Issue: November/December 2005
Payment of Retirement Fund Benefits
This is another article in our series on the boards of trustees of retirement funds, sponsored by Liberty Life to inform trustees in the public interest. Liberty Life does not endeavour to promote, through the content, its own products or services.
This article covers the payment of benefits in different circumstances. As is the case with all their duties, trustees should exercise due care and diligence when dealing with benefit payments. Benefits must be paid in accordance with the rules of the fund and the Pension Funds Act.
In the event of a death benefit, the trustees must use their discretion to pay the death benefit to the member’s dependants or nominated beneficiaries in such proportions as they deem equitable. Care should be taken to ensure that the person to whom payment is made is in fact entitled to such payment.
It is the trustees of a pension fund’s duty to pay benefits in terms of the rules of the fund and the Pension Funds Act. If a trustee negligently pays an incorrect amount, or makes a payment to a person not entitled to such a benefit, the trustee may be held personally liable for making good the loss to the fund.
The trustees must make sure that the person to whom payment is made is indeed entitled to receive it. To this end, proof of identity is required and the trustees should request to see identity documents, marriage and birth certificates. Customary law, which allows for polygamy, should also be taken into consideration.
BENEFIT PAYMENTS ON RETIREMENT
On retirement from a pension fund, a member is entitled to take one-third of his or her retirement benefit is cash, and the remaining two-thirds must be used to buy a pension for life.
Alternatively, the full benefit may be used to buy a pension, which will provide a higher income.
In the case of a provident fund, the full benefit may be taken as a cash lump sum. This places the onus on the member to make sure that his or her retirement capital is invested wisely after retirement so as not to outlive the money.
BENEFIT PAYMENTS ON DEATH
A member’s benefit on death is under the control of the trustees of the fund. The trustees may at their discretion pay the death benefit to the member’s dependants or nominated beneficiaries in such proportions as they deem equitable. A period of 12 months is allowed to trace any dependants or nominees of the member.
To make it easier for all the parties concerned, it is important for members to complete a Nomination of Beneficiary Form and to review and update this form on a regular basis (ideally once a year). That saves valuable time on the death of a member and expedites the distribution of benefits so that the beneficiaries do not suffer any unnecessary hardship.
DISTRIBUTION OF DEATH BENEFITS
Death benefits are allocated in terms of the definition of “dependant” in section 1 and the provisions of section 37C of the Pension Funds Act.
In terms of the Act, dependant in relation to a member means:
The deceased member’s spouse and children.
The deceased member’s parents or siblings.
A child who was conceived but not yet born at the date of the member’s death.
Guidelines when deciding on how to distribute benefits on an equitable basis include:
NOTE: Section 37C was amended in 1996 to provide that even major children of a deceased member automatically qualify as dependants and may therefore be considered for the payment of death benefits.
Where a member has died, the trustees must make every reasonable effort to find and make contact with all the nominated beneficiaries and dependants in order to make an informed decision regarding the payment of benefits.
Four situations can arise:
The trustees may make an allocation to some of, or all the dependants. As mentioned above, the trustees have 12 months in which to trace dependants.
If a member has nominated a non-dependant as a beneficiary and the trustees are unable to trace any dependants within 12 months of the member’s death, the benefits may be paid to the nominated non-dependants in such proportions as the member has selected or as the trustees may deem equitable.
NOTE: If the member’s estate is insolvent, the unpaid debts will be settled first and only then will the balance left (if any) be paid to the nominated non-dependants.
Where the member has a dependant and the member had also nominated a beneficiary who does not qualify as a dependant, the trustees may pay the benefit or such portion thereof to the dependant or nominee in such proportions as they may deem equitable.
If the trustees do not become aware of, or cannot trace any dependant of the member within 12 months of the death of the member, and the member did not nominate any beneficiaries, the benefit will be paid into the deceased member’s estate. If the Master of the High Court has not registered an estate, the benefit may be paid into the Guardian’s Fund.
PAYMENT TO A TRUST
The rules of the fund will determine whether benefits can be paid to a trust or not. When a retirement fund makes a payment to a trust on behalf of a dependant or nominee, such payment is deemed to be paid to such dependant or nominee.
NOTE: Such payment is subject to the rules that the beneficiary or nominee must have been legally or factually dependant on the deceased member as described above.
DEDUCTIONS FROM BENEFITS
The following amounts may be deducted from the benefits payable in terms of the rules of a registered fund:
BENEFITS MAY NOT BE USED AS SECURITY FOR DEBT
A member or beneficiary may not use his or her retirement benefit as security for other debts (except housing loans if the rules of the fund allow for this), or transfer, cede, pledge or hypothecate benefits while they are in the fund.
CREDITORS MAY NOT ATTACH BENEFITS
Subject to the exceptions mentioned below, creditors are not allowed to attach benefits in the fund:
Claims for the above should be paid in the following order of preference:
TRANSLOCATION OF FUND BENEFITS
If a member resigns, is retrenched or dismissed from employment or if the fund is winding up, the member’s benefit (called a “translocation benefit”) may be transferred to a preservation fund.
A preservation fund is a vehicle for the preservation of retirement benefits of employees who cease to be members of an approved pension or provident fund. An employer must apply in writing to participate in a preservation fund, and the trustees of the preservation fund must approve the employer’s participation.
A translocation benefit from a pension fund must be paid into a pension preservation fund, whereas a benefit from a provident fund must be paid into a provident preservation fund.
Translocation to a preservation fund is not permitted if an employer has either merged with or been taken over by another entity and an employee is employed by the merged employer or entity.
The benefit in a preservation fund must be paid as a retirement benefit from the date a member actually retires from his employment with the employer in whose service he is when he retires.
A member who is not employed and who wishes to take a retirement benefit from the preservation fund, may do so before he reaches the age of 70 years, but not before the age of 55 years.
If an employee retires from his or her new employer due to disability prior to attaining normal retirement age, the member becomes entitled to a retirement benefit from the preservation fund, whether or not the age of 55 years was attained.
The minimum benefit is the full actuarial value in the case of a defined benefit fund, and the member’s share in the case of a defined contribution fund. In both instances this entails a refund of both employer and member contributions with fund interest, as well as a share in certain reserve accounts.
Minimum benefits are paid to active members on:
MINIMUM PENSION INCREASES
Where pensions are paid from a pension fund, the Act prescribes minimum increases, i.e. the lesser of a full inflation adjustment and the increase that the fund can afford.
The minimum increases must be reviewed at each statutory valuation date. In the case of a defined benefit fund this will be once every three years, and once a year for defined contribution funds.
In carrying out his duty to provide reasonable benefits, the trustee must look at the type of benefits the funds provide and, if necessary, take appropriate action for enhancing the benefits.
In the normal course of events the employer will set the level of benefits in response to what he can afford, although trustees will fail in their duties if they allow the fund to become outdated without bringing this to the employer’s attention.