Distribution of approved death benefits and guidance from a recent High Court judgement

Approved death benefits, that is, death benefits that are provided through the retirement fund and where the death benefit policy is in the name of the retirement fund, must be distributed according to Section 37C of the Pension Funds Act (“PFA”). This Section of the PFA determines that the board of a retirement fund (“board”) must decide how to distribute the approved death benefit.

At first glance, one might interpret Section 37C as a straight-forward section of the PFA, however, most boards find that the practical application of this section can be very complex, time consuming and is not simply ticking items off a checklist. The complexity of the application of this section is often exacerbated by complicated family structures and the value of the death benefit relative to the actual financial needs of the dependants on the deceased.

In simple terms, Section 37C of the PFA requires that the board should take the following steps in their decision-making process:

1. Identify the dependants of the deceased, and

2. Identify the nominees of the deceased, and

3. Allocate the benefit in a manner that is fair and equitable, and

4. Select an appropriate mode of payment of the benefit (not discussed further in this article).

Let’s take a closer look at the first three steps and then highlight some items from a recent High Court judgement which can guide boards with this process.

Identify the dependants of the deceased

The board must identify the dependants of the deceased. Section 37C of the PFA defines dependants as the following:

1) A person in respect of whom the member is legally liable for maintenance, or

2) A person in respect of whom the member is not legally liable for maintenance, if such person

- was, in the opinion of the board, upon the death of the member in fact dependent on the member for maintenance,

- is a spouse of the member,

- is a child of the member, including posthumous child, an adopted child and a child born out of wedlock.

3) A person in respect of whom the member would have become legally liable for maintenance, had the member not died.

To adequately discharge this obligation the board must conduct a thorough investigation in order to establish all factual, legal and possible future dependants.

Identify the nominees of the deceased

Most members of retirement funds are shocked when they learn that their approved death benefits will not necessarily be distributed according to their wishes (their completed beneficiary nomination form), However, it is important to explain to members that the board is obligated to consider their wishes as one part of the decision-making process. In fact, if no dependents are identified and the estate of the deceased is solvent, then the death benefit must be paid according to the deceased’s latest completed beneficiary nomination form.

Allocate the benefit in a manner that is fair and equitable

Fair and equitable distribution is not defined in the PFA. In addition to this, there is no clear formulated methodology to determine a fair and equitable distribution. The Pension Fund Adjudicator has identified the following factors that should be included in the distribution decision (but these are not the only factors that must be included):

- The age of the dependants;

- Their relationship with the deceased;

- The extent of the dependency;

- The wishes of the deceased; and

- The financial affairs of the dependants and their earning potential.

It is no easy task for boards of retirements to make a decision that is fair and equitable.

Concomitantly, the board must conduct an in-depth analysis into the situation of each and every identified person and take all items into account when making a decision regarding the distribution of the death benefit.

Some guidance from a recent High Court judgement

In Swart and others vs Lukhaimane and others, the applicants applied to the Pension Funds Adjudicator to set aside the decision of the death benefit distribution made by the board of the fund. The Pension Funds Adjudicator set aside the decision of the Fund and asked the Fund to reassess the distribution. The Fund requested additional information from the persons involved and arrived at their second decision- the same distribution as their initial decision. The applicants raised a further complaint to the Pension Fund Adjudicator. The Adjudicator indicated that her decision was final and binding and that the applicants would have to approach the court if they were to take the matter further.

The High Court confirmed that a court cannot interfere with a decision made by a fund simply because it disagrees with the board of a retirement fund’s finding, however, it can interfere if it can be proven that the decision can be attacked under the provisions contained in the Promotion of Administrative Justice Act, Act 3 of 2000 (“PAJA”).

In terms of Section 6(2)(e)(iii) of PAJA a court or tribunal has the power to judicially review an administrative action if the action was taken because irrelevant considerations were considered, or relevant considerations were not considered.

The High Court set aside the decision made by the Fund. The main reasons for the interference from the High Court was:

- The Fund did not take into account the maintenance requirement of all persons involved, and

- The Fund did not consider the marital status of all persons involved, and

- The Fund did not take into account the wishes of the deceased, and

- The Fund did not act reasonably and rationally in making the decision.

Another comment from the Hight Court to note from this case, is that the deceased nominated a trust on his beneficiary nomination form. The Fund argued that a trust is not a dependent as defined in the PFA and therefore did not allocate any amount to the trust. The High Court commented that payment to a trust should not be seen as payment to a trust as a dependent, but rather be seen as payment to the person who receives payment from a trust as a dependent. The High Court further commented that a nomination form should only be ignored if there are compelling reasons to do so.

ENDS