The Pension Funds Adjudicator recently issued determinations dealing with three long-standing but important principles related to retirement fund benefits of which you, as a member of a fund, should be aware.
1. Fund trustees need to be diligent when granting loans
The Pension Funds Adjudicator has found that a retirement fund should not have granted the numerous loans it did to a fund member, and therefore the loans could not reduce his former spouse’s share of his savings in the fund.
Acting adjudicator Elmarie de la Rey referred her determination to the head of surveillance in the office of the Registrar of Pension Funds at the Financial Services Board (FSB) for possible further action against the fund and its administrator, NBC, for granting the loans in contravention of the Pension Funds Act.
GZ, the former wife of BZ, a member of the Nampak Contributory Provident Fund, complained to the adjudicator’s office, because she had expected to be paid out about R51 000 from her former husband’s fund, but was paid only R5 300.
The couple were divorced in 2005. In terms of the divorce order, GZ was entitled to half of BZ’s pension interest, but, in terms of the law as it then stood, the money could be paid to her only when BZ retired, died or resigned from the fund.
In 2007, the Pension Funds Act was amended, introducing the principle of a clean break in pension fund interests after divorce. This paved the way for former spouses to obtain immediate access to any portion of a member’s interest awarded to them in a divorce order.
In 2008, GZ requested that her share of the money in the Nampak fund be transferred to her.
The fund paid her out her share of the pension interest at the date of the divorce order but deducted half of the outstanding loans, which had been made to the member before the divorce and which by then amounted to R92 179.
The Pension Funds Act provides for funds to grant loans to members, or to guarantee a loan granted to a member only under strict conditions. These are to acquire property on which a residence has been or will be erected, to erect a residence on property owned by the member or his or her spouse, or to make additions, alterations or repairs to a residence. The member or a dependant of the member must occupy the residence.
GZ complained to the adjudicator that she was married to BZ in community of property and was not aware of any loans made to him from the fund. During their marriage, they had not owned a home but stayed in a house provided for by a family member.
De la Rey asked the Nampak Contributory Provident Fund for a copy of the loan agreement and was provided with a list of 12 different loans ranging from less than R3 000 to R20 000, taken over a period of 10 years.
She says it is apparent from the submitted list of the loans that they could not have been for any of the purposes provided for in the Pension Funds Act.
The fund and its administrator conceded as much, she says, because they state that it was not their duty to verify the purpose for which the loans were used.
But De la Rey says the Pension Funds Act does require funds that grant such loans to be satisfied that the loans are for housing purposes.
“No questions seem to have been raised by the frequency of the loans and the amounts involved, which ought to have alerted any responsible person that the loans could not have been for housing purposes,” she says.
As a result, the acting adjudicator decided to send her determination to the FSB and ordered the fund to enhance GZ’s benefit by 50 percent of the amount outstanding on all the loans as at the date of divorce.
GZ also complained that she was not given a breakdown of how her benefit was computed.
De la Rey says the Supreme Court of Appeal had ruled in a case before it that a fund must provide such information.
The Nampak fund was ordered to supply the information.
Take care when your divorce order is drawn up and your spouse had a housing loan from his or her retirement fund or even a guarantee for a housing loan from the fund.
The amount still outstanding on these loans may be taken into account when your share in your former spouse’s pension fund is calculated.
In the case of GZ and the Nampak Contributory Provident Fund, De la Rey found the outstanding loan amounts could not be deducted from the non-member’s portion because the fund had not checked that these loans were for housing purposes.
However, in an earlier determination, Farrell vs the Cape Municipal Fund, the adjudicator found a fund was within its rights to calculate the non-member former spouse’s portion of the pension interest after deducting the value of the outstanding loan amount from the pension interest.
Even if your spouse plans to continue to pay off the loan, an amount reflecting the outstanding balance on the loan at the date of divorce may be deducted from the pension interest before it is split as specified in the divorce order.
The fund may not actually settle the loan – the deduction of the outstanding amount simply ensures there is enough left in the fund to cover the loan.
Non-member spouses should check with a fund whether there are any outstanding home loans or home loan guarantees before drawing up a divorce order, Karin MacKenzie, a pension lawyer and director at Herold Gie Attorneys, says.
MacKenzie says it appears from the adjudicator’s Nampak ruling that the loans were not made directly by the fund, but by an entity known as NBC Housing. The fund had stood guarantee on the loans.
The implication of this latest ruling and the Farrell one taken together is that if your former spouse’s fund stood guarantee for a home loan from a bank, the amount of the guarantee could also be deducted from the pension interest before it is split.
But, MacKenzie says, the issue is controversial and some lawyers believe the outstanding amount cannot be deducted from the amount allocated to the non-member spouse unless there is a shortfall in the member’s remaining portion to cover the loan.
2. Nominated beneficiaries are not automatically entitled to benefits
If a retirement fund member nominates you as a beneficiary, it does not necessarily mean that you will receive a death benefit.
Trustees are obliged to consider the nominated beneficiaries, but they are bound by law to distribute death benefits to the dependants of the retirement fund member.
