Prevention is better than cure

The principle of "prevention is better than cure" is well illustrated by the various repercussions after South Africa's Pension Funds Amendment Bill was enacted. In the haste to remedy certain shortcomings in the original legislation, a number of flaws emerged.

Section 37D of the Pension Funds Amendment Bill is of particular interest here. The law was changed to allow a non-member spouse access to a member spouse's pension fund at the time of the divorce rather than having to wait until the member spouse's withdrawal from the fund. It was assumed that legislators intended to create a retrospective 'clean break' situation from the date of the divorce order, but ambiguous wording led to differing interpretations depending on which side of the fence a party found itself.

Retrospective application

The Pension Funds Adjudicator ruled in the case of Cockroft versus the Mine Employees Pensions Fund that the legislation should apply retrospectively to include divorces concluded prior to 13 September 2007.

But pension fund administrators disagreed. Their primary concern is to their members – and as such they had to pay attention to the letter of the law. Jenny Gordon, Old Mutual Senior Legal Adviser: Product Solutions clarifies this stance: "The general legal principal is unless legislation clearly and unambiguously is stated to apply retrospectively there is a legal presumption that it only applies prospectively." Other legal experts agree.

Test case

Pension fund administrators have to protect the vested rights of their members. If an administrator were to apply the law retrospectively and pay out a non-member's share of the member's funds they would open themselves to possible legal claim from the member. Administrators have to wait for clarity on the legislative intentions before proceeding. "From Old Mutual's point of view we are putting a test case before court. We are applying for a declaratory order on the matter. But that does take time and we actually believe that [the matter] will probably be resolved prior to that test case being heard…" says Gordon.

Tax implications

To make matters worse the tax implications of the intended outcome had not been addressed at all. Existing divorce orders might not take cognisance of the tax treatment of the order. If a member agreed to pay his non-member spouse R50 000 as part of the divorce settlement the retirement fund will have to 'release' in excess of that amount to provide for any taxes due.

New legislation

Two new pieces of legislation should address these concerns. The first is the Taxation Laws Amendments Bill which was recently tabled, and the second, the Revenue Laws Amendment Bill which is just months away. But even if the Pension Funds Amendment Bill is fully addressed through a quick change or two there are still gaping holes the legislators need to patch up.

One such example is the treatment of Preservation Funds in the Divorce Act of 1989. When the Act was tabled preservation funds did not even exist. The Divorce Act stipulates how a member's pension interest should be determined in relation to pension funds, retirement annuity funds and provident funds.

For retirement annuities this interest is defined as the member's contribution plus a simple rate of interest, currently set at 15.5%. For pension and provident funds the amount is simply defined as the withdrawal benefit. Unfortunately the definition cannot be applied to a Preservation Fund. Gordon notes that "by definition the Divorce Act does not apply to a Preservation Fund."

Casanova's Charter

We spoke to an expert in the field who painted this extreme picture. He suggests that an individual who knows a divorce is imminent could resign from a retirement fund and place the proceeds in a preservation fund prior to the divorce order. In terms of current legislation the non-member spouse would not be able to touch these funds. The Divorce Act simply doesn't allow for the valuation of funds in a preservation fund!

The danger in leaving the current legislation unchanged is there could be any number of divorce orders where pension fund administrators in their ignorance have valued amounts in preservation funds. And the result of these errors is that cases which should be 'cut and dried' remain open to legal challenge from either side.

Until such time as amendments are made by way of new bills there is little to be done but deal with each case as it arises. Individuals without the means to challenge the legislation in court will have to wait for the legal precedents to be established. And that means accepting that even the Pension Funds Adjudicator's decisions can be tested in a court of law.