OMBUD CASE FILE

Adjudicator Rules On Retirement Fund Payout Complaints

It is sometimes said that the “law is an ass” when one thinks the law is too rigid, unnecessary or ridiculous. This could well have been running through the mind of the Pension Funds Adjudicator, Muvhango Lukhaimane, when she ruled in a matter involving the payment of a surplus benefit amounting to R596.76.

The complainant, Ms A, sought payment of a surplus retirement fund benefit following the death of her husband who had been a member of the Auto Workers Provident Fund. The deceased had been a member of the fund from October 2004 until his resignation on 5 February 2007. He had been paid a withdrawal benefit of R11 167.76 on 9 April 2008.

Subsequent to his exit from the fund, a surplus benefit of R596.76 had become available and payable to the deceased. However, he did not instruct the fund on how his benefit should be paid.

Ms A said that when she enquired about the surplus benefit, the fund stated that as her husband had passed away without providing the fund with an instruction on how his surplus benefit should be paid, the benefit had to be paid in terms of section 37C of the Act, in line with the Interpretation Ruling 1 of 2020 issued by the Financial Sector Conduct Authority. This meant that, instead of the surplus being paid directly to Ms A, the fund had to go through the lengthy process of establishing whom among the deceased’s dependants were eligible for a portion of the amount and make the distribution accordingly.

In her determination, Lukhaimane said Section 37C of the Act places a duty on the board of a fund to identify the beneficiaries of a deceased member and vests the board or management with discretionary powers on the proportions and manner of distributing the proceeds of a death benefit. However, the board may not unduly fetter its discretion by following a rigid policy that takes no account of the personal circumstances of each beneficiary and of the prevailing situation.

“The evidence indicates that a surplus benefit of R596.76 became payable to the deceased following his exit from the fund. The fund indicated that the deceased had passed away prior to him providing it with an instruction on how the surplus benefit was to be paid. Thus, the benefit must be distributed in terms of section 37C of the Act.

“The fund indicated that the deceased’s dependants would be notified about the outcome of its investigation in terms of section 37C of the Act.

“This case is an indication of what a farce the law can be at times. The FSCA’s interpretation ruling requiring amounts for exits such as these to be dealt with in terms of section 37C of the Act is such a case in point.

“Already, the complainant has spent more than R596.76 trying to access this surplus benefit. The fund in turn is going to spend more than R596.76 to determine who is entitled to the benefit in terms of section 37C. In the meantime, everyone is scratching their heads as to what unnecessarily drives costs within retirement fund administration. This interpretation ruling is an administrative action that is not even grounded properly in law,” Lukhaimane noted.

The fund was ordered to investigate and identify the deceased’s dependants in terms of section 37C of the Act and allocate and pay the surplus benefit to the deceased’s beneficiaries.

Old Mutual Censured

In another case before the adjudicator, Old Mutual was given a severe dressing down by Lukhaimane for failing to compensate sufficiently for its errors in dealing with the commutation of a retirement fund benefit.

She was ruling in a matter concerning complainant Mr B, who was aggrieved with Old Mutual’s failure to correctly and timeously process his retirement instruction on his retirement annuity policies. He had requested a cash lump sum of R400 000, with the balance being transferred to a Glacier preservation product. This ought to have resulted in no tax payable as the cash amount was under the R500 000 tax-free threshold.

He said his broker had received an email from Old Mutual notifying him that it had erroneously processed a one-third cash commutation on both his policies instead of the requested R400 000. Mr B asked that his original request for R400 000 be processed. Despite this, Old Mutual processed the incorrect cash commutation.

Mr B further indicated that four months after submitting his request, two thirds of his retirement benefit had still not been transferred to Glacier. Old Mutual offered Mr B an amount of R2 500 for the delay in finalising his claim.

In her determination, Ms Lukhaimane said, based on Old Mutual’s submissions, that several tax directives had been erroneously applied for in respect of this transaction.

Mr B had requested and expected a net cash commutation of R400 000. However, due to the tax that was deducted from his benefit, he was paid only R367 624 (from both policies). Thus, the complainant had a shortfall of R32 376.

“It is clear that the tax paid is as a result of the incorrect tax directives applied for by Old Mutual. Old Mutual ought to place the complainant in the position he would have been in had it applied for tax on the correct cash commutation amounts.

“This Tribunal is cognisant of the response received from the South African Revenue Service (SARS), wherein it indicated that Old Mutual may not cancel the tax directives and that the complainant would be refunded on assessment of his tax. However, this is not a suitable solution, as the complainant may only have access to [the refund] upon assessment by SARS at a later stage.

“Thus, this Tribunal must order Old Mutual to refund the complainant directly. Old Mutual should then recover the amount directly from SARS, as it is not acceptable that SARS and Old Mutual should have the benefit of convenience of administrative processes at the expense of the complainant being out of pocket.

“Whilst Old Mutual is obliged to pay to SARS the tax requested in terms of the tax directives issued, it appears that [the company] fails to take full responsibility for its numerous errors in relation to the complainant’s retirement claim.

“This Tribunal notes, with dismay, Old Mutual’s reluctance to rectify its error … It seeks to absolve itself from any further liability. In the meantime, the complainant is prejudiced by Old Mutual’s errors and delays in processing his retirement claim.

“This Tribunal strongly condemns the behaviour of the Old Mutual, as it defeats the inherent purpose for which retirement funds have been established … The conduct of Old Mutual, as set out in this determination, is not in accordance with what customers expect to experience from financial institutions entrusted with their retirement savings.”