3 of 2020

The Office of the Pension Funds Adjudicator’s Communication 2 of 2020

The Office of the Pension Funds Adjudicator (Adjudicator) published Communication 2 of 2020 on 26 June 2020.

In the Communication the Adjudicator sets out the internal dispute resolution procedures.

The Adjudicator often receives complaints which have not yet been lodged with the relevant retirement fund or administrator. This results in the retirement fund or administrator not being given an opportunity to resolve the matter internally, prior to requiring her office to investigate the complaint and make a determination.

In terms of section 30A(1) and (2) of the Pension Funds Act, a retirement fund may be given an opportunity to resolve the complaint directly with a complainant. In the event that the complaint is not resolved to the satisfaction of the complainant within 30 days, the complainant may register the complaint with the Adjudicator. She is of the view that this approach would be in the best interest of all stakeholders, especially members of retirement funds.

With effect from 1 September 2020, upon receiving a complaint, the Adjudicator will enquire from the complainant whether the complaint was first lodged with the retirement fund or administrator and whether a period of 30 days has lapsed. If the complaint was not first lodged with the retirement fund, the Adjudicator will direct the complaint to the relevant retirement fund or administrator for resolution. The retirement fund, administrator or member must inform the Adjudicator that the complaint was resolved to the satisfaction of the complainant within 30 days, failing which the Adjudicator will request such confirmation and if there is no confirmation, then the complaint will be investigated by her office, without the need for the complainant to re-lodge the complaint.

The Adjudicator may direct a shorter period to resolve the complaint.

Retirement funds or administrators may waive the option to resolve the complaint internally and may do so by emailing this intention to directcomplaints@pfa.org.za.

Alternative dispute resolution mechanisms

Some retirement funds may have dispute resolution mechanisms for complaints to be resolved by an organisation, established for purposes of resolving complaints in the retirement fund industry, like bargaining councils.  The Adjudicator may request that the complainant first approach such organisation, provided that such organisation is approved by the Financial Sector Conduct Authority (FSCA). If the complaint is not resolved with the organisation, the complainant may again lodge the complaint with the Adjudicator.

Retirement funds which have these dispute resolution mechanisms, and/or their administrators are invited to provide the Adjudicator with a letter of approval from the FSCA, confirming that their dispute resolution mechanism has been approved. Retirement funds and administrators can do this by emailing the approval letter to REG.directcomplaint@pfa.org.za

Jurisdiction

The Adjudicator does not have jurisdiction to investigate a matter where proceedings have been instituted in any civil court in respect of the matter which would constitute the subject matter of the investigation.

Where proceedings have been instituted with the Labour Court and or with a council that has been accredited by the CCMA to resolve labour disputes, the Adjudicator is precluded from investigating the complaint and determining such a complaint.

Retirement funds and/or their administrators are invited to inform the Adjudicator of any arrangement where a council has been accredited to resolve disputes within their sector and whether such complaint must first be referred to the particular council for resolution. The information to the Adjudicator must include the type of disputes relating to retirement funds that the council is able to adjudicate upon. This information must be sent to LRA.directcomplaints@pfa.org.za.

Recent determinations and court cases

High Court case

Fund must weigh the competing interest of the member and employer upon the employer requesting the withholding of a member’s benefit

SA Metal Group (Pty) Ltd (“Employer”) vs Deon Jeftha (“Mr Jeftha”), Alexander Forbes Retirement Fund (“Fund”) and the Pension Funds Adjudicator (“Adjudicator”)

Prior to this hearing Mr Jeftha had lodged a complaint with the Adjudicator for an order to compel the Fund to release his withdrawal benefit. The Employer had requested the Fund to withhold Mr Jeftha’s benefit, pending the finalisation of the investigation into his fraudulent acts. The Adjudicator ordered the Fund to pay Mr Jeftha his withdrawal benefit plus interest.

The Employer brought an application with the High Court, seeking an order to set aside the Adjudicator’s determination and for the Fund to continue withholding Mr Jeftha’s benefit, pending finalisation of its investigation into his conduct which resulted in it suffering a loss.

