Understanding the allocation of death benefits in South African retirement funds

It is a sad event when a loved one, especially a parent, passes away. Dealing with grief, family members, funeral arrangements, insurance companies, and the retirement fund of your deceased parent can increase the anxiety levels of adult children who must take control of a situation that most of us cannot fully prepare for. Emotions are high, and we try to control everything. One thing we cannot control is the allocation and payment of the death benefits by the retirement fund of our deceased parents.

In terms of section 37C of the Pension Funds Act, the trustees of a retirement fund have the obligation and discretion, to:

1. Find the dependants and nominees of the deceased member;
2. Allocate death benefits to qualifying dependants and nominees in a just and equitable manner; and
3. Pay the allocated benefits to the qualifying dependants and nominees.

Section 1 of the Pension Funds Act defines a dependent, about a fund member as:

1. The spouse of the member.
2. The child of the member.
3. A person in respect of whom the member is legally liable for maintenance, for example, an ex-spouse who is legally entitled to maintenance in terms of a divorce order.
4. A person in respect of whom the member is not legally liable for maintenance if such a person was, in the opinion of the fund trustees, factually dependent on the deceased for maintenance, for example, a stepchild.
5. A person regarding whom the member would have become legally liable for maintenance had the member not died. 

The Supreme Court of Appeal stated in the Guarnieri ruling that the purpose of section 37C of the Pension Funds Act is to protect existing and potential dependants and that it serves a social function to protect dependency, even over the clear wishes of the member.

When allocating death benefits, the Office of the Pension Funds Adjudicator has identified the following factors that fund trustees must consider when making just and equitable death benefits allocations:

1. The age of the dependants. Minors and dependants who are retired must receive greater consideration than adult dependants who can earn an income to support themselves.
2. The relationship with the deceased. The spouse and children of the deceased should rank above the parents and siblings of the deceased member.
3. The extent of the dependency. A minor child who was 100% dependant on the deceased for maintenance is treated differently from an adult child who earns an income and is only partially dependent on his or her parent for maintenance.
4. The wishes of the deceased. The persons nominated by the member in a nomination form or a will must be considered for an allocation of benefits if the needs of dependants have been met.
5. The financial affairs of the dependants, including their future earning potential. An adult child of the member has a higher future earning potential than the spouse of the member, who is no longer able to work, and the spouse should thus receive more consideration than the adult child.
6. The amount available for distribution. The death benefit must first be applied to ensure that the future needs of dependants are catered for. If there are surplus funds, the nominees of the deceased who are not dependants, can be taken into account for a benefit allocation. Nominees who are not dependants can therefore be excluded from receiving benefits where the death benefit is small.

In the case of Dlamini v South African Local Authorities Pension Fund and Others, the Financial Services Tribunal had to determine if the Pension Funds Adjudicator’s decision that the death benefit allocation decision of the fund was just and equitable must be upheld.

The eldest daughter of the deceased member complained that the decision by the fund trustees to allocate 45% of the death benefit payable by the fund upon the death of her father to his life partner was not just and equitable. The complainant claimed that the decision of the trustees was based on false documentation, that the dependency of the life partner was overexaggerated, and that the fund contradicted itself in the submissions submitted to the Tribunal.

The Tribunal ruled that the onus was on the complainant to prove that the decision of the trustees was not just and equitable. It found that the life partner of the deceased member submitted an affidavit of dependency and that she and the deceased member lived together for a period of two years at the time of his death. The complainant failed to provide any evidence that proved that the deceased member and the life partner were not in a relationship, did not share household expenses, and never resided in the same house. 

The Tribunal agreed that the fund trustees thoroughly investigated the matter and found that the life partner was a factual dependant of the deceased member based on a process during which the relevant considerations were considered, and improper considerations were excluded. Where the discretion to allocate death benefits was reasonably exercised by the trustees of the fund, the Tribunal cannot interfere with the decision, even if the Tribunal would have come to a different allocation, for example, by allocating less than 45% of the death benefit to the life partner.

The adult children of the deceased member are therefore not automatically entitled to the largest part or all of the death benefit to the exclusion of factual dependants of the deceased who are not spouses or blood relatives of the member. The trustees of the fund have a duty to distribute the death benefits in a just and equitable manner among all the dependants of the deceased and cannot favour adult, financially independent, children of the deceased member to the detriment of factual dependants of the deceased member.

* Ladouce is a pension funds lawyer and the author of the book ‘Pensions for Palookas’.

PERSONAL FINANCE