Many dependants and nominees of retirement fund members are unaware of how the provisions of Section 37C of the Pension Funds Act govern the distribution of the member’s death benefits – and it’s generally only after the member’s passing that they realise how the process works and how long it takes. In this article, we provide answers to frequently asked questions about this contentious section of the Act.
What is the purpose of Section 37C?
The purpose of this section of the Pension Funds Act is to ensure that, where a member of a retirement fund dies before reaching retirement age, the death benefit is paid to those who were financially dependent on the member at the time of their death to ensure that they are not left destitute. The Act is designed to ensure that the monies in respect of which the State allowed significant tax concessions are used for the benefit of the deceased member’s financial dependents, thereby reducing the burden on the State.
What funds does Section 37C apply to?
Section 37C is applicable to all benefits payable to a member by an approved retirement fund – including pension, provident, preservation, and retirement annuity funds – at the time of the member’s death. Note that where a member withdraws or retires from a fund but passes away before his/her withdrawal is paid out, no death benefit accrues.
Does Section 37C override the member’s will?
Yes, while South Africans enjoy freedom of testation, there are certain limits to this freedom – with Section 37C being one of them. As such, the Act overrides a member’s will and any other laws to the extent that they are contradictory to the provisions of the Pension Funds Act. The Act makes it clear that it is the duty of the retirement fund trustees to trace and identify the member’s financial dependants and to distribute the benefits accordingly. The trustees may take any nominated beneficiaries into account when making a determination.
What is the difference between a dependant and a nominee/beneficiary?
A ‘dependant’ is anyone financially dependent on the member at the time of her death including children, parents, or grandparents of the member. It can also include life partners, civil union partners, same-sex partners, or customary marriage partners. It also includes factual dependants such as step-children, foster children, adopted children, or unborn children. The definition of ‘dependant’ also extends to anyone entitled to claim maintenance from the member, or someone who may in future have become financially dependent on the member. On the other hand, a ‘nominee’ is any party whom the member nominated on her retirement fund beneficiary nomination form, bearing in mind that a ‘nominee’ may not necessarily be financially dependent on the member.
What does the trustees’ investigation entail?
The process of identifying and tracing the member’s dependants is largely a manual one and can be time-consuming and labour intensive, especially because the trustees have a fiduciary duty to investigate the circumstances of every possible dependant. They are required to undertake a thorough investigation, apply their mind, exercise discretion, and act in good faith at all times, with a view to reaching a fair and equitable determination. Because the process is a cumbersome one, fund trustees have a 12-month period in which to make a determination, although it is their duty to ensure that the determination is made as quickly as possible. During the course of their investigation, the trustees will need to obtain input from a number of parties depending on the complexity of the member’s family structure and the number of financial dependants. Trustees need to be acutely aware that opportunists may make fraudulent representations as to their financial dependency and, as such, every potential financial dependant needs to be thoroughly investigated.
How do the trustees apportion the funds?
Once the financial dependants of the member have been identified, the trustees are required to apportion the funds amongst the dependants and/or nominees, with their primary goal being to ensure that no one who was financially dependent on the member is left without support. In making a determination, the trustees must take into account the financial position of each person, their sources of income, and other financial support available to them. They will also consider the age of the person, their relationship to the deceased, their future earning potential, and the value of the death benefit available to apportion. Lastly, where the deceased has nominated a beneficiary on this retirement fund benefit, this nomination will be taken into consideration by the trustees, but only to the extent that the nominee was financially dependent on the member at the time of her death.
What happens if the member made no beneficiary nomination?
In such circumstances, the benefits will be distributed and allocated amongst the identified dependants at the trustees’ discretion.
What happens if there are no financial dependants?
If the member had no financial dependants at the time of death but had made beneficiary nominations, the trustees must first determine whether the member’s deceased estate is solvent. If not, then the death benefit – or a portion thereof – must be used to settle the debts in the estate, whereafter the balance can be paid to the beneficiaries in the nominated proportions.
What happens if the member made no beneficiary nomination and has no financial dependants?
In a situation where a deceased member made no beneficiary nomination and has no financial dependants, the death benefit will be paid into the deceased’s estate but only after a period of 12 months has elapsed. This waiting period is to allow for any untraced dependants of the member to come forward.
What options do the dependants and beneficiaries have when receiving the funds?
The funds can be made available in the form of a compulsory living or life annuity with a South African registered insurer in the name of the dependants and/or nominees. Alternatively, the dependants and/or nominees may take the full benefit as a cash lump sum, although it is important for them to understand potential the tax implications of doing so. Finally, the dependants and/or nominees can take the benefit in the form of a combination of a cash lump sum and a compulsory life or living annuity. Where the beneficiaries are minors, the trustees may pay the benefit to a beneficiary fund, to the parent/guardian of the minor, or a trust.
As is clear from the above, the payout of a member’s death benefits can realistically take up to a year before her dependants receive their share of the funds. It is therefore important for the member to ensure there is sufficient liquidity in her estate to tide her dependants over financially until the retirement fund benefits become available. As such, if you’re contributing to a retirement fund, ensure that your advisor undertakes an estate planning exercise to ensure that your loved ones are adequately provided for in the period leading up to your death benefit payout.
Have a wonderful day.
Sue
