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Section 37C of the Pension Funds Act and its implications
Overview
Section 37C of the Pension Funds Act came into effect in August 1976. This section regulates the benefits payable upon the death of a member of a retirement fund. Ultimately, Section 37C places the onus on a fund’s board of trustees in identifying and allocating these ‘death benefits’. Starting with an overview of Section 37C, this article sets out trustees’ responsibilities in the application of Section 37C of the Pension Funds Act.
Prior to the introduction of Section 37C into the Pension Funds Act, 1956 (herein referred to as 'the Act'), the benefit payable as a result of the death of a pension fund member would take place as set out in their last will and testament or according to the provisions of the laws of intestate succession.
Intestate succession
If you die without leaving a valid will, your estate (all your assets left behind) will devolve according to the Intestate Succession Act, 1987 (Act 81 of 1987). This means that your estate will be divided amongst your surviving spouse, children, parents or siblings according to a set formula.
The advent of Section 37C brought a statutory distribution regime which expressly excludes freedom of testation and rather looks to the board of a fund to distribute the death benefit.
Freedom of testation
Testators are given freedom to direct how their estate should devolve and free rein to dispose of their assets as they deem fit.
Why is it in place and how does it work?
Every retirement fund, registered in terms of the Act, is managed by a board of management commonly referred to as trustees. The trustees direct and manage the business of the fund and are consequently responsible for allocating retirement fund benefits that are payable on the death of a member in accordance with Section 37C of the Act.
Section 37C is applicable to all retirement funds, including pension, provident, preservation and retirement annuity funds. When a member of a retirement fund dies before reaching retirement age, the death benefit – which is the lump sum benefit that becomes payable – must be paid to the member’s dependants and/or nominees. (See 8 for more detail on dependants and nominees). Distribution of the member’s death benefits remains the responsibility of the fund trustees and they need to ensure that this is done fairly and equitably – meaning that the decision as to how the death benefit will ultimately be allocated and paid will be determined impartially and based on the relevant information that the trustees collected in order to effect a fair and equitable distribution of the death benefit.
The intention is to protect dependants, even over the clear wishes of the member. At its core the Act serves a social function, striving to ensure that no one who was financially dependent on the member is left without support.
Death benefits are expressly excluded from the member’s estate, and the benefit must be dealt with according to the Act. Therefore, the member cannot leave the death benefit to a specific person via the terms of their last will, and the executor of the member’s estate does not deal with the payment of these death benefits except in specific circumstances as provided in the Act.
One of the objectives of Section 37C is to limit a member’s freedom of testation in relation to benefits payable from their retirement fund in consequence of their death in order to protect financial dependency of dependants over the wishes of the deceased member as may be expressed in a valid nomination form or a last will andtestament. Another objective of the section is to offer protection to dependants who do not reside in the same vicinity of the late member or the operations of the fund, which may make searching and finding dependants more difficult.
This latter objective is achieved by the placing of the death benefit under the control of the board of trustees to be dealt with in accordance with a prescribed statutory scheme of distribution. The statutory scheme of distribution also overrides a fund member’s expression of wish as may be contained in a last will and testament or a beneficiary nomination form.
As noted in The legal obligations of retirement fund trustees in respect of Section 37C of the Pension Funds Act 24 of 1956 by Vanashree David:
In other words, the rationale behind Section 37C is to ensure that those who were financially dependent on the member are not left destitute after their death. It also helps reduce the burden on the state by reducing the need for dependants to rely on social grants if they were supported financially by a member before their death. Furthermore, by saving for retirement, members receive significant tax concessions as incentive to provide for spouses, children and dependants in the event of the member’s death.
What constitutes a death benefit?
The Act defines “benefit” as any amount payable to a member or beneficiary in terms of the rules of the retirement fund.
Section 37C provides that the section applies to any benefit, other than a benefit payable as a pension to the spouse or child of the deceased member, payable by a fund upon the death of a member. Benefits payable in the form of a pension are dealt with in terms of the rules of a fund.
The death benefit is made up of the share of fund plus the insured risk benefit, commonly referred to as the ‘approved risk portion’ in most cases, whereas in some cases it is only the share of fund that will be payable by the fund.
A death benefit does not accrue if a member withdraws or retires from a fund and then dies before their withdrawal or retirement benefit is paid out. The benefit payable in terms of the rules will be paid into the estate of the member.
Some employers operate an unapproved lump sum death benefit scheme. Through practice, trustees often deal with unapproved death benefits as well. This is not allowed, as there is no provision in rules to do so.
Dependants versus nominees
Dependant: Spouses, children, parents, grandparents and grandchildren or anyone proven to have been financially dependent on the member at the time of their death and at the time of making payment; anyone entitled to maintenance; as well as anyone who may in the future have become financially dependent on the member. Nominee: A nominee is any party (natural person, trust or legal entity) whose details the member provided to the retirement fund in writing indicating that they should be considered by the trustees for a possible allocation of the death benefit. Examples would be one or more dependants, or a person who is not a dependant, such as a friend of the member.
