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Readers response to the FAnews online article - Divorce benefits

23 October 2007 Gareth Stokes

FAnews Online asked readers the following:

The Pension Funds Amendment Bill has gone from hero to zero in a matter of minutes. Despite best intentions, legislators have failed to improve the lot at ground level. One of the difficulties with any legal system is that the astute professional will always find an angle to launch a challenge. Is Old Mutual’s decision against the spirit of the law – or does it make sense until legislators finalise the relevant tax law? [Click here to read the newsletter]

The following is a sample of the reader responses received on the matter.

Plenty of issues to be clarified – HB

“There are even more issues that need to be clarified:

Does this apply to Retirement Annuities too? Remember the conflict of Pension Fund Act versus the Long term insurance Act. If it does apply, what happens to recurring premium RA’s if the spouse withdraws, specifically regards fund values, penalties imposed by insurers etc. For sure there are going to be penalties involved and who is going to carry them?

Let’s say the pension / RA is in a stable fund – will early withdrawal by the spouse carry the non-vesting bonuses [which only vest in maturity]?

And what happens if market value adjusters are in place at the specific time, what does the spouse qualify for? Will it be the fund value minus MVA?

Sadly this is another case where the ruling and its implications were NOT thought through properly, nor investigated.

Legislators have not covered all bases – JM
 

I am disappointed that the legislators have not looked at all the corners, when putting down the amendment, surely they should have done that or don’t they have enough resources?

Instead of just looking at freeing the funds they should have done and in-depth or broad analysis and research on other broad issues like taxes and so forth that will be affected by the new Law. Besides disappointing most divorcees, I think it is the duty of every professional business and individuals to question the legislation and check the impact of that suggested Law, because they will be responsible for implementing it.

Unintended consequences could have been avoided - ID

Has anyone asked themselves why the Pension Funds Adjudicator has agreed to pay out divorcees a portion of their former spouses’ retirement fund savings, rather than transfer the divorcee’s share to another retirement fund, without any tax implications for the former spouse member? This new legislation – as with most of the Pension Funds Adjudicator’s latest rulings – will have unintended consequences which, in hindsight, were entirely foreseeable.
 
With current high interest rates on mortgages, many couples will be tempted to get divorced so they can access their retirement fund savings to pay off the arrears on the bond. This would not be all that bad if it stopped there.  But they could also take their retirement fund savings to buy a new car, or take a holiday, with the argument being, “It’s my money isn’t it?” This all flies against the intended national strategy of wealth creation through savings. 
 
You can expect to see a lot more divorcees reliant on a state pension fund to see them through their old age as a direct result of this new legislation coming from the Pension Funds Adjudicator. This is so stupid, that you ask yourself what kind of qualifications or financial expertise the Pension Funds Adjudicator actually has.  What calibre of people work in that department? Who comes up with these ideas?

Journalists should get their facts straight – DW

I find it unfortunate that journalists often seek sensation rather than getting their facts right. Your comment that “The Pension Funds Amendment Bill is clearly intended to be applied retrospectively” is astounding, if one considers that the Legislature saw it necessary to specifically declare some sections to have retrospective effect. Would this have been necessary if all the provisions of the Pension Funds Act Amendment Act were to be applied retrospectively?

Furthermore, your statement that decisions that life industry players must part with money are never welcome should also be substantiated. Please explain how a retirement fund administrator will benefit from withholding the non-member spouse’s portion in the fund. The only person that will gain thereby is the fund member, whose interest retirement fund trustees are obliged to protect.

The position is rather the following:

1.      A law has been promulgated, which the trustees of a fund are obliged to follow. It is not for them to deviate from the law purely because they deem it to be “in the spirit of the law”. That is why we have a legislative process prescribed by our Constitution.

2.      There is reason to doubt that the provisions of the Amendment Act regarding divorce claims should be applied retrospectively having regard to the fact that some provisions were specifically declared to have retrospective effect whereas the amendments to section 37D were not.

3.      If the Amendment Act is interpreted incorrectly, members who were divorced prior to 13 September 2007 will be prejudiced as they would have earned fund returns on the amount paid to the non-member spouse. It might seem unfair that the non-member spouse will not receive such fund returns, but then again, the member will be liable for tax on the amount paid to the non-member spouse.

I think all in the industry would welcome changes to legislation to correct this situation, but until that happens, fund trustees will have difficulty in applying the provisions of the divorce amendment.

The fault lies with the legislators, not the institution – JD

I comment in my private capacity and as a lawyer.

The presumption against retroactivity of legislation is a strong one and a necessary one. Every citizen trying to operate in a legal manner needs certainty, and it is hard to have certainty when an act you commit now may become illegal or actionable in future. A simple example to illustrate a simpler point which you seem to have missed: you are caught dealing a party drug at a night club.  On analysis, it turns out to be a new substance, potentially dangerous, but not yet declared illegal. It is declared unlawful just before your trial. Retroactivity might seem desirable, in the “spirit” of combating illegal drug dealing, but it would be highly unfair.

That is not to say that sometimes retroactive legislation may be necessary. The issue around a divorcee's interest in pension funds may well be a case in point. What is important, though, is that where legislation is intended to have a retroactive effect this must be absolutely clear in the wording of the legislation, to overcome the presumption referred to above. It is not for the Treasury to say what the intention of parliament was, or that an act should be applied retroactively; it is for the courts, and they can only do that when the language of the amendment is clear. The fault here, Mr Stokes, lies with the drafter of the legislation, and not the institutions.