Mr Jeftha’s submissions:

• that his benefit was over R4million, it had been withheld by the Fund for 4 years and that his financial adviser was notified of the withholding when he was requesting a transfer on his behalf;
• that the Fund took the decision to withhold his benefit, without it exercising its discretion with care and balancing the competing interests with the strength of the Employer’s claim, as required of the board;
• that the Fund had failed to afford him an opportunity to respond and test the allegations of his former Employer, or to establish their circumstances;
• that the Employer did not copy him on any of the correspondence to the Fund regarding the request to withhold his benefit; and
• that failure by funds to afford employees an opportunity to respond to, or test the allegations by their former employers, or to establish their circumstances was not unusual.

Employer’s argument

The Employer submitted that Mr Jeftha had breached his employment contract by outsourcing work contrary to the procurement protocol and that such act resulted in a loss, which loss must be reimbursed from Mr Jeftha’s benefit in the Fund.

Fund’s submissions:

• that it notified Mr Jeftha that the Employer’s right to request that his benefit be withheld was not absolute and had to be considered in light of his rights;
• that it had emphasised the urgency of the matter to the Employer and that failure to take legal steps and any unreasonable delay in updating the Fund would result in the Fund releasing the benefit to Mr Jeftha; and
• that it had found that the Employer had not delayed the process unreasonably and that Mr Jeftha was aware of the delay that was caused by his lack of co-operation.

The High Court held the following:

• that the Employer’s case should have been put to Mr Jeftha to afford him an opportunity to respond, before the Fund could make a decision which impacted on his rights;
• that the mere satisfaction by the board that the Employer had placed allegations before it, should not on its own have been sufficient to meet the withholding test;
• that any claim that would have the effect of depriving a member of the use and enjoyment of his/her benefit in the fund must be carefully scrutinised;
• that there must be a prima facie case and proof of fraud, dishonesty or theft, before a fund could accept the existence of prima facie right, failing which a fund was not entitled to withhold a benefit; the employer must have suffered some harm as a result of the member’s fraud, dishonesty, theft or misconduct;
• that section 7C of the Pension Funds Act places a duty on the board that envisages careful scrutiny of claims made against benefits by employers and a weighing of the competing interests of the parties after affording a member an opportunity to place his/her case properly before the fund;
• that the Board must be seen to act independent and act in such a way that there is no suspicion about its impartiality;
• that there was no proof of collusion on Mr Jeftha’s part, that Mr Jeftha’s non-adherence to the Employer’s procurement policies did not constitute dishonest conduct for the purposes of withholding his benefit;
• that there were no sound reasons to reverse the Adjudicator’s determination;
• that the board demonstrated an inability to comply with its legally prescribed fiduciary duties; and
• that the board did not conduct its responsibilities with the required independence and impartiality.

The court dismissed the application with costs.

Discussion points:

Funds must –

• afford members an opportunity to respond to the allegations made by the employer, before withholding the member’s benefit and correspond directly with the member;
• balance the interests of the employer against those of the member and scrutinise requests made, taking into consideration the possibility of financial prejudice to the member;
• act with due care and impartiality when deciding whether to withhold and deduct from a member’s benefit upon the request by the employer;
• act independently and should not merely withhold a member’s benefit at the request by the employer;
• re-consider their section 37D processes, follow-up on them and obtain regular status updates regarding the withholding; and
• properly record the reasons for a withholding decision

Distribution of death benefit determinations

Legal dependant must also be a financial dependant

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

Following the decision of the Financial Services Tribunal (“Tribunal”) to remit the matter back to the Adjudicator for reconsideration [refer to PFA rulings 1/2020], the Adjudicator reconsidered the matter taking into consideration submissions that were made to the Tribunal.

Complainant’s further submission

The Complainant alleged that he and the deceased were in the process of reconciling. However, he did not produce evidence to this effect. The Adjudicator was satisfied that there was no supporting evidence to prove that the Complainant and the deceased were in the process of reconciling.

