Why You May Not Always Control How Your Pension Is Allocated

A recent decision by the Pension Funds Adjudicator serves as a reminder that in the realm of retirement fund benefits, a member’s written will or nomination form does not hold the definitive authority.

Section 37C of the Pension Funds Act (24 of 1956) is a complex and frequently misinterpreted statute. The particular case brought before the Pension Funds Adjudicator involved a conflict regarding the beneficiaries of a R1.58 million estate.

In this instance, the deceased member’s ex-wife lodged a complaint after their 18-year-old son was omitted from the retirement fund death benefit due to having received funds from a separate life insurance policy.

The trustees concluded that his financial situation did not necessitate additional financial aid from the fund’s death benefit.

Read/Listen: Caution: Pension payouts may override your will

Many South Africans typically believe that their retirement savings will be distributed precisely as indicated in their will, or will automatically go to their spouse or children. However, the reality governed by Section 37C is notably different, placing onus on retirement fund trustees to ensure that death benefits are allocated fairly, with a primary emphasis on dependency.

The rationale behind legislative oversight

The objective of Section 37C is social protection. It aims to guarantee that individuals who were financially reliant on a deceased member are not left in poverty, irrespective of what a nomination form might stipulate.

This means that while a member may designate a specific individual to receive 100% of their benefits, the trustees are legally required to conduct an investigation.

They must identify all legal and factual dependents, including spouses, children, life partners, and anyone else financially supported by the member, and then allocate the funds based on need and fairness.

Why outcomes might diverge from intentions

This legal framework creates a gap between expectations and actual outcomes following a member’s death. There are three main reasons for these discrepancies:

1. Dependency is prioritized over nominations for retirement fund benefits: A nomination form serves as a guideline for trustees regarding benefits, but it is not a binding contract. If a member names a self-sufficient adult sibling while leaving behind a minor child or a financially reliant ex-spouse, the trustees are obliged to supersede the nomination to provide for those in greater need.
2. The nature of the estate: Many mistakenly believe that retirement benefits are part of a deceased individual’s distributable estate. In truth, pension, provident, and retirement annuity benefits are governed by the Pension Funds Act, not the Law of Succession. Thus, these benefits are directly distributed to dependents or nominees and do not necessarily adhere to the instructions outlined in a will. Adding to the complexity, some employer-owned policies managed through the retirement fund may not be subject to the Pension Funds Act and could be included in the member’s estate.
3. Products dictate distribution rules: Different financial products have different distribution guidelines. While death benefits from retirement funds fall under Section 37C, other benefits from life insurance policies (including employer-owned policies that might be housed within the retirement fund) or certain living annuities may permit direct beneficiary nominations that aren’t influenced by trustee discretion. This can lead to a fragmented inheritance, with various assets distributed according to distinct legal standards.

Read:
From grief to financial empowerment: 10 essential steps for recent widows to secure their future
Divorce and retirement funds: 10 key facts regarding pension interests

Enhancing your legacy through cohesion

The potential for conflict and financial strain on survivors is significant when expectations do not align with legal realities. S37C disputes remain among the most frequent complaints received by the Pension Funds Adjudicator and are often contested legally. To mitigate these risks, a proactive approach to estate and retirement planning is essential.

Ensuring your dependents are protected requires more than just having a plan; it necessitates having a plan that functions effectively in practice.

This begins with aligning your beneficiary choices across all financial products and comprehending how each benefit will be distributed and taxed.

Simply signing a nomination form once and setting it aside is not sufficient. As your risk landscape shifts – through marriage, divorce, or the arrival of children – your nominations must be revised to match your current circle of dependency.

Read: Woman’s claim to R21m death benefit denied

Although opting out of Section 37C is not possible, providing trustees with clear, updated information and a documented explanation for your choices can aid them in making a fair decision that aligns more closely with your desires.

The crux is that retirement planning entails not just the accumulation of wealth, but also its responsible distribution. Recognizing the function of Section 37C is vital in ensuring greater stability for your dependents in the future.

Henré Prinsloo is the head of employee benefits at Momentum Corporate.