Distribution of assets on the death of a member

Some time ago we posed the question; what happens to a member’s pension fund assets should he or she die before he or she retires (FA News April 2013).

As a general rule everyone is free to decide what happens to their assets when they die. They can make their wishes clear in his or her will. This is no true with pension fund assets.

A subject rarely pure
Once a member dies an executor is appointed. The member can nominate his or her executor who will distribute his or her assets in terms of the Will, under the supervision of the Master of the High Court. If the member does not have a Will, his or her assets will be distributed in terms of the common-law of Succession.

The member can nominate a beneficiary in terms of a life contract in which event the policy proceeds go directly to the nominated beneficiary and not via the member’s estate or administrator (Pieterse v Shrosbree NO and others; Shrosbree NO v Love and others 2005 (1) SA 308 SCA).

If the member dies insolvent, matters are more complicated. The matter was governed by SS39 and 41-44 of the now repealed Insurance Act 27 of 1943. Aspects of these sections were declared unconstitutional in Brink v Kitshoff NO 1996 4 SA 197 CC. Section 63 was a new section in the Long Term Insurance Act (LTIA) which turned out to be incomprehensible and was recently revised but has not really solved the matter of life insurance and insolvency. As Justice Ponnan put it, relying on the playwright Oscar Wild this “is a subject rarely pure and never simple”.

Complicated matters
Assets held in a retirement funds are governed by the much utilised S37C of the Pensions Fund Act 24 of 1956. This provision states:
? S37(1) Notwithstanding anything to the contrary contained in any law or in the rules of a registered fund, any benefit… shall … not form part of the assets in the estate of such a member, but shall be dealt with in the following manner:

How the assets are disposed of is thus governed by the Pension Funds Act and not in terms of the normal law of succession. As a rule, the responsibility to decide what happens to your assets rests with the “trustees” of the retirement fund. Fifty per cent are elected by employees with the balance being appointed by the employer. “Trustees” are not professionally trained to be “trustees”. Generally they do not have the knowledge, skills or training to make the decisions they are required to make. This may not be a fatal flaw if trained pension fund administrators existed. The current system is sub-optimal.

The first subsection which was amended in 2013 reads:

? 37(1)(a) If the fund within twelve months of the death of the member becomes aware of or traces a dependant or dependants of the member, the benefit shall be paid to such dependant or, as may be deemed equitable by the fund … to one of such dependants or in proportions to some of or all such dependants.

Dependant is defined as a person whom the member is liable to maintain, and a person whom the member is not liable to maintain; a spouse and a child of the member. The Pension Fund Adjudicator ruled some time back spouse does not necessarily mean married to.

A few assumptions
At a first glance this section may appear benign but it is not. Assume as is often the case the member wishes to leave his or her entire retirement assets to the surviving spouse. This section does not recognise this but leaves it to the fund that is the “trustees”, to decide. Let us take a few hypothetical examples.

Assume a husband was having an affair which produced an illegitimate offspring the existence of whom is unknown to the surviving wife. The husband paid a small sum of money each month to his second family but made no provision for this second family in terms of his will. What is the position in this case?

A dependant is defined in the Pensions Fund Act to include ‘a person in respect of whom the member is not legally liable for maintenance if such person is a child of the member, including… a child born out of wedlock.’ So the “trustees” can order some of the retirement assets be paid to the illegitimate child. The definition of a dependent includes a person “in fact dependent on the member for maintenance”. The second family was in receipt of a monthly payment.

Clearly the provisions in the Act are far wider than the position if left to the common-law.

What happens if the member had nominated a beneficiary? This is dealt with in terms of S37C(1)(b) which reads:

? If the fund does not become aware of or cannot trace any dependant of the member within twelve months of the death of the member, and the member has designated in writing to the fund a nominee who is not a dependant of the member, to receive the benefit or such portion of the benefit as is specified by the member in writing to the fund, the benefit or such portion of the benefit shall be paid to such nominee: provided … This sub-section applies if the fund is not aware of any dependants (as defined in the Act). If the fund is aware of the existence of dependants then subsection (1)(a) applies. This subsection also does not apply if the person nominated is a dependant.

The Act continues to S37C(1)(bA) the relevant portion of which reads:

? If a member has a dependant and the member has also designated in writing to the fund a nominee to receive the benefit or such portion of the benefit as is specified by the member in writing to the fund, the fund shall within twelve months of the death of such member pay the benefit or such portion thereof to such dependant or nominee in such proportions as the board may deem equitable: … Provided this paragraph [does] not prohibit a fund paying the benefit, either to a dependant or nominee contemplated in this paragraph or, if there is more than one such dependant or nominee, in proportions to any or all of those dependants and nominees.

So if the member has a spouse (defined in the Act as a dependant) and has nominated that dependant as the beneficiary of the pension fund assets then the fund shall, within 12 months of the death of the member, pay the benefit to the dependant (spouse). However, the fund still retains discretion to distribute the funds ‘in proportions to any or all those dependants and nominees.’

It should be clear these issues are complicated as S37C continues with a number of further sections.

Managing processes
In reality the trustees are not trained or knowledgeable in these matters, to make the decisions the Act assumes they are capable of making and are called to make.

An overwhelming case can be made and is indeed made for the training and appointment of professional fund administrators trained in these matters to correctly advise trustees on this complex process. The common law position, based on property rights is much clearer. The Act should as a point of departure conform to the common law position.