Fund’s further submissions

The Fund submitted that financial dependency at the time of death is the overriding factor in all section 37C claims. The Complainant failed to prove his financial dependency on the deceased and he had confirmed this numerous times, even to the Tribunal.

The Fund therefore, was of the view that the Complainant had not been and would not be left destitute, following the death of the deceased.

The Complainant was gainfully employed, young and qualified enough to earn a good living and care for himself.

Adjudicator’s reconsidered decision

The Adjudicator submitted that section 37C(1)(c) provided for two scenarios in which a death benefit could be paid into the deceased’s estate. Firstly, where the deceased has no dependants and no nominees and secondly, where the fund had not discovered any dependants within twelve months after the death of the deceased and the deceased has designated a nominee to receive a portion of the benefit, and after payment to the nominee the remaining benefit is paid to the estate.

She held that albeit the Complainant was the deceased’s legal dependant, he was estranged from the deceased, they were in the process of a divorce and he was not financially dependent on the deceased.

The Adjudicator was satisfied that the Fund had considered that the Complainant was a legal dependant and was satisfied with the Fund’s decision to pay the benefit into the deceased’s late estate and therefore dismissed the complaint.

The Adjudicator held that legal dependency is not sufficient to be allocated a benefit and that financial dependency should also exist.

She thus dismissed the matter, meaning she was satisfied with payment to the estate of the deceased.

Discussion points:

In this case, the Adjudicator is of the view that legal dependency alone is not sufficient, the beneficiary must also be financially dependent.

Legal dependency alone without financial dependency is sufficient to allocate a death benefit

VR Krzus (“Complainant”) v Momentum Pension Preservation Fund (“Fund”) and MMI Group Limited

The Complainant was the deceased’s sister and she was dissatisfied with the board’s decision to allocate the entire death benefit to the deceased’s estranged wife. The board resolved to allocate the entire benefit to the deceased’s estranged wife on the basis that she was the deceased’s legal dependant.

The Complainant submitted the following:

• that the deceased and his wife were separated for 10 years and were in the process of a divorce;
• that the wife was not financially dependent on the deceased at the time of his death and she had confirmed this in writing; and
• that she and her brother were the deceased’s nominated heirs in terms of his will.

The Fund submitted that where the only dependant is a legal dependant, the board does not have the discretion to disregard such a dependant and distribute the benefit to the deceased’s estate. It submitted that there is a legal dependant and that there was no justification to pay the benefit into the deceased’s estate, the Guardian’s Fund or any unclaimed benefit fund as proposed by the Complainant.

Adjudicator’s determination

The Adjudicator accepted that the deceased’s estranged wife was a legal dependant and that there was no need for her to prove anything further to qualify as a spouse, except to show that she was indeed a spouse.

She however added that the exercise does not end there. The board’s next duty is to consider an equitable allocation to qualifying dependants. That dependency on the deceased at the date of death is important in determining a beneficiary’s extent of dependency.

The Adjudicator found that the board misdirected itself by allocating the entire benefit to the deceased’s estranged wife, even though it had established that she was not financially dependent on the deceased. She ordered the board to allocate the benefit in terms of section 37C(1)(c), which provides that where there are no dependants and nominees, the benefit should be paid to the deceased’s estate.

The Adjudicator set aside the decision of the board on the basis that the deceased and his wife were estranged at the time of his death; that the wife was not in receipt of maintenance from the deceased; was not financially dependent on the deceased and thus was not entitled to a portion of the death benefit and found the decision of the board to be unjust.

Tribunal hearing

The Fund lodged an application for reconsideration with the Financial Services Tribunal (Tribunal) on the basis that the definition of dependant includes spouse and the definition does not require the spouse to have also been financially dependent on the deceased. It stated further that where the only dependant is a legal dependant, the board does not have a discretion to disregard the dependant and distribute the benefit to the deceased’s estate.

