Edition: Jun - Aug 2014
Editorials

PENSION LAW

Divorced approaches

Karin MacKenzie
MacKenzie . . .same principle,
different conclusions

Court decisions on 'pension interest' appear to conflict. Karin MacKenzie* analyses the consequences.

Two judgments, handed down last year in the Cape High Court, deal with pension-interest claims on divorce. The decisions are difficult to reconcile, yet will have far-reaching consequences.

The first, Kotze v Kotze & Another, was a full-bench decision. It concerned the entitlement to share in pension interest where it has not been dealt with in a divorce order. The second, Gibson v Gibson & Another, set out the applicable principles where an order concerning pension interest is incapable of implementation and must therefore be varied.

Although the cases appear to deal with different issues, and the respective courts offered different approaches, they both concern the interpretation of orders regulating the proprietary consequences of divorce.

The facts in Kotze

The parties were married in community of property and divorced in 2005. The order dividing the joint estate only dealt with the two immovable properties, and did not refer to the substantial pension interest.

The member spouse ('MS') retired in 2011, at which time he received his benefit in full. The non-member spouse ('NMS') subsequently approached the court for an order entitling her to 50% of the pension interest. She claimed she had not been aware of this pension-fund asset at the time of divorce.

The MS disputed this, alleging that the NMS had elected not to claim the pension interest to avoid corresponding claims on her assets. He contended that he would have opposed such relief had it been sought, and that the joint estate would have been divided differently had the pension interest been taken into account. There was therefore a dispute of fact concerning the context in which the original order was made.

The decision

The court dismissed the application, but an appeal to the full bench was upheld. The court analysed s7(7) of the Divorce Act (which deems a pension interest to be part of the assets in the separate or joint estate). It concluded that, where the pension interest had not been dealt with in an order, the non-member spouse would still be entitled to a 50% share of the pension interest.

The implications of this finding are significant. As long as the parties were married in community of property, Kotze states that the entitlement to 50% of a pension interest follows as a matter of law, and can be enforced subsequent to the finalisation of proceedings, provided only that it has not been dealt with in the order.

It is suggested that this case should instead have turned on the interpretation of the order. What did the silence on the pension interest convey? Was there an implicit asset swap as alleged by the member spouse and consequently a conscious decision not to lay claim to the pension interest?

In bypassing this question, the court appears to have conferred a special status on a pension interest. This is not justified by the wording of s7(7). A pension interest is like any other asset and must be put into the 'pot' of the joint estate for purposes of division. If it has not been referred to in the divorce order, it must be established whether or not the omission was deliberate. If the parties are in dispute, a court ought to determine this issue first.

If the pension interest was a hidden asset (as alleged by the NMS), different principles may apply. But this was not the basis of the decision. Notwithstanding the questionable reasoning, being a judgment of the full bench it may create significant uncertainty in settled divorce transactions.

The facts in Gibson

The parties were divorced in 2003. The order allocated a portion of the MS's pension interest in a preservation fund to the NMS. At the time, however, there was no definition of 'pension interest' in a preservation fund (only being inserted into the Pension Funds Act in 2008).

The order was not endorsed against the fund's records, and the full proceeds were paid to the MS when he subsequently retired in 2008. In 2011, the NMS launched proceedings to recover the amount of the assigned pension interest from the MS. As in Kotze, the claim was therefore against the member personally and not the fund.

The decision

This court confirmed that the definition of 'pension interest' in a preservation fund does not operate retrospectively. Its decision has therefore reversed the earlier position established in the 2009 case of Protektor Preservation Pension Fund v Bellars & Others. This meant that the original order was incapable of implementation.

It was clear that the settlement agreement and consequent order had been based on a mistake common to the parties (that there was a pension interest in the preservation fund, when there was in fact none), and that the overall allocation of assets had intended to take this significant investment into account. The problem was how to give effect to the order and the underlying intention of the parties.

In this case, as will frequently be the position in post-divorce circumstances, the parties were in dispute as to the value of the 'pension interest' at the date of divorce, as well as the appropriate substituted orders which would reflect the intention at the time.

The court held that, where variation of an order is sought and the parties cannot agree on its terms, sufficient evidence must be placed before the court for it to establish what the intention was at the time of divorce, and whether the division of assets does not need to be revisited in its entirety to ensure fairness between the parties.

Difficulties will often be present if the claim is against the MS personally and not the fund, as financial liquidity may be a problem. The court held that there was insufficient information to make a proper determination of the issues, but gave the NMS leave to apply again on supplemented papers.

Conclusion

Kotze and Gibson are really dealing with the same principle i.e. the circumstances in which divorce orders can be rectified or varied. Comparing the outcomes, the approach in Gibson is to be preferred, although a full-bench decision is precedentially binding.

In future claims of this nature, however, the surrounding facts may determine which judgment is more relevant, and consequently applicable.

* Karin MacKenzie heads the pension law departmentment at Herold Gie Attorneys. She was previously a senior assistant adjudicator in the Office of the Pension Funds Adjudicator.