The different types of dependants, as well as the process of selecting a nominee, are discussed in further detail on p.8.
Trustees as the ultimate decision-makers
Section 37C places onerous duties on trustees in determining and ensuring the fair and equitable distribution of death benefits. The process – which is largely manual – can often be lengthy and cumbersome, leading to frustration on the part of the member’s family, who may be in dire financial need.
In making a fair and equitable distribution of the death benefit, Section 37C imposes three principal duties on the board:
1. Identify and trace dependants (as defined in Section 1 of the Act) and those persons, if any, who have been nominated by the deceased member.
2. Make benefit allocations on a fair and equitable basis.
3. Determine an appropriate mode of payment of the death benefit.
In order to execute these duties, The Act requires the trustees to conduct an enquiry into the member’s circle of dependants at the time of their death before deciding how the benefit will be allocated. The Act grants the trustees at least 12 months to search and find dependants, but the timeframe for allocating the benefit depends on the completeness and relevancy of the information provided, as well as the response time of the dependants and nominees.
In all instances, the trustees aim to distribute the death benefit as quickly as possible. However, the process can be challenging and timing depends on the complexity of individual circumstances and how long it takes to find all dependants.
Other factors can also influence the time taken to effect payment. For example, if the member dies through unnatural or undisclosed causes, the trustees may not be able to make any decisions or pay any benefits, until the official cause of death has been established by a state agency, or the police have confirmed that no one who is considered by the trustees to receive part of the benefit was involved in the member’s death.
The statutory scheme of distribution of death benefits as contemplated in section 37C of the Act is very problematic for most boards of trustees and becomes increasingly so as our society moves away from the rigidity that previously defined the institution of marriage. The complexity of unique family units in South Africa makes the process of determining dependants difficult and subjective, as trustees are expected to balance the intended outcomes of the law with the compassion required to address the best interests of these unique family units, which may often be unfamiliar to a board of trustees.
In order to execute their duties under Section 37C properly, trustees require a basic and general understanding of the law of persons in South Africa in order to prepare them for their task. Fund trustees, death benefit subcommittees and human resource personnel require the necessary skills to discharge their onerous duties and responsibilities as contemplated in section 37C of the Act, where they are required to make findings of fact and law.
Complexities of Section 37C
As set out in this article, applying Section 37C of the Act is an onerous and complex process and the Act and its regulations offer little or no guidance to a board of trustees as to the application of very legally complex issues that may arise. While the intention of Section 37C was to streamline the distribution of benefits to ensure that no dependant is left destitute after a member’s death, the outcome determined by trustees is not always met favourably – and the process of allocating death benefits can become drawn out and may sometimes be subject to protracted dispute resolution or litigation. Increasingly, disputes around the distribution of death benefits as determined by trustees are being brought to the Pension Funds Adjudicator to resolve. A person aggrieved by the outcome may approach the Financial Sector Tribunal or a high court.
In March 2020, the Financial Sector Conduct Authority (FSCA) published the Interpretation Ruling 1 of 2020 (RF) on the Application of Section 37C of the Pension Funds Act, 1956. This was in response to the consultation process around the fact that within the retirement fund industry there are differing practices on interpreting and applying Section 37C. “It is therefore important that there is clarity, consistency and certainty in the interpretation and application of this section,” according to the FSCA.
A process is currently underway to provide suggestions and amendments for submission to the FSCA to address some of the complexities around the interpretation and application of Section 37C. Industry bodies, including Batseta, the Institute for Retirement Funds Africa (IRFA) and the Pension Lawyers Association (PLA) are collaborating in this regard, with the intention to make decision-making relating to death benefits easier for trustees, and reduce the number of decisions challenged in the forum of the Pension Funds Adjudicator.
The FSCA has acknowledged the industry’s concerns:
The articles in this educational publication will look at the duties imposed on trustees by Section 37C in more detail.
REFERENCES
• Allan Gray. Available at: https://tinyurl.com/ypm2j9w2
• ASISA Academy
• David, Vanashree. The legal obligations of retirement fund trustees in respect of Section 37C of the Pension Funds Act 24 of 1956. February 2012. Available at: https://tinyurl.com/mwdmvvw4
• Fedgroup Financial Services. Explaining how your pension funds are distributed after your death. February 2020. Mail & Guardian virtual press office. Available at: https://tinyurl.com/4kjfmu7v
• FSCA. Available at: https://tinyurl.com/mrnfept6
• Gould, Giselle. Light at the end of the Section 37C tunnel. December 2019. EB Net. Available at: https://tinyurl.com/mphr5ysp
• Jordaan, Eric. The distribution of retirement benefits. June 2021. Moneyweb. Available at: https://tinyurl.com/bd2wwccn
• Roberts, Janice. A look at Section 37C of the Pension Funds Act. April 2019. MoneyMarketing. Available at: https://tinyurl.com/yc5xkahk
• Sanlam. Available at: https://tinyurl.com/4bja5c7a
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