Edition: March / May 2017
EXPERT OPINION

Minefield for trustees

Help in navigating distribution of death benefits is offered by
Jeanetta Hendricks, business development manager at FedGroup.

People can bequeath their estates to whomever they please. But this freedom does not extend to distribution of approved death benefits payable from a fund registered under the Pension Funds Act.

When a member of a pension fund dies before retirement age, the fund trustees must determine how the death benefit of the member is distributed amongst his/her beneficiaries and dependents. The member’s nomination-of-beneficiary form should only serve as a guide or investigative tool.

Hendricks . . . through the complexity

According to s37C, any person who was factually or legally dependent on the fund member should receive a fair and equitable share of the benefit. Dependents could therefore include spouses, children, parents, and/or any other legal or financial dependents. This makes death benefit distributions highly subjective.

Determining the links
Trustees also have the unenviable task of balancing the law’s intended outcomes with compassion to address the best interests of unique family units. For example, the more a family deviates from a family unit where the married parents and children all live in the same house, the more difficult it becomes to prove the links that determine dependency. The absence of formal marriage structures makes a distribution investigation more onerous.

Considerations could also include factual dependents e.g. same-sex partners, stepchildren, foster children, or a common-law spouse. Trustees need to determine how these relationships are viewed in the eyes of the law and in the context of dependency. These are material factors in determining fair and equitable distribution.

Levels of support
Adding complexity is the level of support required by each beneficiary. This can be difficult to anticipate. For example, young children will need support until they are majors while their parents would need support until they die. Trustees must also deal with the question of which generation the deceased member has a bigger responsibility to support.

The most difficult aspect of distribution is often the investigation needed to ensure all possible beneficiaries have been located. The investigation should be concluded within 12 months of the fund member’s death. The deceased may well have a split family structure, or partners who might be unaware of each other. Some potential dependents may not know of the fund member’s death.

When fund members hide illegitimate children, discovery of these dependents is extremely difficult. Trustees must be mindful of the implications once the distribution has been paid.

Further, trustees must make every reasonable effort to identify and trace all dependents. The Act doesn’t say how to determine qualified dependents or how trustees should apportion the benefits when making determinations. Nor are there express instructions, procedures or formulae on steps regarded as reasonable.

Breaking legislative silos
Familial structures must be treated case-by-case in accordance with the unique circumstances of the deceased’s household. Yet trustees are usually remote from families’ and dependents’ realities.

To make informed decisions, trustees need not only conduct investigations that are thorough and factual. They should also refer to relevant legislation within and ancillary to the retirement industry. But there’s a tendency to read the Act only, then to rely mainly on industry best practices and value judgments on who qualifies as a beneficiary to make fair and equitable distributions.

To promote better compliance and good governance, the Financial Services Board released circular PF 130. While it does not deal specifically with distribution of death benefits, it is a valuable guide to service providers’ best practice.

To help support the trustees’ process and ultimate decision, there is case law as well as ancillary legislation e.g. the Children’s Act, Divorce Act, Maintenance Act (when making determinations on minor children), or the Civil Union Act and Recognition of Customary Marriages Act (to determine spousal or partner apportionment).

Some or all could also help inform due diligence on death benefit distributions. However, trustees have no clear guidelines on which piece of legislation to apply when Acts conflict.

A decision on how to distribute a death benefit requires a multi-faceted approach to the trustees’ deliberation process. The actual apportionment is also based on how the trustees interpret the required information. Different boards might make different allocations, although all the allocations could be seen as equitable and fair.

Beneficiaries are completely bound by the decision of the trustee, and trustees in turn shoulder an enormous responsibility. It requires not only a deep understanding of the applicable regulations and Acts, but also the sensitivity and skill to judge each case on its merits.