Retirement Funds (02) Flashcards
How are members’ retirement benefits protected?
Section 37A of PFA
A member’s benefits (including an annuity purchased by the fund from an insurer for a member) payable in terms of the rules of the fund
may NOT be reduced, transferred or otherwise ceded, pledged or hypothecated, attached or subjected to any form of execution under a judgment or order of court,
or be taken into account in the determination of a judgment debtor’s financial position in terms of section 65 of the Magistrates’ Courts Act 32 of 1944 for an amount exceeding R3 000 per annum.
Exceptions
There are four exceptions to this rule
- claims in terms of the Income Tax Act;
- claims in terms of the Maintenance Act 99 of 1998; and
- other allowable deductions in terms of section 37D of the Pension Funds Act; and
- a fund is permitted to pay a member’s benefit to a third party if the member or beneficiary is able to show that he is unable to open a bank account.
If any member or beneficiary tries to cede their benefit, the fund can withhold or suspend payment of the benefit and make payment to the members or beneficiary’s dependant.
What are exceptions to the protection of members benefits from a regulatory perspective?
Exceptions
There are four exceptions to this rule
- claims in terms of the Income Tax Act;
- claims in terms of the Maintenance Act 99 of 1998; and
- other allowable deductions in terms of section 37D of the Pension Funds Act; and
- a fund is permitted to pay a member’s benefit to a third party if the member or beneficiary is able to show that he is unable to open a bank account.
If any member or beneficiary tries to cede their benefit, the fund can withhold or suspend payment of the benefit and make payment to the members or beneficiary’s dependant.
What type of protection is a member afforded on insolvency?
Protection on insolvency
- A member’s benefit in a retirement fund does not form part of the assets of his or her estate.
- If his or her estate is insolvent or sequestrated, the retirement benefit is protected from attachment or appropriation by any creditors or by the trustees of the insolvent estate (excluded from estate).
- This is only in respect of benefits that have not yet accrued to the member.
- Once the member is entitled to a benefit from the fund, to the extent that the benefit is not preserved, it is no longer subject to the protection afforded by this section.
What type of protection is a member afforded on death?
Members of retirement funds has no freedom of testation over their retirement benefits.
The benefits do not form part of the assets in member’s estate.
The manner in which benefits will be paid from retirement funds is determined by the trustees.
- The trustees are required to ensure that the monies are paid to those people who were financially and legally dependant on the member prior to his death, in a manner deemed equitable by the trustees.
Persons nominated by a member in writing, but who were not dependent on the member, may also be considered in the distribution.
How will retirement benefits of a member be distributed upon death?
37C. Disposition of pension benefits upon death of member.
(1) Notwithstanding anything to the contrary contained in any law or in the rules of a registered fund, any benefit (other than a benefit payable as a pension to the spouse or child of the member in terms of the rules of a registered fund, which must be dealt with in terms of such rules) payable by such a fund upon the death of a member, shall, subject to a pledge in accordance with section 19 (5) (b) (i) and subject to the provisions of sections 37A (3) and 37D, not form part of the assets in the estate of such a member, but shall be dealt with in the following manner:
(a) If the fund within twelve months of the death of the member becomes aware of or traces a dependant or dependants of the member, the benefit shall be paid to such dependant or, as may be deemed equitable by the fund, to one of such dependants or in proportions to some of or all such dependants.
What is the definition of a dependent in the context of retirement benefits?
Rule 1 - Definition dependant
‘dependant’, in relation to a member, means—
(a) a person in respect of whom the member is legally liable for maintenance;
(b) a person in respect of whom the member is not legally liable
for maintenance, if such person—
– (i) was, in the opinion of the board, upon the death of the member in fact dependent on the member for maintenance;
– (ii) is the spouse of the member;
– (iii) is a child of the member, including a posthumous child, an adopted child and an illegitimate child;
(c) a person in respect of whom the member would have become legally liable for maintenance, had the member not died.
“a person who is the permanent life partner or spouse or civil union partner of a member in accordance with the Marriage Act, 1961 (Act No. 68 of 1961), the Recognition of Customary Marriages Act, 1998 (Act No. 68 of 1997) or the Civil Union Act, 2006 (Act No. 17 of 2006), or the tenets of a religion.”
What is the definition of a dependent in the context of retirement benefits and in laymans terms?
Paragraph (a) – Legally liable to maintain:
- Parents – children
- Children – parents
- Grandchildren – grandparents
- Spouses – invariable legal consequence is duty to support spouses married under the Marriage Act.