Nominated beneficiaries who are not dependants of a deceased member may not receive any benefits if the trustees decide that the dependants need all the money the fund will pay out.
This was the case in a complaint that came before the office of the Pension Funds Adjudicator recently.
Elmarie de la Rey, the acting adjudicator, dismissed the complaint brought by the daughter-in-law of a member of the Sappi Pension Fund, because the woman’s claim was based on the fact that she was a nominated beneficiary and not on the basis that she was a dependant.
The Sappi Pension Fund distributed a death benefit of R108 408, which became available when one of its pensioner members, NK, died in 2010.
The trustees decided to give 80 percent of the benefit to the member’s son, MK, and 20 percent to the member’s adopted daughter, because they were both dependants.
The board of trustees told De la Rey that, because the benefit to be distributed was relatively small, no allocation was made to MK’s wife, SK. The trustees had assumed that SK would derive some benefit from the allocation because she shared a home with her husband.
The member had nominated his son and his daughter-in-law as beneficiaries of his death benefit and had stipulated that they should receive 50 percent each.
De la Rey says in her ruling that, although the deceased member may have expressed an intention to benefit certain people in the nomination form, it does not necessarily imply that the nominees will, in fact, be awarded anything.
The deceased’s wishes, as contained in the form, are only one of the factors taken into consideration when allocating a death benefit, the ruling says.
Quoting from a High Court ruling, De la Rey’s ruling says that section 37C of the Pension Funds Act, which deals with the distribution of retirement fund benefits, “was intended to serve a social function. It was enacted to protect dependency, even over the clear wishes of the deceased.
“The section specifically restricts freedom of testation in order that no dependants are left without support … The fund is expressly not bound by a will, nor is it bound by the nomination form. The contents of the nomination form are there merely as a guide to the trustees in the exercise of their discretion.”
SK cannot claim to be entitled to a portion of the death benefit because she is a nominated beneficiary of the deceased, and she had not submitted that she was a dependant of the deceased. Therefore, there is nothing to suggest that the trustees of the Sappi fund erred in their decision on how to allocate the member’s death benefits; they acted rationally and arrived at a proper and lawful decision, the acting adjudicator says.
3. In cases of misconduct, your employer has a claim to your benefit
If you leave your job, especially if you are fired due to misconduct, your employer is, under specific circumstances, entitled to demand that money from your pension fund be withheld from you.
And even appeals to the Pension Fund Adjudicator will not get the money released if your employer has acted correctly.
In a recent spate of rulings on this issue, the acting adjudicator, Elmarie de la Ray, rejected nine complaints from fund members, because she found that the withholding of withdrawal benefits in each case was in line with the requirements of the Pension Funds Act.
Another two complainants had their complaints upheld and their retirement funds were instructed to calculate and pay out their benefits as soon as possible.
De le Ray says the Act seeks to protect an employer’s right to recover losses caused by the misconduct of an employee. However, this is not an absolute right.
The requirements for a deduction by your employer from your retirement fund are:
* An amount must be due by a member of a fund to his or her employer;
* The amount must be due at the date of retirement or the date on which the member ceases to be a member of the fund;
* The amount must be in respect of compensation payable to the employer;
* The compensation must be in respect of any damage caused by the member (former employee) to the employer;
* The damage caused to the employer must be by reason of theft, dishonesty, fraud or misconduct by the member; and
* The member must have furnished a written admission of liability to the employer in respect of the compensation for the damages caused to the employer; or the employer must have obtained a court judgment in respect of the compensation.
In the first of the two complaints upheld by the adjudicator, the complainant was dismissed from his job following an incident involving the theft of about R188 000. The complainant did not dispute the fairness of the dismissal at a hearing of the Commission for Conciliation, Mediation and Arbitration, and criminal charges were laid against him by the employer. However, the criminal case was closed in August 2008 due to insufficient evidence.
De la Rey says in her ruling that there are no facts to show that the employer subsequently attempted to re-open the criminal case against the complainant or that it had instituted civil proceedings against him.
She accepts that an employer has a right to withhold a member’s benefit pending the finalisation of legal proceedings that allege theft, fraud or misconduct. But in this complaint there are no pending proceedings.
The fund’s decision to withhold the member’s benefit was set aside and the respondent was ordered to pay the complainant’s withdrawal benefit within 14 days of the determination.
In the second case, conditionally upheld by the adjudicator, the complainant had his retirement benefit withheld because his application did not reflect his tax number. The complainant was later advised that the retirement benefit was being withheld because civil action for R75 107 was pending against the former member.
De la Rey found that the complainant had not admitted liability for the amount in writing and no court judgment had been obtained by the employer. Further, there was no evidence to show that any further steps were taken by the employer besides issuing a summons in May 2007 against the complainant.
The employer was ordered to provide proof of the steps taken to obtain a civil judgment against the complainant within seven days of the determination. Failing this, the fund was ordered to pay the complainant his withdrawal benefit together with interest calculated at a rate of 15.5 percent a year from March 2007 to the date of payment.
CONTACT
The Acting Pension Funds Adjudicator is Dr Elmarie de la Rey.
Telephone: 087 942 2700
Website: www.pfa.org.za