Light at the end of the section 37C tunnel
A long overdue rethink of section 37C of the Pension Funds Act is finally under way, following a request from the Deputy Registrar to the industry to give suggestions for amendments and submit them to the Financial Sector Conduct Authority (FSCA). It is hoped that the outcome will make decision-making relating to lump death benefits easier for trustees, and reduce the number of decisions challenged by the Pension
Funds Adjudicator.
The process has been marked by a unique collaboration of industry bodies, including Batseta, the Institute for Retirement Funds Africa (IRFA) and the Pension Lawyers Association (PLA), which asked their members for input and then consolidated comments. I was privileged to serve on the Batseta panel relating to its submission.
This article touches on just three elements of a detailed submission.
BENEFICIARY FUNDS
The current situation
The reduction of the age of majority to age 18 by virtue of the Children’s Amendment Act 2007 required the trustees of beneficiary funds to effect lump sum payments at age 18.
Payment of lump sums at this age is not ideal as –
A very low percentage of learners achieve matric, or any other NQF level 4 qualification, at age 18;
According to Fairheads’ research-based feedback from guardians and caregivers, and from the actual experience:-
a large number of beneficiaries have elected to drop out of school once they receive their lump sum at age 18. This has an impact on their continuing education prospects, their future employment opportunities and in turn possible financial support that they might otherwise be able to provide to their families if they did have an education and employment;
at the age of 18, very few (if any) of these beneficiaries have the financial knowledge and other skills to properly manage lump sums. There is a very real risk that the beneficiaries receiving these lump sums will spend these funds carelessly and recklessly, with little thought of acquiring the skills to become financially independent;
where 18-year-old beneficiaries are counselled to seek financial advice or on how to manage their finances responsibly, less than 10% follow this advice, although this process seemed to be improving over time;
when given the option by a retirement fund to place their portion of a death benefit in a beneficiary fund, because they are still at school, beneficiaries seldom exercise this option.
The section makes provision for the payment of a benefit to a beneficiary fund. Payment to the guardian is the default position and arises from the guardian’s legal duty to manage the minor child’s financial affairs and the right to decide how best to use money in the best interest of the child. To deprive a guardian of this right which is a natural consequence of guardianship, a fund must have convincing reasons.
A fund must consider the following factors:
The guardian’s personal financial and educational circumstances;
Evidence that the guardian has squandered money in the past or been declared insolvent or had a business declared insolvent;
Any indication that the guardian intends to use the money for something other than the minor’s benefit;
Experience handling large sums of money or any investments;
The guardian has a legal disability (mental disability, under curatorship / administration / spendthrift).
It is not clear from the section whether there is an obligation on the fund to assess whether any of the abovementioned factors are present before payment to the guardian is made or whether the fund must only assess if for example a third party informs the fund that the guardian will squander the money etc.
Ultimately there is no guarantee that a guardian will use the money allocated to a minor for the minor’s benefit (even if none of the factors mentioned above are present at the date of paying the minor’s benefit to the guardian) as the financial circumstances of the guardian may deteriorate soon after payment.
Consolidated proposed solution
It is recommended that section 37C(2) of the Pension Funds Act be amended to include a new subsection (c) which will read as follows:
“(c) Notwithstanding anything to the contrary in any other law, a beneficiary or a member of a beneficiary fund will not be eligible to receive his or her remaining benefit as a lump sum until –
(i) he or she is at least 18 years of age, and has acquired a grade 12/matric certificate or equivalent NQF Level 4 qualification, or
(ii) he or she has reached age 21, whichever event occurs earlier. If, however, the board of a retirement fund or beneficiary fund is of the view that there are sound reasons why the lump sum benefit should be paid despite the conditions in (i) or (ii) not having been met, it may pay the balance of the benefit remaining for the beneficiary or member as a single lump sum, provided the beneficiary or member is at least 18 years of age.
In addition there is a case to be made for the protection / instalment payment of lump sums for minor children, as argued by Naleen Jeram in a paper presented at the PLA Conference in 2014 that an anomalous situation exists as from 1 March 2016 it was contemplated that a retiring member at age 60/65 can no longer take his or her end benefit in a lump sum at retirement. On the other hand the law allows a minor’s benefit and an 18-year-old to receive a lump sum death benefit from a retirement fund.
Comment: This is an outcome for which Fairheads Benefit Services has long argued the case and we sincerely hope the FSCA will consider such an amendment to subsection c) of section 37C.
THE 12-MONTH PERIOD
The current situation
Section 37C(1)(a) implies that the 12-month investigation period for trustees of retirement funds to reach their decision regarding the allocation of death benefits starts from the date of the member’s death.
The situation is problematic as many families only notify the fund of the member’s death following cultural rituals and the observance of a mourning period.
Consolidated proposed solution
Section 37C should be amended to make it clear that the 12-month period should only start from the time that the fund is notified of the member’s death – not from the date of death itself.
This also needs to apply to group life benefits where currently the allowed period to claim is within six months from the death of the member. This too should be amended to six months from the time that the fund is notified.
Comment: This solution would be most helpful to trustees and give them time to reach a considered decision. Indeed, the case law confirms that the 12-month period starts when the fund is notified of the member’s death (Masindi vs Chemical Industries National Provident Fund and others [2016] ZAGP JH 184.
DEFINITION OF A LIFE PARTNER / SPOUSE
The current situation
There is a legal debate as to whether a permanent life partner is a separate category.
It is often difficult for funds to establish objectively if a relationship was in fact a permanent life partnership and there may be disputing evidence and claims from families and from the alleged partner him/herself.
Consolidated proposed solution
The definition should be restructured to make it clear that permanent life partner is a separate category of spouse entirely.
Members should be required to register their permanent life partners with the fund if they want that person to be accorded the status of permanent life partner for the purposes of s37C payments – and provide details about the nature of the relationship that make it a permanent life partnership.
Comment: This proposed solution would go a long way to helping decide complex familial and relationship challenges. Currently there is no one definition of a permanent life partner and this can lead to practical problems, for example if there are several retirement annuities or retirement fund credits and different boards of trustees reach differing decisions. A national database listing all the funds to which a person belongs would help boards to reach congruent decisions as they would have the opportunity to collaborate and arrive at consistent distribution decisions.
In conclusion, the consolidated proposed suggestions from the various industry bodies show significant progress towards finding a solution for s37C. As John Murphy stated in Dobie NO v National Technikon Retirement Pension Fund [1999] 9 BPLR 29 (PFA):
“One thing is certain about section 37C. It is a hazardous, technical minefield potentially extremely prejudicial to both those who are expected to apply it and to those intended to benefit from its provisions. It creates anomalies and uncertainties rendering it most difficult to apply.”
Yet, Murphy continues to state that “there can be no doubt about its noble and worthy policy intentions.”
Let us hope that the submissions to the FSCA will result in these policy intentions being made possible.
ENDS
