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Background

 

A creative new way to allocate death benefits into Section 37C.

The death benefits allocated to a deceased's dependants by retirement fund trustees are very often much higher in value than the value of the deceased's estate.  Compared to the disciplines and controls of the Administration of Estates Act, the retirement fund industry used to deal with the allocation process in a fairly informal manner.  Since the establishment of the Pension Fund Adjudicator's office, however, the decisions made by trustees have come under scrutiny a number of times and in very many of these cases the Adjudicator ruled against the trustees.  He often ordered that the benefit be paid to other dependants than the ones indicated by the trustees, or altered the amounts payable. Where the benefits already paid cannot be recovered, this constitutes a loss suffered by the fund. In effect, the other members in the fund suffer the loss and unless the fund carries sufficient insurance, the trustees can be liable in their personal capacities.

There are tax reasons why the death benefits are provided as part of a pension or provident fund's benefit, namely, the first 2 x annual salary is effectively tax-free, whereas the contributions are tax deductible.  If the benefits are provided outside the fund, the contributions are not tax deductible, but the proceeds will be free of tax.  Although it would be administratively easier to provide benefits outside the fund, it is quite a process to make the shift, especially from a labour relations point of view. As a result, the lump sum death benefits, payable by retirement funds, typically represent large amounts of money, which increases the stakes for all concerned.

We are told that the State's objectives in respect of the introduction of section 37C was that, the death benefits payable by retirement funds, in return for tax advantages granted, must be used to address the needs of those dependants of the deceased who might otherwise become a burden on the State.

Lack of clarity

It is however, not clear what exactly the objectives of the fiscus were.  In what order of priority should dependants benefit?  Should the surviving spouse and children receive priority, or should persons who were merely factually dependent on the deceased have equal claims on the benefit payable?  The Act merely requires that "the benefit shall be paid to such dependant or, as may be deemed equitable by the board, to one of such dependants or in proportions to some of or all such dependants."   Other than the dependency requirement, the Act does not lay down clear criteria or decisional referents to guide the trustees in their discretion.

 

Problems with Section 37C

Apart from the fact that Section 37C does not explicitly recognise dependency and freedom of testation as separate criteria and lay down decisional referents for trustees, the definition of dependant is too wide.  In the US and Canada, for example, the entire death benefit is payable to the surviving spouse and only if there is no spouse, to the children.  Section 37C places all the responsibility on the trustees, which translates into an open-ended liability for the fund and/or the employer.  In addition, section 37C is procedurally flawed.  Compared to the Administration of Estates Act, no process requirements are laid down to protect either the potential dependants or the trustees.  It also does not allow the trustees to recover extraordinary costs from the benefit payable. Any research, investigation, litigation and other costs must be carried by the fund, which means that it will have to be cross- subsidised by the other members in the fund. The application of section 37C is also not clear.  There is a very active debate at present as to whether it applies to benefits payable on death, after retirement, or not, and whether it applies to pensions payable in terms of the rules of the fund or only in respect of lump sum benefits payable.

 

How does one ensure consistency?

We believe that the most compelling solution, given the current legislative framework, is for each fund to develop and lay down decisional referents.  It is important that the trustees know, "Under what circumstances, as a matter of policy, will we not give effect to a beneficiary nomination".

Sanlam Employee Benefits believes that, based on a proper interpretation of the Act, two distinct criteria can be identified, namely dependency, measured by the amount of any legal entitlement to maintenance, and freedom of testation.  In a young family where the deceased is survived by a spouse and minor children who require maintenance, the dependency criterion is effective.  In a more mature family, where the deceased is survived by a spouse who is financially independent (even though he or she shares the family home with the deceased), and major financially independent children, the dependency criteria is simply no longer effective.  Once the maintenance needs have been met or no longer exist, freedom of testation becomes the determining factor.

The following order of priority is considered the most compelling: 

• Dependants who have a legal right to maintenance from the deceased should effectively have a first claim to the benefits (factual dependants should continue to benefit only in the discretion of the trustees).

• The balance should be allocated in terms of the beneficiary nomination, failing which, in terms of the 'adjusted' laws of intestacy, i.e. the spouse gets R150, 000 or a child's share, whichever is the greater.

• The trustees must, however, take into account such extraordinary circumstances as may exist at the time.

The determination of the right to maintenance is done in accordance with the jurisprudence and principles laid down in motor vehicle accident claims.  With the help of a powerful Internet based calculator, trustees can make this calculation in a matter of seconds. It first determines the total income of the household and projects the future needs of the surviving spouse, the children and other dependants. It then places the trustees in a position to exercise their discretion based on proper information in a way that is not only equitable but also consistent and properly considered.