Words on Wealth: Mabuza case raises questions about living annuities

The legal dispute involving the pension assets of the late former Deputy President David Mabuza highlights the fact that there are important structural and legal differences between financial products, where certain rules come into effect on death. It’s vital that you are fully aware of these rules when choosing a certain type of product. It’s also important to know which assets or products fall within your estate and are therefore governed by your will, and which ones fall outside your estate and over which your will has no say.

At the centre of the dispute is R44.7 million in Mabuza’s living annuity. The disbursement of the proceeds of the annuity to Mabuza’s widow, Nonhlanhla Mnisi, was suspended by the Mpumalanga High Court following an application by a customary wife of Mabuza’s, Emunah Silinda, and her daughter Tamara, who argued for the money to be frozen until Mabuza’s dependants could be located and their claims considered.

This week, Alexforbes, the provider of Mabuza’s living annuity, and against which the temporary injunction was issued, published a statement clarifying the law governing living annuities and explaining its position.

Statement from annuity provider

Alexforbes says: “While we respect the judgment, Alexforbes is currently reviewing our legal options in response, especially the unjustified cost order against us, considering that Alexforbes had complied fully and timeously with the court’s directions.

“We believe it is important to clarify the legal framework that applies in this matter. As a principle and policy, Alexforbes seeks to avoid publicly disclosing client information, but given the public interest in this matter and the High Court order, it is necessary to share the following facts:

“On retiring in early 2023, the late Mr DD Mabuza elected not to retain his pension benefit in the Political Office-Bearers Pension Fund. Instead, in terms of the fund rules, he chose to transfer the full value of his pension to purchase a living annuity from a registered insurer – specifically a living annuity product from Alexforbes.

“A living annuity is not a retirement fund and is not governed by Section 37C of the Pension Funds Act. Whilst retirement fund death benefits are distributed in accordance with Section 37C at the discretion of fund trustees to identified dependants and nominees, this does not apply to a living annuity. A living annuity is an insurance product, regulated by the Long-Term Insurance Act and the Income Tax Act, where the policyholder’s nominated beneficiaries receive the remaining capital portion of the investment upon death. In law, the insurer must pay the nominated beneficiaries, and there is no discretion to depart from this. Any departure would have significant legal consequences.”

Alexforbes says it is critical to distinguish between the two product frameworks:

• Living annuities are distributed strictly in accordance with the policyholder’s beneficiary nomination form and do not form part of the deceased estate.
• Retirement funds (pension, provident, retirement annuities, and preservation funds) fall under Section 37C, requiring trustees to consider the relationships of the deceased, underpinned by the principles of fairness, to determine legal and factual dependency for the allocation of benefits.

Thoughts and takeaways

At first glance, this seemed reminiscent of a recent case, Machipi v Palabora Mining Company and Others, which was decided by the North Gauteng High Court in February and involved the distribution of group risk benefits. Here, the court’s decision appeared to ignore the fact that, because the group risk policy was an “approved” policy instituted by the pension fund, it was subject to the Pension Funds Act, as opposed to an “unapproved” policy, which is instituted by the employer and not subject to the Act. The decision, which came under fire from the pension fund industry, has been taken on appeal by the administrator of the pension fund.

However, news reports covering the Mabuza case suggest that the Mpumalanga High Court judge did know the difference between a product that fell under the Act and one that didn’t, but questioned whether the beneficiary nomination form was a true reflection of Mabuza’s final wishes.

According to The Sowetan, Silinda’s lawyer, Adv Doctor Sibuyi, told the judge that a document in their possession suggested that Mabuza had told Alexforbes in May that he wanted to change his nomination of beneficiaries and include his children. However, that never happened, and he died two months later.

What is clear is that the beneficiary nomination form named a single beneficiary, Nonhlanhla Mnisi, and that Alexforbes, correctly, allocated the entire proceeds of the annuity to her.

There have long been legal questions around why retail living annuities should not fall under the Pension Funds Act. The fact that they don’t not only affects dependants on an annuity holder’s death, but denies spouses a compulsory half-half split on divorce.

Perhaps this case, if it goes all the way to the Constitutional Court, will challenge the current legislation.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE