period referred to in s37C does not refer to the general time period for payment, but rather to the period to trace beneficiaries. This is a practical approach, given how time-consuming investigations can be.

Usefully, the High Court has also now clarified in Masindi v Chemical Industries National Provident Fund and others that this 12-month period runs from when the fund learns of the death, not the date of death itself, because the obligation to act cannot be triggered if there is no knowledge of the member’s death.

However, the court also said that retirement funds need to be proactive in their processes and investigations and cannot simply wait to be informed of the death. Some mechanisms available to help funds in this regard include tracking and immediately following up if monthly contribution payments stop, and also checking to see if any members’ deaths are indicated on the Home Affairs database. A proactive approach is encouraged because s37C investigations can be harder and less effective the longer the fund waits to commence investigations.

PARTIAL PAYMENTS

Circumstances sometimes require a fund to pay out to one or more beneficiaries while continuing the investigation into other potential beneficiaries. In Sithole v NBC Umbrella Retirement Fund and another the Adjudicator accepted that “partial payments” are permissible while investigations continue. Here, payments were made to four out of ten beneficiaries identified, but 12,5% of the benefit was withheld pending further investigation of the remaining six.

The Adjudicator took no issue with this approach but reminded the fund that s7D(1)(c) requires that adequate and appropriate information is communicated to members and beneficiaries informing them of their rights, benefits and duties. Where partial payments are made, “adequate” information would require the reasons for partial payment, the process going forward and the expected timelines to complete payment.

While the mechanism of partial payments can be very useful if there are multiple beneficiaries or family units and lengthy, complex investigations, it can also be risky if information arises or additional beneficiaries are traced later, which may have changed the distribution.

It should therefore be carefully considered.

NOMINATIONS

In Makhubela v Rand Water Provident Fund and another the member’s beneficiary nomination form named three beneficiaries and the member specifically stated that he did not want two of his major children to get any share the benefit. They then challenged their exclusion from the distribution of the R1.7m benefit.

The Adjudicator ruled that “the litmus test … relating to the distribution of death benefits is whether or not

a party was financially dependent on the deceased member and if by his death the party stands to suffer financial prejudice.” The excluded beneficiaries here had not demonstrated dependence, and the member’s express wishes indicated strained relationships with them – both being factors relevant to the distribution decision. The important point demonstrated by this case is that where the member specifically indicates that a person should not receive a share of the benefit, this can be taken as an indication of a bad relationship (which is relevant factor) but this cannot on its own, and without reference to other factors, exclude a beneficiary from consideration.

TESTAMENTARY DISPOSITION VERSUS NOMINATION

It’s often tricky for trustees where the member’s wishes were never communicated directly to the fund, but the Will or some other document states, for example, “I leave my benefit in XYZ fund to my son”. This is not a valid testamentary disposition, but it is a valid nomination?

Section 37C(1)(bA) would suggest not because it states “If a member has a dependent and the member has also designated in writing to the Fund a nominee to receive the benefit…”. Those words indicate that some notification to the fund of the member’s wishes is required.

THE STATUS OF PERMANENT LIFE PARTNERS

The status of permanent life partners and the legal debate around the definition of “spouse” is often a tricky issue for funds to navigate. In terms of the Pension Funds Act, a “spouse” is “a person which is the permanent life partner or souse or civil union partner of a member in accordance with the Marriages Act, the Recognition of Customary Marriages Act, the Civil Union Act or the tenets of a religion.”

There is legal debate around whether permanent life partners are a category of spouse on their own or whether, to be a permanent life partner, the relationship must be recognized by one of the above Acts or religion.

It is arguable that the words “permanent life partner, spouse or civil union partner” indicate that a permanent life partner is a category of spouse on its own (for the purposes of the Act) because persons married in terms of the Marriages Act, the Recognition of Customary Marriages Act, Civil Union Act or tenets of a religion already have legal recognition as “spouse”. Permanent life partners were included in the definition of spouse because without that, they would not be accorded that status and would not qualify for spouse’s pensions.

Their inclusion in that definition therefore elevates their status to that of “spouses” for the purpose of pension related benefits.

In Makgopa v PPS Retirement Fund Ms Makgopa was married to the member by customary rites but the marriage was annulled by the court. She was awarded a share of the death benefit, but this was challenged on the basis that she was not a spouse because the marriage had been annulled. After reassessing, the fund said that it regarded her as a permanent life partner, which fell within the definition of a spouse for the purposes of s37C. That decision was then challenged on the basis that due to annulment she could not be regarded as a “spouse” as defined.

The fund referred to Hlati v Univ of Fort Hare Retirement Fund and others which held that a permanent life partner, who had an inter-dependent relationship with a deceased member and who was then worse off because of the member’s death, would be considered a factual dependent. The fund said it regarded Ms Makgopa as a factual dependent because of a shared common household, joint liability in respect of moveable property, financial dependence and joint financial responsibility for their children. The Adjudicator held that despite a court order declaring the customary marriage to be null and void it was clear that they were in a permanent relationship since 1988, had raised their children together and shared business interests and she was also dependent on him. The Adjudicator also noted that even if Ms Makgopa was not a permanent life partner, she would still be a factual dependent because of the joint household, which indicated a financial dependency on each other.

In Swanepoel v Eskom Pension & Provident Fund, the issue at stake was the permanent life partner’s eligibility for a spouse’s pension. This case reinforced the interpretation that “spouse” in the rules is to be read with the definition in the Pension Funds Act, which recognizes permanent life partners as a category of “spouse” in their own right. The complainant was one of the member’s three sons nominated in the nomination form. Each received a share of the lump sum death benefit but no share of the monthly pension payable on the member’s death.

The sons contested payment of that pension to the life partner, saying that she had not even been nominated as a beneficiary by the member.

In terms of the rules, the pension was only payable to an eligible child under 21 or if incapable of supporting him/herself due to a physical or mental infirmity, or to a widow(er). As the sons were all majors and financially able, they did not qualify. Regarding the partner, it was argued that the rules defined a widow as a spouse of a “marriage” so she was disqualified. But the Adjudicator found that the rules also defined a spouse as including a permanent life partner – and so the same interpretation as in the Makgopa case (of a spouse including a permanent life partner) was reinforced in the Swanepoel case – that is, that is a permanent life partner in one’s own right, and in terms of the Civil Union Act.

The important point here for funds is that if the marriage is not in terms of any Act (or religion or custom), the person can still be regarded as a spouse if there was evidence of a permanent life partnership. And if not, it is highly unlikely that someone claiming status as a permanent life partner would not also at least qualify as a factual dependent on the basis of the mutual dependency they carried in a shared household.

This would qualify one as a dependent for the purposes of s37C but maybe not for a spouse’s pension on death.

BLOEDIGE HAND PRINCIPLE

“Die bloedige hand erf nie”, a common law principle, means that the person responsible for causing the death of another cannot benefit financially from that death. The High Court in the Makanya case made it directly applicable to the Government Employees Pension Fund and in Danielz made it applicable to insurance benefits. The two cases of Nel v Netcare 1999 Pension Fund and another, and Rhyn vs UTI

Flexi Retirement Fund (Pension Section) and another now make it clear that the bloedige hand principle applies equally and directly to pension fund cases.

In practice, the criminal justice system moves slowly in South Africa and trustees need to adopt a practical approach by weighing up the risks, for example by obtaining information from the investigating officer about the likelihood of charges.

The Nel case also raised another interesting question. If the fund awarded a benefit to the deceased’s child, but the child’s parent was accused of the member’s murder, does the “bloedige hand” principle preclude payment?

In this case, the Adjudicator was persuaded to allow the payment because it was not going to be paid directly to the guardian but rather to a trust for the child’s benefit.

In these circumstances trusts and beneficiary funds can be a useful mechanism to administer the benefit in and to make direct payments where needed, such as for school, transport, clothing and the like.

DUTY OF SUPPORT TO ELDERLY PARENTS

The case of T v University of KwaZulu Natal Pension Fund and Absa Consultants and Actuaries dealt with the duty of support to elderly parents. The complainant was the sole nominee but the member also had an elderly mother and siblings. An issue that arose in this case was the status of the member’s elderly mother.

The fund had failed to prove her financial dependency on the member, and there was no evidence of her own finances then or into the future. There was also no evidence regarding the extent of the siblings’ obligation and ability to support her – which they all carried. The fact that member had no children, and the siblings did, was not enough to shift the financial burden solely onto the member.

Considering all the factors, the Adjudicator ordered the fund to reconsider its decision.

Some key points for trustees to note from this case are that a nominee does not have to prove financial dependency on the member to be considered; the s37C investigation should be around the overall picture generated not individual factors; and that when considering elderly parents trustees should consider their needs and other sources of income, including the fact that siblings of the member or other children of the parents also bear financial responsibility.

CASES CONSIDERED ABOVE

Dobie NO v National Technikon Retirement Pension Fund [1999] 9 BPLR 29 (PFA)

Masindi v Chemical Industries National Provident Fund and others (Case No 16/24267 decided 13/12/2016 – High Court)

Sithole v NBC Umbrella Retirement Fund and another [2018] 2 BPLR 504 (PFA)

Makhubela v Rand Water Provident Fund and another [2018] 1 BPLR 114 (PFA)

Makgopa v PPS Retirement Fund [2018] BPLR 102 (PFA)

Swanepoel v Eskom Pension & Provident Fund [2018] 2 BPLR 522 (PFA)

Hlati v Univ of Fort Hare Retirement Fund and others [2009] 1 BPLR 37 (PFA)

Nel v Netcare 1999 Pension Fund and another [2018] 3 BPLR 747 (PFA)

Van Rhyn vs UTI Flexi Retirement Fund (Pension Section) and another [2018] 3 BPLR

T v University of KwaZulu Natal Pension Fund and Absa Consultants and Actuaries