Retirement planning – Distributing retirement fund death benefits

Allocating death benefits, and determining appropriate methods of payment

Once the board of trustees has determined the beneficiaries and is satisfied that its proposed allocation is fair and equitable, the beneficiaries must elect how they would like to receive the death benefit.

The final duty of the trustees is to determine the most appropriate manner in which the benefits should be paid to the dependants and/or nominees, with there being a number of options available.

The trustees must inform beneficiaries of their decision, the reasons for reaching it, and the portion of the benefit allocated, subject at all times to the restrictions placed on them in terms of the Protection of Personal Information Act 2013.

Payment timeframe
Section 37C(1)(b) aims to ensure that death benefits are distributed within a reasonable timeframe. According to Section 37C, the payment should be effected after a period of 12 months from the date of the member’s death, at the very least. However, if the board sees the need for further investigation, it is not compelled to make payment after the 12 months have passed. Neither does Section 37C prohibit the distribution of death benefits within 12 months, nor does it compel distribution at the expiry of the 12-month period.

The Section 37C(1)(b) 12-month time-frame should serve as a benchmark that a board should strive to meet, but distribution should not be made if it has not taken all reasonable steps to identify dependants, or is uncertain about dependants already identified. There may also be unavoidable delays in obtaining all relevant information.

If a board finds itself in the position where further investigation is needed, it should notify the identified beneficiaries of the need for further investigation. Communication with beneficiaries could guard against unwarranted costs that could arise from complaints being laid by dependants, as well as prevent any delay that could be caused due to dealing with a complaint brought to the Pension Funds Adjudicator (PFA).

Complaints and the Pension Funds Adjudicator
Dependants and nominees who wish to dispute trustees’ decisions with regard to death benefit allocations and payments can do so by submitting a complaint to the principal officer of the fund. In the event that the principal officer’s response is unsatisfactory, and should they wish to take the matter further, a complaint can be lodged with the PFA.

As discussed in previous articles carried in the July and August 2022 issues of Personal Finance, Section 37C imposes onerous duties on retirement fund trustees and, increasingly, complaints are being brought to the PFA. The retirement fund industry is engaging with the Financial Sector Conduct Authority in this regard.

The following article extract, which appeared in Death benefits and Section 37C: The burden on the board of trustees, published back in 2014 by Sanlam, still holds true: “Section 37C must be carefully followed by the trustees, especially when it comes to determining when the duty to pay arises … Boards would benefit if the legislature provided more specific guidelines, but for now, trustees and administrators should be mindful and pay close attention to PFA determinations as a form of guidance.”

However, in the absence of clear and specific guidelines around the application of Section 37C, the interpretation and application of this legislation can result in unintended outcomes—despite trustees’ best efforts to make reasoned and fair determinations.

Pitfalls of an incorrect application of Section 37C
As has already been set out, Section 37C imposes significant duties on the board of trustees. Not only is the board tasked with conducting a proper investigation to determine all of the deceased member’s dependants, it also has to make an equitable distribution of the death benefits.

Furthermore, Section 37C imposes all these duties on the board without providing any guidelines as to how they are to be achieved.

Added to this responsibility, if the board fails to properly investigate all facts; fails to consider all the relevant factors; or takes irrelevant factors into account, the board’s decision will be reviewable on the grounds that it exceeded its powers or that the decision constituted an improper exercise of its powers.

At the same time, any failure by a board to take a decision timeously will be deemed as maladministration, potentially giving rise to a claim for losses or prejudice suffered by the beneficiary. Section 37C as a whole is therefore fraught with great difficulty in its application, and must be carefully followed by a board of trustees, especially when it comes to determining when the duty to pay arises.

As an example: In the matter of Dobie NO v National Technikon Retirement Pension Fund [1999] 9 BPLR 29 (PFA) the Pension Fund Adjudicator (PFA) considered the principle of mora, or late payment interest, as well as the timeframes of Section 37C in great detail.

Ultimately, the PFA pointed out that the timeframes stipulated in Section 37C “have led to considerable debate and confusion in the pension funds industry and require clarification”. The PFA also further noted that “although the intention of the [Section 37C] legislature was noble, the problem with this Section lies in its application”.

Advice for trustees
Increasingly, disputes around the distribution of death benefits as determined by trustees are being brought to the PFA to resolve.

While the intention of Section 37C was to streamline the distribution of benefits to ensure that no dependant is left destitute after a member’s death, the outcome determined by trustees is not always well-received by dependants and nominees, and the process of allocating death benefits can become drawn out when disputes are lodged with either the fund and/or PFA or the Financial Sector Tribunal or the high court.

In order to mitigate this, a possible solution would be for the legislature itself to provide more specific guidelines (e.g., regarding the steps to be taken, what would be regarded as equitable, legal dependency, maintenance and indigency, etc.) and then allowing for a final distribution to known dependants and nominees at the expiry of a reasonable period (a type of prescription period).

Such guidelines also need to provide clarity around what information can be provided to beneficiaries in terms of the Promotion of Administrative Justice Act 2000, and the Protection of Personal Information Act, 2013—concluding with the necessary indemnities to protect the board against further claims.

At present, such guidelines are not yet in place, and it is advisable for trustees and administrators to keep a close eye on PFA determinations, Financial Sector Tribunal reconsiderations, and outcomes of High Court cases in this regard for useful guidance on the application of Section 37C.

Editor’s note:
As a former trustee of a pension fund, I have had first-hand experience of the administrative nightmare involved in tracing any and all possible dependents of a deceased member.

This task becomes particularly difficult when the member has taken on financial responsibility for those outside their immediate family, or has become estranged from persons connected to previous relationships where a right of dependency could be claimed—for example, children born from such relationships.

Members also need to be reminded that retirement fund trustees are required to take into account not only those who have a legal right to be considered as a dependent, but also those who are factually dependent on the member (whether or not a legal obligation exists).

What can retirement fund members can do to help trustees to ensure that dependents are treated equitably and in compliance with Section 37C? The best thing that they can do is to document all known cases where such dependency may be established. Examples include:
-Dependents based on the member’s current relationship (spouse, children).
-Minor children born out of previous relationships.
-Instances where the member has voluntarily assumed responsibility for those outside their immediate family, where dependency could be claimed. This could include caring for elderly relatives, or taking in children of relatives who are deceased.

Any such notification to the fund trustees should not only include the dependant’s name, but any information that will enable the trustees to make contact in the event of the member’s death. Such information should ideally include the dependant’s ID number, physical and postal addresses, and contact telephone numbers, and should be updated regularly.

WRITTEN BY ATLEHA-EDU

Atleha-edu is a non-profit organisation providing financial education to retirement fund trustees and members, in
partnership with Strate and the ASISA Foundation.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as financial advice.