Pension Plain: what are the duties of the fund trustees when allocating a death benefit?

Over the last few days, every gossiping tongue in South Africa has expressed an opinion about a R44 million pension payment dispute of almost presidential proportions. According to court records and media reports, the daughter of our recently deceased former deputy president and her mother are seeking a court order to prevent a financial services provider from paying out the money in the living annuity policy that former deputy president David Mabuza purchased from the financial services provider when he retired.  A complicated legal and financial dispute is the last thing that a family in grief should be expected to deal with, and my heart goes out to the family in this challenging time.

It is reported that the parties are also seeking a court order declaring that the money in the living annuity is an asset of the late estate of David Mabuza that must be distributed in a just and equitable manner between his dependants and that it should not be paid to the sole beneficiary nominated by the deceased, as per his signed nomination form.  It therefore seems that the claimants are seeking a distribution of the living annuity money in terms of section 37C of the Pension Funds Act and not for that money to be paid to the nominee or into the deceased estate and distributed in terms of the will of the deceased or the rules of intestate succession.

Section 37C of the Pension Funds Act states that, notwithstanding anything to the contrary in any law or in the rules of a registered fund, any benefit payable by such a fund, upon the death of a member, shall not form part of the assets in the estate of such member, and it further states how the death benefit must be dealt with.  It places a duty on the trustees of the fund to:

1. Find the dependants and nominees of the deceased member;
2. Allocate benefits in a just and equitable manner among dependants and nominees; and
3. Pay benefits to dependants and nominees as per the allocation.

In the recent case of Van den Heever versus ABSA Pension Fund, the Financial Services Tribunal confirmed that, for the fund to make a just and equitable death benefit allocation, it must consider the following factors:

1. Age of dependants;
2. The relationship with the deceased;
3. The extent of dependency;
4. The wishes of the deceased;
5. The future earning capacity of the beneficiaries; and 
6. The amount available for distribution.

The Financial Services Tribunal found in the Van den Heever case that where the death benefit distribution of the fund trustees is fair, reasonable and in accordance with section 37C of the Pension Funds Act, the Pension Funds Adjudicator and the Financial Services Tribunal cannot second-guess the fund and find in favour of a different benefit allocation to replace the allocation made by the fund trustees. 

It further stated that if the Pension Funds Adjudicator or the Financial Services Tribunal finds that the fund trustees did not conduct themselves in terms of the law and the rules of the fund or ignored relevant factors and considered irrelevant ones, it can refer the matter back to the trustees of the fund for a new allocation decision, but it cannot replace the allocation decision of the trustees with its own opinion of what the death benefit allocation should be.  In the specific matter, the Financial Services Tribunal found that the fund trustees cannot be faulted in the death benefit allocation they made, and the Pension Fund Adjudicator’s determination that the trustees must make a new allocation decision was set aside.

Given the fact that section 37C of the Pension Funds Act clearly states that the death benefits payable by a fund do not form part of the estate of the deceased fund member, it therefore does not seem possible for a court, as it seems it was requested to do in the Mabuza case, to declare that a death benefit payable by a fund should form part of the estate of that deceased member, in contradiction to the stipulations of section 37C of the Pension Funds Act. 

The authority of the court in the Mabuza matter to order the fund trustees to allocate the money in the living annuity policy in terms of section 37C of the Pension Funds Act is also debatable. The living annuity “asset” is not a benefit payable by a retirement fund upon the death of a member as it is not a fund benefit that becomes payable upon the death of a member. 

When a fund purchases an annuity policy from an insurer upon the retirement of a fund member, the fund transfers the pension benefit and the obligation to pay a pension in relation to the member to the insurer. The insurer then issues an insurance policy that will provide either a life annuity (a guaranteed monthly pension for life) or a living annuity (an investment account from which the pensioner can withdraw a monthly pension). Upon the death of a living annuitant, the policy benefits can only be paid out to the nominated beneficiary of the annuitant, who does not have to be a dependant or dependants of the annuitant. The annuitant, therefore, has the freedom to nominate anybody to receive the benefits in the living annuity after his or her death. 

Retirement fund trustees have an obligation to pay death benefits upon the death of a member as prescribed by the Pension Funds Act and the rules of the fund. Insurers have an obligation to pay policy benefits to nominated beneficiaries in terms of the policy, including in the case of a living annuity policy that was bought with the retirement benefits of the annuitant that was transferred from his or her retirement fund to the insurer. 

Where the roles of trustees and insurers are misunderstood or confused, grieving families of deceased fund members or living annuitants are thrown into a legal minefield that can lead to payment delays, frustration and the airing of personal disputes that are consumed by a gossip hungry public who might be more interested in a public family fight than what is prescribed by law or what might be in the best interest of the parties involved.  

When all is said and done, and after legal costs and lump sum death benefit tax have been deducted, the R44 million can quickly become far less than R30 million if grieving family members cannot find an amicable solution for their legal dispute.

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

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