Distribution of pension assets on the death of the member
01 April 2013 | Magazine Archives FAnews & FAnuus | Prof Robert Vivian | Robert W Vivian, Albert Mushai, University of the Witwatersrand
This series of articles addresses a simple question: what happens to your pension assets should you die before retirement?
First, some background. Pension-fund assets are extremely important to individuals and what happens to these is increasingly in the public interest. Some years ago in the UK, research was conducted at what we in South Africa call the Master’s Office. That is the place at which deaths are registered when people die, and where the administration of deceased estates is regulated.
Research reveals that, in the vast majority of cases, persons who die wealthy were born wealthy. This study falls within the field of social mobility and one can conclude from this study that very little social mobility took place. In fact, it is more accurate to say that the poor stay poor. Until recently, the social gap was narrowing, but worldwide it has been shown to be widening, once again.
What happens to one’s assets when one dies?
What this finding means is that the vast majority of persons need their pension assets to survive. As we know, for the vast majority these assets will prove to be inadequate. The position of the pensioner has been aggravated in recent years by declining non-contractual (non-pension) savings. In many cases, the only cash assets a pensioner has with which to survive are derived from pension-fund savings. The question therefore is what happens to these assets if the fund member dies before withdrawing them from the fund or receiving a pension?
One would think that pension-fund assets should follow the path normally followed with regard to dealing with all other assets of the deceased person. So what happens to one’s assets when one dies? While one is alive, one can decide what will happen to the assets and express these wishes in a Will. Many people forget or decide not to draw-up a Will and die intestate, in which case their assets are distributed in terms of the Law of Succession pertaining to intestate estates.
A vested right to assets
Until recently everyone had a great deal of freedom to decide what to do with their assets, including leaving nothing to a surviving spouse. Even the rules of intestate succession are not very generous to the surviving spouse – the position of the surviving spouse was changed with the passing of the Maintenance of Surviving Spouse Act 27 of 1990 (as amended), which now provides the surviving spouse with a claim for maintenance against the estate of the deceased spouse.
The legal status of the assets upon death is uncertain and a term was invented to cover this: vesting. It is said that persons who stand to inherit do not own the assets but have a vested right to them. Once the Master receives the necessary documentation, he or she will appoint an executor to wind-up the estate. The executor is also not the owner of the assets.
The winding up of estates is done in terms of the oft amended Administration of Estates Act 66 of 1965 and taxes in the form of Estate Duty are levied in terms of the Estate Duty Act 45 of 1955. The executor will, as appropriate, collect the assets and prepare the liquidation and distribution account (L&D account), which is submitted to the Master and advertised in the press and Government Gazette. Once this is done, the executor distributes the assets in accordance with the L&D Account and the assets pass on to the beneficiaries who then become owners.
The case of life insurance policies
Not all of the deceased’s ‘assets’ are distributed by the executor in line with the above procedure. Take for example the proceeds of a life insurance policy. The premiums are paid by the deceased and while alive he or she can decide who the beneficiary of the policy benefits should be. Having so decided, he or she can also change his or her mind.
On the death of the owner of the policy, the beneficiary has a direct claim for the benefits against the insurance company. The policy benefits therefore do not need to go through the estate as administered by the executor. Insurance policy benefits are an example of ‘assets’ that do not go via the estate. There is nothing of course preventing the policy owner from nominating his or her own estate as a beneficiary, in which event the ‘assets’ will go through the estate.
Now one would think that the pension fund assets form part of the assets of the deceased person and will be distributed in accordance with the principles of winding-up of estates as discussed above. The pension fund assets are derived from contributions from the salary of the member, together with contributions from the employer and investment accruals from these contributions.
To whom do the assets belong?
In short, the pension fund member has every reason to believe that most if not all the assets in the fund, standing to his or her account, are his or her assets to be dealt with as decided by the member. At a minimum, one would expect that the assets would be distributed in accordance with the wishes of the deceased member of the fund, unless good reasons exist to the contrary.
Thus one would expect:
• That the member can decide to whom the assets should go and, as in the case of an insurance policy, decide who the beneficiary will be.
• That he or she can leave the assets to his or her estate, in which event they will be distributed by his or her executor as specified the Will.
As will be seen in subsequent articles, this is not the case.
