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Clean-break principle brings GEPF in line with the Pension Funds Act

15 October 2015 GEPF

The “clean-break” principle relating to members and their spouses was introduced into the Government Employees Pension Law to bring it in line with global best practices and to provide a more equitable solution in cases of divorce.

Prior to this, when a GEPF member and his or her non-member spouse divorced, the non-member spouse could only claim their portion of the pension interest when the member spouse exited from the fund. This often led to significant delays in payment.

With the adoption of the clean-break principle, the portion of the pension interest assigned to the non-member spouse—as determined in the divorce order in terms of the Divorce Act 1979—is now payable on the date the divorce is granted. The non-member spouse has a choice to either take the benefit in cash or transfer the benefit to another approved fund.

While the Pension Fund Act or its Amendments do not apply to the GEPF, the decision by GEPF’s Board of Trustees brought the Fund in line with other pension funds. (GEPF is a pension fund established in terms of the Government Employee’s Pension Law, 1996.) GEPF’s early policy had resulted in many complaints from members who felt aggrieved that the Government had instituted a policy that GEPF did not follow but all other retirement funds were obliged to.

The implementation of the clean break principle was further made necessary by a judgement issued by the High Court of South Africa that ruled that the Government Employees Pension Law is inconsistent with section 9(1) of the Constitution of the Republic of South Africa to the extent that it fails to afford former spouses of members of the Fund the same rights and advantages that are enjoyed by former spouses of members of funds regulated by the Pension Funds Act, 24 of 1956. The GEPF was given then 12-months to change the GEP Law and Rules to implement the clean break principle.However, there are a number of implications that needed to be considered in implementing the clean-break principle, including tax issues, the date of accrual, the deemed withdrawal benefit, the reduction in respect of the amount paid to the non-member spouse, and the interest on the amount paid to the non-member spouse.

The GEP Law and the Rules specified the date of accrual in respect of the benefits to be paid after the divorce order settlement.

The amount paid to `the non-member spouse’ is based on the stipulated share of the member’s withdrawal benefit at the date of divorce. Prior to 2012, a GEPF member’s withdrawal benefit was either a cash resignation benefit (which if not transferred to another retirement fund, would be charged tax) or to pay actuarial interest. From 2012, actuarial interest is payable regardless of the member’s choice.

When the benefit is paid to the non-member spouse on divorce, however, the member’s benefit would be reduced. GEPF could either reduce the member’s pensionable service or create a “debt” which would be deducted against their benefit when they finally exited the Fund.

Once a divorce order is attached against a member’s benefit, the member effectively owes a “debt” to the non-member spouse. Under the previous practice, that “debt” was paid—without interest—to the non-member spouse when the member finally exited the Fund.

There were a number of complications that made the reduction of the member’s benefit (or service) inappropriate for GEPF. The Board of Trustees decided to treat the divorce settlement paid to the non-member spouse as a “notional debt” owed to GEPF, which would be deducted against a member’s benefit upon their final exit from the Fund.

The reason the settlement is now owed to the Fund is because the Fund would pay the amount due to the non-member spouse on behalf of the member at the date of divorce rather than the non-member spouse receiving it on the member spouse’s exit date.

When the Fund pays the non-member spouse (on behalf of the member) interest is levied on the member’s exit benefit. This is to achieve cost neutrality between the member and the Fund. If no interest is charged, the member profits at the expense of the Fund (and other members in the Fund). If the interest charge is higher than the Fund returns, the difference between the interest and the Fund returns will profit the Fund at the expense of the member. To achieve cost neutrality the interest needs to be equal to the Fund returns. The Board decided to apply the REPO rate as the interest on this notional “debt” which is expected to be lower than Fund returns.

The advantage of the creation of the debt approach is that the member’s service is not adjusted as a result of the divorce settlement, and therefore the member’s benefits and enhancements is not affected.

The Fund calculates the years of service—or “negative service” that is actuarially equivalent to the divorce settlement—and maintains two service dates on the system. One is the original service date (which assumes that the member did not divorce), and the other is the service date that will be equivalent to the divorce settlement, and this is offset against the original service date when the member exits.

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