Section 37C of the Pension Funds Act – Duties of the board of management in distributing a death benefit
By William Donachie, Legal and Technical Specialist
Section 37C of the Pension Funds Act 24 of 1956 (the Act) deals with the distribution and payment of death benefits upon the death of a member of a retirement fund. It was introduced primarily to ensure that death benefits are paid in accordance with the object of the Act and government policy.[1] Its purpose, however, is to make sure that the dependants of the deceased member are not left destitute upon the death of the member.[2] To achieve this, the distribution of death benefits is at the discretion of the board of management (the board) of a fund. The board has discretionary powers to distribute the benefits equitably among the beneficiaries.[3] Section 37C specifically provides that death benefits do not form part of the deceased’s estate. This means a beneficiary under the last will and testament of the deceased is not necessarily a beneficiary under section 37C of the Act.[4]
Most boards, if not all, will attest to the fact that section 37C is not without problems and requires a great deal of technical knowledge on how they are expected to apply it. The section imposes an onerous duty on the board to determine dependency and to effect an equitable distribution among a deceased member’s dependants and nominees.[5] The board must exercise this discretion notwithstanding the fact that it has no prior knowledge of the parties concerned or the relationship they shared with the deceased member.[6] As a result, boards should ensure that members are given regular opportunities to update their wishes by completing and updating a nomination form. In Dobie NO v National Technikon Retirement Pension Fund[7], the Pension Funds Adjudicator acknowledged the challenges that are brought by section 37C stating as follows:
“One thing is certain about section 37C, it is a hazardous, technical minefield potentially prejudicial to both those who are expected to apply it and to those intended to benefit from its provisions. It creates anomalies and uncertainties rendering it most difficult to apply. There can be doubt about its noble and worthy policy intentions.”
What makes the application of section 37C challenging is the lack of legislative guidance on how to effect an equitable distribution among the beneficiaries of the deceased. Recently, some boards also started making use of a death benefit calculator to assist the board in formulating an equitable distribution – no doubt because of the complexity of some cases. However, the duties of trustees were summarised in Sithole v ICS Provident Fund and Another[8] as follows:
When making an “equitable distribution” amongst dependants the board of management has to consider the following factors:
- the age of the dependants,
- the relationship with the deceased,
- the extent of the dependency,
- the wishes of the deceased placed either in the nomination and/or his last will, and
- financial affairs of the dependants including their future earning capacity potential.
In making their decision, trustees need to consider all relevant information and ignore irrelevant facts. Further, the trustees must not rigidly adhere to a policy or fetter their discretion in any other way.
These duties are quoted religiously in the section 37C determinations handed down by the Adjudicator. According to the Adjudicator, these factors should always be taken into consideration in the determination of what is equitable. However, these factors should not be considered in isolation and other factors deemed relevant to the specific case should also be taken into account when making an equitable determination. From past determinations, it would appear that if a board took all the above factors into account and can objectively substantiate its decision with evidence, the Adjudicator would be inclined to accept the board’s decision.
These duties again featured in a recent determination of IA & TP Magoleng v Alexander Forbes Retirement Fund and Another[9]. In this case, the deceased member left behind two major children, aged 25 and 26. The deceased completed a nomination form in which his two children were nominated to receive 25% each with 50% of the benefit going to Ms Mashiane. The complainants contended that Ms Mashiane was not the deceased’s life partner, and they did not live together. She also owned a business and could not prove financial dependence on the deceased and should therefore not share in the benefit.
The board deviated from the nomination form and allocated 21.5% of the benefit to each child and 57% to Ms Mashiane, who the fund found to be the deceased’s life partner. The fund argued that section 37C grants the board the discretion to distribute and allocate death benefits equitably. As a result of this discretion, the board argued that the nomination form was not binding on the board and was only used as a guideline when it conducted its investigation. The Adjudicator relied on the case of Swart N.O. and Others v Lukhaimane N.O. and Others[10] where the court stated that a wish in a nomination form should not be lightly ignored and even though it is only one of a number of factors to be considered by the board, it is a substantial factor.[11] However, the Adjudicator could not determine whether it was appropriate for the board to deviate from the nomination form, as it failed to conduct a proper investigation. Thus, because of a lack of objective evidence to support the deviation from the nomination form, the Adjudicator ruled that the board should reconsider the allocation of the death benefit to the beneficiaries.
The fund also made use of a death benefit calculator to determine the extent of the beneficiaries’ financial dependency on the deceased. The methodology of the calculator is to list each beneficiary’s share of the deceased’s monthly salary they needed from him as well as the possible duration of dependency. It then calculates how much each beneficiary would need, reduced proportionately considering the amount of the benefit available.
The Adjudicator found that the fund cannot merely rely on a calculator that predetermines entitlements based on portions of the deceased’s salary and that it should rather actively investigate Ms Mashiane’s dependency on the deceased. In this matter, the board did not investigate income from other sources, such as the allegation that Ms Mashiane owned a business from which she earned an income. In this regard, the fund was not able to objectively establish the extent of Ms Mashiane’s financial dependency on the deceased. The Adjudicator found that the fund essentially left it to a calculator to calculate the extent of dependency without any justifiable reason.
Conclusion
If a board decides to deviate from the contents of a nomination form, the investigation must show why they decided to do so. The nomination form can only be deviated from if following it will lead to an inequitable distribution of death benefits. Thorough investigation remains of the utmost importance and a distribution cannot be based on a calculator alone.
[1] Naidoo v Coca Cola Shanduka Beverage Provident Fund and others [2019] JOL 46217 (FST).
[2] Naidoo v Coca Cola Shanduka Beverage Provident Fund and others [2019] JOL 46217 (FST).
[3] Manamela T, Chasing away the ghost in death benefits: A closer look at section 37C of the Pension Funds Act 24 of 1956, 2005 17 SA Merc LJ 278 277.
[4] Mashazi v African Products Retirement Benefit Provident Fund [2002] 8 BPLR 3703 (W). In this case, Hussain J remarked on page 3705 that “Section 37C of the Act 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. It specifically excludes the benefits from the assets in the estate of a member and enjoins the trustees of the pension fund to exercise an equitable discretion, taking into account a number of factors.”
[5] David V, The legal obligations of retirement fund trustees in respect of section 37C of the Pension Funds Act 24 of 1964 (Master of Law, University of South Africa, 2012) 6.
[6] David V, The legal obligations of retirement fund trustees 6.
[7] Dobie NO v National Technikon Retirement Pension Fund [1999] 9 BPLR 29 (PFA).
[8] Sithole v ICS Provident Fund and Another [2000] 4 BPLR 430 (PFA) 436.
[9] Case no. PFA/GP/00093592/2022/YVT 23 June 2023.
[10] Swart N.O. and Others v Lukhaimane N.O. and Others [2021] JOL 49952 (GP).
[11] Swart, paragraph 32.