While there is uncertainty, it would be highly irresponsible, if not plain stupid, for a financial institution to operate in defiance of the basic presumption. If Old Mutual were to pay a divorced non-member spouse an amount calculated in terms of the amendment now, it would be possible for the member to sue, on the basis that the legislation is not clearly retroactive. If I were a member with a substantial fund, and my spouse’s interest in the fund, calculated in the old way, had been taken into consideration when my divorce settlement was finalised, I wouldn't hesitate to sue Old Mutual were it to pay a greater share to my spouse, unless the law were clear that they could.

The underdog - the unfortunate wife screwed by the system - is an attractive cause for media and politicians. The problem is that many divorce settlements have been concluded based on the fact that the old provision was inadequate. Non-member spouses' lawyers frequently press for an additional share of other assets to compensate for the inadequate share in the pension.

It is not unknown for the house, the car, the cash, everything but the pension in fact, to be awarded to the non-member spouse to compensate for the deficiency in the pension interest under the old legislation. The problem with making the new legislation retroactive is that it may well give non-member spouses a greater claim to a pension interest than was anticipated when the divorce settlement was finalised. Now is that fair?
So to answer your question: It makes legal and business sense for institutions to wait until the government has clarified its intentions.

Additionally, it is not axiomatic that the retroactive application of the legislation is fair or even desirable.

An unwarranted attack on a life company – RK

Your attack on Old Mutual is unwarranted (this time). It has nothing to do with the unwillingness to part with money. In no system can legislation arbitrarily be interpreted to meet some intangible spirit of the law.

A system is based on a clear factual meaning of the law.  If it is meant to be retrospectively, then it should be changed by legislation and not by interpretation.
Furthermore your attack is based on the premise that the person waiting for his/her portion of the retirement annuity is destitute. Clearly you have had little to do with divorces.

Not following the letter of the Law would be negligent – WT

I believe Old Mutual is correct is seeking clarity on the law before proceeding. Anything less would be gross negligence. The current situation must be blamed on government, who has failed to provide the necessary framework to provide for an equitable solution.
 
On that matter, where all these regulatory body are enforcing good corporate governance FSB, Ombuds and Council for Medical Schemes, it is a pity they do not apply the same standard to government departments. Or, it may be not, as if this happened, we may not have any government departments left.

I’m with Old Mutual – MAW

I despise the attitude at which you made reference to Old Mutual and their stance on the amendment of this Act. I am of the opinion that they are correct in insisting that the specific legalities of this amendment be sorted out before there is a barrage of bitter divorcees attacking existing pension funds.

There are indeed a few questions that need to be answered, like what happens if a “settlement in-lieu” of the pension fund was made at time of divorce? Then surely no claim – but Old Mutual is right, it would have to go to court! If a payment was made, how would the administrators react to such payment? Would it be considered as the one withdrawal, therefore imposing tax implications? Who would pay the tax, the fund member, or the claimant?  If it is to be regarded as the one withdrawal , it is then making a preservation fund completely null-en-void , as the receiver has already changed the legislation with regards to considering “length of employment” as part of the “tax-free” calc , it leaves only liquidity selling point for preservation funds, which now too may be out of the picture.

There is still too much speculation on how this is to be treated, and while legislation is still up in the air. I’m with Old Mutual, go to court guys!

Why all the confusion about taxation – BE

How penal was the old dispensation – the benefit amount awarded to the non-member spouse was determined on the member’s resignation benefit which often did not include accumulated interest or growth (if it did it was a paltry amount determined by the rules/actuary). The non-member spouse earned no interest or growth on the award and the award became laughable because of inflation, if the benefit was finally paid after many years. The member actually benefited by the growth on the award and this was probably one of the best deals that we men ever had!

I cannot understand the confusion about taxation – divorce settlements have always been taxed as resignation, retirement or death benefits, as the case may be for the reason of accrual to the member, why should it now change? The benefit accrues to the member and the law only permits the deduction of the settlement amount under Section 37 and has no bearing whatsoever on the taxation of the benefit.

However, I say that we can transfer the non-member spouse’s divorce benefit to a RA fund or his/her employer fund, with no tax on the transfer amount.

BECAUSE!

If you read the Pension Funds Act it defines a member of a fund as:

“Member” means, in relation to -

(a)     A fund referred to in paragraph (a) of the definition of “pension fund organization”, any member or former member of the association by which such fund has been established;

(b)     A fund referred to in paragraph (b) of that definition, a person who belongs or belonged to a class of persons for whose benefit that fund has been established,"

Paragraph (b) of the definition of a pension fund organisation includes dependants of the member or former member for whose benefit such funds are established. There is no reference to persons who are employed by an Employer who participates in such a fund.

Therefore, by the above definition a non-member spouse is deemed to be a member by the Pension Funds Act and a member who becomes entitled to a resignation benefit may transfer his/her benefit to another approved fund. Therefore, I see no reason why the divorce settlement may not be transferred to another approved fund. The spouse's "membership" ceases on the date of his/her divorce and now, under the law amendment, becomes entitled to the immediate payment of his/her benefit. The deemed spouse member becomes a "resignation" on the date of the final decree.

I would much rather suggest that fund administrators apply for tax directives, using the non-member spouse's details - you must apply even if the recipient elects to transfer to another approved fund. It would be interesting to see the outcome of such an action.

As to Old Mutual’s objection on applying the recent law amendment on a retrospective basis: I have not once seen a divorce order against a female fund member but this may well change over time. Were I a female, I would ask if the Old Mutual really has the interest of women at heart with their ‘Her Policy’ (or something like that) or is it just another marketing ploy which has no real substance to it. They clearly do not care much about females who are not members of the various funds that they administer.

I also find it interesting that Old Mutual want intermediaries (administrators who are independent) to challenge the Adjudicator’s ruling. Why? The intermediaries will then again be blamed for another bad thing that they

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