Words on wealth: Concourt clarifies who is entitled to pension benefits when a worker dies

The rules on who gets what in terms of retirement benefits and life insurance payouts when a pension fund member dies have proved a headache for pension funds for almost 50 years, with certain requirements remaining contentious to this day.

These rules have been in place since 1976, when a crucial amendment was made to the Pension Funds Act of 1956. The amendment introduced the famous (or infamous, whichever way you look at it) Section 37C, which changed the way monetary payouts were made to beneficiaries. In fact, it changed who those beneficiaries were, placing the onus on the pension fund to find out.

In a privately held life policy, the process is simple: the payout on the death of the person insured goes to whomever he or she nominated as a beneficiary. If there is more than one, the money is apportioned according to the percentage ascribed to each beneficiary. If no beneficiaries are nominated (a mortal sin, in my view), the payout goes to the dead person’s estate. No quibbles.

Until 1976, pension fund payouts were almost as simple – essentially, the payout was made according to the terms of the deceased’s will or, if there was no will, according to the laws of intestate succession.

Under Section 37C, payouts became far more complicated and onerous for pension funds and far more contestable in court. The provisions override the will or intentions of the deceased by requiring the fund, in distributing the benefit (which may consist of both retirement savings and a group life policy payout), to prioritise financial dependants of the deceased – in other words, those who really need the money – even if they are not named as beneficiaries. It requires a pension fund to actively identify dependants and apportion the money according to what it decides these dependants deserve.

While the motive behind this amendment was honourable, Section 37C has been at the centre of innumerable court cases and complaints to the Pension Funds Adjudicator, because determining dependants and how much each gets is open to dispute. How easy is it for a fund to overlook someone (who may come out of the woodwork and challenge the distribution months after it was made) or get the apportionment wrong? This is done by a bunch of people – the pension fund board – who are strangers to the deceased and his or her family.

The matter is further complicated by the fund having to distinguish between legal dependants, established by their legal relationship, such as a wife or child, and factual dependants, who may not be directly related to the deceased but were being supported financially by the deceased.

I intend to write a separate column on what I (and others) believe is wrong about Section 37C. Here, I draw your attention to an important recent case regarding its interpretation that reinforces the principle of fairness in funds’ allocation decisions. 

Landmark judgment

Last week, the Constitutional Court ruled on the case Mutsila v Municipal Gratuity Fund and Others, concerning the interpretation of Section 37C, overriding a precedent set in 2019 by the Supreme Court of Appeal (SCA) in the case Guarnieri v Fundsatwork Umbrella Pension Fund.

In 2014, Tshifhiwa Mutsila complained to the Pension Fund Adjudicator about the Municipal Gratuity Fund’s decision to allocate a significant portion of the death benefit of her late husband, Takalani Mutsila, to another claimant, Dipuo Masete, along with her two children. The fund had allocated over half (52.5%) of the R1.6m death benefit to Masete based on the fact that Masete claimed she had been married to Takalani Mutsila through a customary marriage and, together with her children, was financially dependent on him.

The Pension Funds Adjudicator found the fund had not verified Mutsila’s claim and ordered the fund to reconsider its allocation of the benefit. However, when the fund appealed this ruling, the SCA decided in its favour by relying on the Guarnieri case. 

The Constitutional Court, in overturning the SCA decision, found that the fund had, in fact, failed to properly investigate the factual dependency of Masete and her children, relying on unverified information, and that the Guarnieri decision was flawed.

In her article on the website of law firm Bowmans, “Landmark Constitutional Court judgment on the distribution of death benefits”, Deirdre Phillips, partner at Bowmans in Cape Town, says this is the first time the highest court in the land has ruled on Section 37C.

Phillips says the judgment “directly overturns Guarnieri, which held that the ‘time at which to determine who is a dependant for the purpose of distributing a death benefit is when that determination is made, and furthermore, the person concerned must still be a beneficiary at the time when the distribution is made’”.

She says the Constitutional Court found this approach legally flawed and problematic for the following reasons:

• Section 37C requires dependency to be assessed as at the date of the member’s death, not at the time of distribution.

• The definition of “dependant" refers to past, not ongoing dependency.

• Changed circumstances after death may affect the allocation, but not the status of a person as a dependant.

“This judgment affirms the social security purpose of death benefits payable by retirement funds and the duty of retirement funds to protect vulnerable dependants. It sets a binding precedent for all retirement funds, adjudicators, and courts,” Phillips says.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE