Issue: November/December 2005
Edutorials
Liberty Life

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.

INTRODUCTION

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:

  1. A person in respect of whom the member is legally liable for maintenance.

EXAMPLE:

The deceased member’s spouse and children.

  1. A person in respect of whom the member is not legally liable for maintenance, if such a person:
    • Was, in the opinion of the board of trustees, upon the death of the member in fact dependant on the member for maintenance;
    • Is the spouse of the member, including a party to a customary union according to Black law and custom, or to a union recognised as a marriage under the tenets of any Asiatic religion;
    • Is a child of the member, including a posthumous child, an adopted child and an illegitimate child;

EXAMPLE:

The deceased member’s parents or siblings.

  1. A person in respect of whom the member would have been legally liable for maintenance, had the member not died.

EXAMPLE:

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:

  • Age of the dependant
  • Relationship with the deceased
  • The extent of dependency
  • The financial affairs of the dependants, including their future earning capacity or earning potential
  • The wishes of the deceased

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.

ALLOCATION SITUATIONS

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:

  1. Allocation to dependants where no beneficiaries have been nominated.

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.

  1. Allocation to beneficiaries where there are no 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.

  1. Allocation to nominated beneficiaries and 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.

  1. Allocation where there are no dependants and no beneficiaries have been nominated.

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:

  • Any amount outstanding in respect of housing loans only that the fund or employer made to the employee. Personal loans made by the employer to the member in terms of a contractual agreement (for example a car loan) may not be deducted from the member’s benefits.
  • Any amount for which the fund or employer is liable in terms of a guarantee by the fund or employer.
  • Damages caused to the employer by the employee as a result of theft, fraud, dishonesty or misconduct while the employee was still a member of the fund. Before this amount can be recovered, the member has to admit liability to the employer in writing. If the employee refuses to sign an admission of liability, the employer may obtain a court judgment against the member.
  • With the member’s consent, medical aid subscriptions and insurance premiums.
  • Such other deductions as the Registrar may agree to.

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:

  • Payment of income tax on lump sums and arrear taxes.
  • Deductions for housing loans and damages caused to the employer by an employee due to theft, fraud, dishonesty or misconduct.
  • Judgement debts to a maximum amount of R3 000.
  • Maintenance payable.
  • Amounts payable in terms of a divorce order to an ex spouse.

Claims for the above should be paid in the following order of preference:

  • Tax on lump sum benefits
  • Housing loans or divorce orders
  • Arrear taxes
  • Damage claims against employees
  • Maintenance orders
  • Judgement debts

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.

MINIMUM BENEFITS

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:

  • Resignation
  • Dismissal
  • Retrenchment
  • Transfer
  • Conversion from a defined benefit to a defined contribution fund
  • Liquidation of a fund

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.