What if divorced? Does maintenance liability survive the marriage?
Paragraph (b) – Not legally liable to maintain.
(b) (i) Was in fact dependant – beneficiary must show that he/she is left in a financial predicament or is financially worse off.
(b) (ii) Spouse – see definition on previous spouse.
(b) (iii) A child of the member, including a posthumous child, an adopted child and an illegitimate child.
Paragraph (c)
In terms of paragraph (c), any person in respect of whom the deceased member would have become legally liable for maintenance, had the member not died is regarded as a dependant.
This sub-section may potentially cover parents who are not legally dependent on their child for maintenance at the time of the child’s death, engaged couples, parties intending to marry, etc.
Who is responsible for conducting a reasonable investigation in order to find a deceased members dependents?
Section 37C(1)(a) places the duty to conduct a diligent investigation on the BOARD OF TRUSTEEs alone – not on the participating employer.
As part of enquiry, board must establish the nominees of the deceased:
- Must be in writing
- Must be a person who is not a dependant
- Form must be addressed to the fund
- Nominee must survive member
Can estate be nominated as beneficiary? – No.
How do the board of trustees of a retirement fund ensure that the distribution of benefits is equitable upon members death?
The ITA does not specify the factors that the board must consider when making an equitable distribution.
The pension adjudicator has held that the following factors are to be taken into account:
- The wishes of the deceased
- The amount available for distribution.
- The extent of the dependency
- The relationship with the deceased
- Financial status of each beneficiary including future earning capacity of each beneficiary
- The ages of the beneficiaries
How will minors be treated in terms of the distribution of benefits upon the death of a member in the context of a retirement fund?
Only exceptional cases will dictate payment directly to the minor. Rarely used by funds.
The next question is whether the guardian should be deprived of right to administer monies on behalf of child?
The following four factors are to be taken into account:
- The amount of the benefit
- The qualifications (or lack thereof) of the guardian to
administer the monies
- The ability of the guardian to administer the monies, and
- Purpose of the funds should be that the benefits are utilised in such a manner that it can provide for the minor until he attains the age of majority.
The payment of a minor’s benefit to the minor’s guardian is the default position, which arises from the guardian’s legal duty to manage her minor child’s financial affairs and her right to decide how the funds due to the minor should be utilized in the best interests of the minor.
How will benefits of a deceased member be distributed in the event where there is only one dependent?
Section 37C(i)(a) – Dependants only If the deceased is survived by one dependant only and no nominees, the dependant is entitled to the entire benefit.
Where deceased is survived by two or more dependants, the board must make an equitable distribution amongst them.
How will benefits of a deceased member be distributed in the event where there are only nominees?
Section 37C(i)(b) – Distribution to nominees only if deceased member is survived by no dependants and member has nominated a beneficiary who is not a dependant, the benefit must be paid to the nominee subject to terms of the proviso.
The nominee can only receive portion of benefit as is specified in the nomination.
Proviso. If liabilities exceed assets, shortfall must first be paid to estate and balance to nominee.
How will benefits of a deceased member be distributed in the event where there are both dependents and nominees?
Section 37C(i)(bA) – Dependants and nominees
- The deceased is survived by both dependants and nominees who are non-dependants.
- Board must make equitable distribution amongst the beneficiaries (dependants and nominees).
- Nominee must be nominated on or after 30 June 1989.
How will benefits of a deceased member be distributed in the event where there are no dependents and nominees?
Section 37C(i)(c) – Distribution to estate
- Deceased not survived by any dependants and he/she has not nominated a beneficiary.
- Benefit to be paid to the estate. Heirs of the estate will inherit it subject to executor’s fees.
What are deductions that are allowed from fund benefits and individual reserves?
- income tax owed to SARS;
- amounts due to the fund in respect of loans (or guarantees for loans so granted) in terms of section 19(5);
- compensation for damages or losses to the employer caused by the member due to theft, fraud, dishonesty or misconduct by the member and in respect of which the member HAS ADMITTED LIABILITY in writing or in respect of which the employer has obtained a court judgment;
- medical aid contributions or insurance premiums which the fund has agreed to pay on behalf of the member or beneficiary;
- amounts due by the member under a maintenance order issued in terms of the Maintenance Act or owing to a non- member spouse in terms of a divorce order contemplated in terms of section 7(8) of the Divorce Act 70 of 1979 or in terms of a court order made in respect of the division of assets of a marriage under Islamic law pursuant to its dissolution.
