3 of 2019

DEATH BENEFITS

Before paying death benefits, boards must verify that a dependant is still dependent

Fundsatwork Umbrella Pension Fund (“the Fund”)

v Guarnieri and Others

The Supreme Court of Appeal (“SCA”) had to determine at what stage during the process of distribution of a death benefit in terms of section 37C of the Pension Funds Act, a person must qualify as a dependant to be entitled to an allocation of a portion of the death benefit.

The deceased’s wife, who was the complainant in the case before the Pension Funds Adjudicator, was dissatisfied that the board of the Fund had allocated 42% of the deceased’s death benefit to the deceased’s mother, who was sick and in an old age home. The deceased’s mother died four days before the board finalised its decision to allocate a portion of the benefit to her.

The Adjudicator set aside the initial distribution and referred the matter back to the board to reconsider its decision. The board made the same decision, which was then challenged in the High Court.

The High Court set aside the board resolution and replaced it with an order allocating a larger benefit to the deceased’s wife and her children. This led to the Fund referring the matter to the SCA.

The Fund was of the view that the determination for dependency had to be made at the date of death of the member and that subsequent changes should be ignored. The Fund submitted that it was unaware that the deceased’s mother had died four days before their decision was made.

The SCA held that the length of the 12 month-period means that factual circumstances may change and a situation may arise where someone who qualified as a dependant at one stage ceases to qualify at a later stage.

The SCA further held that the time at which decisions should be taken to determine who is a dependant is not at the time of death, but rather when the distribution decision is being made, as the board would have completed its investigation and be able to assess the present and future needs of the dependants it has identified. According to the SCA, this does not impose too great a practical burden on the board but merely imposes an obligation on the board to ensure that the information received is accurate and to ensure that when it makes distributions, the intended Boards should ensure at the time of making the distribution determination that the beneficiaries are still alive and therefore qualify as dependants. Even if it is at the time of making the decision not known that a possible beneficiary had died, it will become known at the payment stage at which point the board should be notified and reconsider allocating that portion to the other beneficiaries.

An agreement with the deceased prior to death to exclude oneself to share in the death benefit is equitable

K Naidoo (“Complainant”) v Coca Cola Shanduka Beverage Provident Fund (“Fund”) and Alexander Forbes Financial Services

The Complainant is the spouse of the deceased member. The Complainant was dissatisfied with the board’s decision to pay the death benefit into the deceased’s estate as he was the deceased’s legal spouse.

The Complainant provided proof to the Fund that he was not financially dependent on the deceased. The Fund submitted that the deceased had no children and was survived by her parents and two sisters and she had not completed a beneficiary nomination form. The deceased and the Complainant had separated in November 2015 and she was living alone until her death in June 2016. The deceased had initiated divorce proceedings prior to her death. The Complainant and the deceased agreed in the deed of settlement that neither party had any claim to the assets of the other. The deceased had appointed her parents as her sole beneficiaries in terms of her testament.

The Adjudicator held that the Complainant by agreement with the deceased prior to her death, had excluded himself from being a legal and/or factual dependant and that this exclusion from the allocation of the death benefit is equitable.

The Adjudicator dismissed the complaint and found that payment to the estate was justifiable as the deceased did not have any dependants and/or nominees and her estate was solvent.

A deed of settlement by separated spouses may be taken into account when considering the allocation of a death benefit in terms of section 37C.

DIVORCE ORDERS:

VARIATION ORDERS

Parties should take care not to get another divorce order to vary an existing divorce order

SP Galane (“Complainant”) v Municipal Gratuity Fund (“Fund”) and Sanlam Life Insurance Limited

The Complainant is the non-member spouse and is dissatisfied with the Fund’s refusal to pay a portion of the member spouse’s pension interest to him, as was assigned to him in terms of a divorce order.

The parties entered into a settlement agreement which was made an order of court in March 2017. The Fund found that the order did not comply with the provisions of the Divorce Act and was therefore not enforceable against the Fund. As a result, the parties obtained a new court order with amended wording, which was problematic as pension interest is calculated on the date of divorce and therefore there was uncertainty on which date pension interest must be calculated. The second divorce order also fell short of the legislative requirements and was therefore not enforceable against the Fund, as it did not contain an order to the Fund to pay the Complainant. It further provided that an endorsement be made for “50% after taxation of the pension interest operable by the fund”.

The above is capable of at least three interpretations, namely:

1.	The non-member spouse is entitled to 50% of the member’s pension interest, the 50% must be taxed and the net amount paid to him; or
2.	The non-member spouse is entitled to an amount which, after tax, is equal to 50% of the member’s pension interest; or
3.	The non-member spouse is entitled to 50% of the remaining amount (i.e. the net amount after tax) after the member’s full pension interest is taxed.

The Adjudicator held that the order was unenforceable against the Fund and that the parties must approach the court and amend the order to clearly indicate the percentage of pension interest assigned to the non-member spouse and a specific instruction for the Fund to pay the non-member spouse.

She suggested that the parties approach the court for rectification of the orders and highlighted that even though both orders were unenforceable against the Fund that they remained binding between the parties.

A variation order must specifically vary the clause relating to pension interest

LK Fokazi (“Complainant”) v Sanlam Staff Umbrella Pension and Provident Fund (“Fund”) and Sanlam Life Insurance Limited (“Administrator”)

The Complainant is the non-member spouse of the Fund in terms of a valid divorce order. In the divorce order the parties agreed that “there shall be no claims against one another’s pension/provident/retirement fund”.