The Tribunal held the following:

• that financial dependency is a different category from dependency established by relationship with the deceased and if the legislature intended for dependency to merely be a financial issue, then there would not have been a need to make provision for various categories;
• that not being financially dependent on the deceased does not disqualify the wife as a dependant in terms of the Act and found that the Adjudicator erred by allocating the benefit to the deceased’s estate;
• that the board therefore did not have a discretion to disqualify a dependant who otherwise qualified in terms of the Act, and doing this would be an irregularity;
• that the board’s discretion only comes into play when determining an equitable distribution between numerous dependants and/or nominees;
• that the Adjudicator had incorrectly rejected the deceased’s spouse as a dependant and had wrongly applied the default position under section 37C(1)(c) of paying to the estate; and
• that the wife’s lack of financial dependency does not disqualify her as a dependant in terms of the Act and thus the Adjudicator erred in holding otherwise.

The Tribunal remitted the matter back to the Adjudicator for reconsideration.

Adjudicator’s reconsidered determination

The Fund made further submissions to the Adjudicator following the decision of the Tribunal and submitted that:

• the only identified dependant is the deceased’s estranged wife and as the only identified dependant, the benefit must be distributed in terms of section 37C(1)(a), which relates to the distribution of a death benefit to dependants only;
• this section of the Act is clear and does not provide for any discretion to distribute the benefit in any other manner other than to dependants, when only dependants are identified;
• the definition of dependant includes a spouse and it does not require the spouse to have been financially dependent on the member at the time of his death; and
• the wife is the only dependant and as the only dependant, she does not have to quantify her level of dependency and that the entire benefit can be allocated to her.

Adjudicator’s reconsideration

The Adjudicator reiterated that the purpose of section 37C is to protect those who were financially dependent on the deceased during his lifetime.

The Adjudicator accepted that the Fund was correct in finding that the spouse of the deceased need not prove anything further to qualify as a spouse, except that she was indeed a spouse. The next duty of the board is to consider an equitable distribution to the qualifying dependants, which is based on the extent of financial dependency on the deceased.

She held that:

• the board relied on the fact that the wife qualified as a legal dependant and allocated the entire benefit to her, taking into account that the deceased did not have any other dependants or nominees;
• there was only one dependant and that equity and proportions do not factor when there is only one dependant and no nominees and the entire benefit must be paid to that one dependant; and
• as the spouse is the only dependant even though she was separated from the deceased, the board was obliged to pay the entire benefit to the spouse and she dismissed the complaint.

Discussion points:

In this case, the Tribunal is of the view that boards do not have a discretion to disregard a dependant and distribute the benefit to the deceased’s estate, where a legal dependant exists.

Financial dependency is a different category from legal dependency and there is no indication of the intention of the legislature for dependency to be merely financial.

The board’s discretion only comes into play when determining equitable distribution between numerous dependants and or nominees.

 Comments following both cases

Unfortunately boards find themselves at another juncture with two contradictory decisions coming from the Adjudicator.

As it currently stands the Act is clear that where the deceased member leaves a dependant/s, then such benefit is to be equitably distributed to such dependant/s and that payment to the estate can only be made where there are no dependants and/or nominees.

Lack of financial dependency where there exists legal dependency does not disqualify a dependant from being allocated a portion or the entire benefit.

However, the Constitution mandates a purposive interpretation. In other words, the purpose or object of legislation should be considered when interpreting legislation. The purpose of section 37C is to look after the financial dependants of the deceased and for this reason the lack of financial dependency justifies the trustees’ decision to not allocate a portion of the death benefit to the estranged spouse.

It is unfortunate that section 37C does not provide trustees with clear guidelines to distribute and pay benefits equitably amongst the beneficiaries, but it is clear from the two cases highlighted above that the Adjudicator will not substitute trustees’ decision with her own if the trustees considered all relevant factors. In both cases, the trustees’ initial decisions were upheld and it could not be found that they fettered their discretion, or failed to conduct a proper investigation, although one case was based on the literal interpretation of the Act and in the other case, the purpose of section 37C was considered in interpreting section 37C.

Hopefully in time an amendment to section 37C will bring the purpose through clearly and provide more clarity.

