Edition: Sep - Nov 2014


Through the quagmire

Trustees face real dilemmas when they must determine pension-fund distributions. Jeanetta Hendricks* discusses what to do, and not to do.

Terence Berry
Hendricks...subjective process

When a member of a pension fund dies before retirement age, the board of trustees is faced with the difficult task of determining how the death benefits should be allocated among beneficiaries, dependants and nominees.

The duty of the board is to pay these benefits in line with the rules of the fund as well as the dictates of the Pension Funds Act. When reading s37C of the Act it is clear that there is an onerous duty on the board to determine dependency and ensure that people who were dependant on the deceased member are not left destitute after his/her death, irrespective of whether or not the deceased was legally required to support them.

The Act does provides some guidance in defining categories of dependants. These include:

  • Legal dependants i.e. anyone to whom the member owed a legal duty to support;
  • De facto dependants i.e anyone to whom the deceased owed no legal duty of financial support but who nevertheless depended on him/her financially;
  •  Future dependants i.e. someone whom the deceased did not maintain financially at the point of his/her death, but who would've become dependent on him/her in future, had he/she not died.

All identified dependants do not automatically qualify to receive a portion of the death benefit. Neither do nominated beneficiaries. Identification as a dependant or a nomination as a beneficiary only entitles a person to be considered by the board when making the benefit-allocation decision.

Amidst these challenges the board is then tasked with making a fair and equitable distribution, in most instances without prior knowledge of the deceased member's household circumstances. Without established and regulated guidance or directives in the Act on how the board should apportion the benefit, trustees need to rely on industry best practices and value judgements to make a determination. This can be a highly subjective process that is often fraught with difficulty.

Accordingly, adequate training and a better understanding of the trustees' obligations under s37C - and a proper exercise of discretion on the part of the board -- could potentially reduce the number of complaints directed at the Pension Funds Adjudicator. Key elements that trustees need to consider pertain to due diligence in the identification of dependants and strict adherence to their statutory obligations.

As s37C provides that death benefits do not form part of the deceased's estate, trustees are tasked with ensuring that all dependants benefit equitably based on their individual needs and circumstances, and the extent of their dependency on the deceased.

The board cannot assume that dependants are aware of their potential rights to benefits. They might not come forward to claim their share of benefits. Active tracing of all potential dependants is therefore a process not to be taken lightly. It should be undertaken as diligently and speedily as possible, so as to avoid unnecessary costs to the fund.

However, trustees still seem to battle with a lack of understanding as to what s37C requires of them at the different stages of a death-benefit distribution. Coupled with this is the fact that fund members and their dependants also do not understand that s37C limits the member’s freedom of testation. It is thus one of the leading causes of contestation after distribution of benefits has been made.

The Act does not define “equitable”. Neither does it provide guidelines on how a board should make an equitable distribution. Over the years, the regulator has issued guidelines on factors to consider in an effort to achieve equitable distribution.

These factors include the age of the dependant; the dependant’s relationship with the deceased; the extent of the dependency; the wishes of the deceased as stipulated either in the beneficiary nomination form or his/her last will, and the financial affairs of the dependants including their future earning potential.

Even though these guidelines are available, trustees cannot accept them as the only factors to consider when determining the allocation of death benefits. The board needs to properly investigate the matter. If trustees fail to take into account all the relevant factors, or take irrelevant factors into account, the board’s decision will be reviewable on the grounds that it exceeded its powers or that the decision constituted an improper exercise of its powers.

In addition, any failure by the board to take a decision timeously could potentially be deemed as maladministration. This could give rise to a claim for losses suffered.

Unfortunately, with no foreseeable changes to the Act in terms of guidance on equitable distribution or apportionment of benefits, standard operating procedure, industry best practice and recommendations provided by the Adjudicator remain the only tools trustees currently have at their disposal to ensure equitable and objective fund distribution.

* Hendricks is the FedGroup specialist on beneficiary care.