The parties later obtained a variation order to the initial divorce order which provided that the non-member spouse shall be entitled to a portion of pension interest. The Fund refused to give effect to this order as the variation order did not set aside the initial statement in the divorce order that each party will not have a claim against one another’s funds.

The Adjudicator found that a variation order must specifically vary a particular part of the order to avoid uncertainty. It was not clear from the variation order whether it varies the statement in the initial divorce order which stated that the parties will not claim against each other’s funds. The variation order just makes provision for payment of pension interest to the Complainant without specifically indicating that the initial statement is varied.

She concluded that the clause in the variation order was not correctly formulated as it conflicted with the initial divorce order and thus held that the variation order was not binding on the Fund and therefore unenforceable and she dismissed the complaint.

Parties should take care when amending their divorce order that they obtain a variation order (as oppose to another divorce order) and that the specific part of the order relating to the split of retirement fund benefits is amended.

Enforceable undertakings

Enforceable Undertakings are one of the new powers that the FSCA has acquired under the Financial Sector Regulation Act (“FSRA”).

Persons such as retirement funds, administrators or natural persons, may provide a written undertaking to the FSCA about how they are going to conduct themselves in future in relation to a matter regulated by a financial sector law. This process will normally commence after an FSCA inspection or a whistle-blowing report. If the undertaking is accepted by the FSCA, it becomes an Enforceable Undertaking.

The FSCA has wide powers to ensure that persons comply with Enforceable Undertakings, such as issuing a directive, administrative penalties, referral to the Financial Services Tribunal and revoking a license.

As a deterrent, every Enforceable Undertaking is published on the FSCA’s website. The FSCA has published a number of Enforceable Undertakings to date. A summary of three Enforceable Undertakings that was published by the FSCA are set out below.

Ian Young and Total SA Provident Fund (“the Fund”)

During 2012 Ian Young was appointed the principal officer of the Total South Africa Provident Fund (“the Fund’). The Fund appointed Lifesense Financial Services Administration Division (Pty) Ltd (“Lifesense”) as the administrator of the Fund during 2013. In 2014 Young was appointed as the Director of Lifesense.

•	Contraventions The board of the Fund failed to avoid a conflict of interest in terms of section 7C(2) of the Pension Funds Act when Young was appointed as director of Lifesense, the Fund’s administrator. The directorship in Lifesense created an impermissible gratification in terms of Directive 8.

•	Enforceable Undertakings provided to the FSCA The following enforceable undertakings were given to the FSCA:
i)	Young undertook to resign from the position of principal officer with effect from 31 January 2019 or sooner.
ii)	Young would remain a director of Lifesense, but may not accept any appointment to the Fund or any other fund to which Lifesense or its associated companies provides services.
iii)	The Fund must appoint a new principal officer as soon as reasonably possible.
iv)	The board undertook to ensure that no officer of the fund has an interest in any service provider to the Fund.

Lidia Visser, Andries Schaap and Sasol Pension Fund (“the Fund”)

A conference expenditure issue and a related party transaction issue were raised as part of the same Enforceable Undertaking.

A	Conference expenditure issue This matter arose from a whistle-blowing report, after which the FSCA made enquiries. Visser (the principal officer) sought approval from Schaap (the general manager of the Fund) to attend a pensions conference on sustainability in the USA, at the cost of the Fund. The general manager, empowered under the fund policy, approved the trip but did not verify the existence of the conference. The principal officer stated that during the trip she made three unplanned visits to various pension related events, however, no evidence was provided to prove this. She also did not provide a report on activities and learnings from the trip to the Fund. The board set up a sub-committee to investigate the matter and held a disciplinary enquiry. Both the principal officer and the general manager pleaded guilty and received final written warnings from the Fund. The principal officer then retired from her position in the Fund.
•	Contraventions
i)	The principal officer acted inconsistently with fit and proper requirements set out in the Pension Funds Act.
ii)	The principal officer and the general manager contravened section 2 of the Financial Institutions (Protection of Funds) Act.
iii)	The board failed to adequately comply with section 7C(2)(f) and 7D(1)(b) of the Pension Funds Act by delegating approval of travel expenditure to the general manager without exercising adequate oversight.

•	The Enforceable Undertakings provided to the FSCA
i)	Visser and Schaap will jointly and personally refund the trip expenses to the Fund within 30 days.
ii)	The Fund will amend its travel policy within 60 days to the extent that any travel expenditure amounting to R15,000 or more must be properly motivated to the board/sub-committee and approved prior to travel and that disciplinary issues relating to a principal officer or a senior officer must be brought to the board’s or sub-committee’s attention for decision regarding disciplinary action.
ii)	Within 90 days, the Fund and employees will do a whistle-blowing session with the FSCA.
iv)	All of the above were to taken place on the understanding that the principal officer had retired and that the FSCA reserved the right to object to the appointment of Visser as the principal officer of any other fund.

Lessons to be learned from the three cases

The board of a fund must:

(i)	Be diligent to avoid conflicts of interest and ensure that none of the services allocated to a service provider of the fund amounts to a contravention of Directive 8.
(ii)	Verify that upon approval of travel, the events for which the travel is needed, are in fact scheduled to occur and that trips are truly for the benefit of the fund.
(iii)	Ensure that the fund has a policy, process and documentation for travel approval and that it documents its approval.
(iv)	Ensure a subsequent report/feedback to the board on the learnings and activities from the trip.
(v)	Report any related party transactions in the annual financial statements.

 

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