Being a nominee entitles one to be considered to receive a benefit

NM Pretorius (“Complainant”) v Corporate Selection Umbrella Pension Fund (“Fund”), Liberty Group Limited and FLS Automation South Africa

The Complainant was the deceased’s daughter, who is dissatisfied with the decision of the board to allocate the entire death benefit to the deceased’s wife.

The deceased was separated from his wife, had changed his will and bequeathed his estate to his three adult children, had removed his wife from his medical aid and changed his nomination form to reflect that his children would receive his unapproved death benefit. The deceased had in his previous will bequeathed his house and pension to his wife.

The Fund submitted the following:

• that the deceased was still married to his wife at the time of his death and would still be responsible for her well-being;
• that the deceased’s wife was financially dependent on the deceased, even though they were separated because the deceased assisted her with bond payments and household expenses;
• that the deceased’s children were not financially dependent on the deceased; and
• that the wife would have had a claim on the deceased’s pension interest had he survived and the divorce proceedings finalised.

The Adjudicator held that dependency at time of death is important in determining the beneficiary’s extent of dependency on the deceased. The board’s decision to allocate the entire benefit to the deceased’s wife was unjust and the board should have obtained proof that the deceased financially maintained his wife and should there be no proof of financial dependency, the benefit must be distributed to the estate of the deceased as the deceased did not designate any nominee to receive the benefit.

The Adjudicator held that the board’s failure to obtain proof of the wife’s financial dependency and the reliance on the affidavit of the wife was unjust and a fettering of the board’s discretion. She found that the board fettered its discretion and set aside the board’s decision to pay the entire benefit to the deceased’s wife.

Tribunal decision

The Fund instituted an application to the Tribunal for reconsideration against the decision of the Adjudicator.

The Fund saw no reason why there was a need for proof of financial dependency in respect of the deceased’s wife, as it is not the only factor that should be considered.

The Fund submitted that the factors that it took into account were that there was a valid marriage, the deceased provided financial assistance to his spouse in respect of the bond and municipal accounts, other monetary assistance provided to the spouse, the ages of the deceased’s beneficiaries and the fact that all his children were major and financially independent.

The Tribunal found that based on the submissions that were made, the decision of the board was not irrational and improper.

The Tribunal held that a board’s decisions can only be interfered with where it can be shown that a board had taken irrelevant, improper and irrational factors into consideration, or where it can be shown that no reasonable board could have reached such a decision.

The Tribunal found that the Adjudicator had in this instance no power to substitute the decision of the board with its own decision. Payment to the estate can only be made where there are no dependants and no nominees, where there are no dependants and only a nominee who is not a dependant, (to the extent that a deceased’s member’s estate liabilities exceed its assets), or where there are no dependants and a nominee was only nominated to receive a portion of the benefit.

The Tribunal set aside the decision of the Adjudicator and remitted the matter back to the Adjudicator for her reconsideration.

Adjudicator’s reconsideration

The Adjudicator held that the deceased’s children were nominated, and the major children should therefore have been considered as nominees of the deceased. The Fund was incorrect in relying on the fact that the children were not financially independent on the deceased.

The Adjudicator held that a nominee should not be considered as a beneficiary because he or she was financially dependent on the deceased, but that the consideration as a beneficiary flows from the fact that the person concerned was nominated by the deceased.  She therefore found that the children’s financial dependency on the deceased was irrelevant, because they were nominees and thus it was not necessary for them to prove their financial dependency on the deceased.

The Adjudicator ordered the board to reconsider the allocation in terms of s37C(1)(bA) (allocation where there is a dependant and nominee), as the major children are nominees and the board must therefore consider an equitable distribution between all beneficiaries.

The Adjudicator found that the death benefit was not properly allocated and set aside the board’s decision and ordered the Fund to reconsider its decision.

Discussion points:

The Adjudicator can only interfere with the board’s decision where it can be shown that the board had taken irrelevant, improper and irrational factors into consideration.

The Adjudicator cannot substitute the board’s discretion with her own decision.

A nominee must be considered for an allocation of a death benefit and need not prove financial dependency. A nominee’s entitlement to be considered in the death benefit allocation flows from being nominated and not from financial dependency.

Disclaimer.