December 11, 2020

Argument for a purposive approach to the interpretation of section 37C of the Pension Funds Act (“the Act”)

By William Donachie, Legal and Technical Specialist

Introduction

Prior to the new democratic dispensation, the most prevalent theory of statutory interpretation in South Africa was the literal theory or the orthodox text-based approach.[1] In terms of this theory, the interpreter focused primarily on the literal meaning of the provision.[2] If the meaning of the text was clear, that was the meaning to be used, irrespective of the consequences.[3]

The Constitution of the Republic of South Africa, 1996 mandates a purposive and value-based theory of interpretation.[4] In terms of the purposive approach, the focus on the literal interpretation of the words goes further than the mere intention of the legislature.[5] The focus is now on the determination of the purpose or object of the legislation. In South Africa, the purposive approach had its origin in Jaga v Dönges; Bhana v Dönges[6] as early as the 1950s, but was not consistently applied.

The purpose of this article is to make a case for a purposive interpretation of section 37C of the Act, in light of the fact that the Act itself gives very little indication as to how the section should operate or be applied.[7]

The purpose of section 37C

Section 37C was inserted into the Act in 1976.[8] This section deals with the distribution and payment of death benefits upon the death of a member of a pension fund. It was introduced primarily to ensure that death benefits are paid in accordance with the object of the Act and government policy[9]. Its purpose, however, is to make sure that the dependants of the deceased member are not left destitute upon the death of the member.[10] In order to achieve this, the death benefits are placed under the control of the trustees of a fund. The trustees have discretionary powers to distribute the benefits equitably among the beneficiaries.[11] The section specifically provides that death benefits do not form part of the deceased’s estate and, as a result, a beneficiary under the last will and testament of the deceased is not necessarily a beneficiary under section 37C of the Act. The section requires that a death benefit be distributed in accordance with a legislated scheme in which preference is given to factual need and dependency above a member’s freedom to dictate the manner in which the benefit should be distributed upon his or her death.[12]

In Mashazi v African Products Retirement Benefit Provident Fund[13], Hussain J remarked the following about this section:

Section 37C of the Act was intended to serve a social function. It was enacted to protect dependency, even over the clear wishes of the deceased. The section specifically restricts freedom of testation in order that no dependants are left without support. It specifically excludes the benefits from the assets in the estate of a member and enjoins the trustees of the pension fund to exercise an equitable discretion, taking into account a number of factors.

Section 37C is not without problems and requires a great deal of technical knowledge from trustees who are expected to apply it. The section imposes an onerous duty on the board of trustees to determine dependency and to effect an equitable distribution among a deceased member’s dependants and nominees.[14] The board of trustees must exercise this discretion notwithstanding the fact that it has no prior knowledge of the parties concerned or the relationship which they shared with the deceased member.[15] As a result, boards of trustees should ensure that members are given regular opportunities to provide updated indications of their wishes by completing and updating a nomination form. In Dobie NO v National Technikon Retirement Pension Fund[16] the Adjudicator acknowledged the challenges that are brought by section 37C and stated that:

One thing is certain about section 37C: it is a hazardous, technical minefield potentially prejudicial to both those who are expected to apply it and to those intended to benefit from its provisions. It creates anomalies and uncertainties rendering it most difficult to apply. There can be doubt about its noble and worthy policy intentions.

Blurred lines

Two recent cases illustrate how the interpretation of section 37C can blur the lines and lead to uncertainty in its application.

In a recent case the allocation of the total death benefit to an estranged spouse was under consideration in Momentum Retirement Annuity Fund v VR Krzus and Another (PFA53/2019) [2020] Financial Services Tribunal (09 March 2020). The finding was that an estranged spouse qualifies as a dependant as defined in the Act and that the spouse may receive the death benefit even if there was no financial dependency on the deceased member. It also found that the benefit does not have to be paid to the estate of the deceased. The finding in this case seems to suggest a literal approach to the interpretation of section 37C.

However, a few months earlier the outcome of a similar case was different, which appears to be a purposive approach to the interpretation and application of the section. In Naidoo v Coca Cola Shanduka Beverage Provident Fund and Alexander Forbes Financial Services, the estranged husband was not allocated the death benefit of his wife even though he was still a legal dependant as defined in the Pension Funds Act. The Adjudicator submitted that the rationale behind section 37C was to ensure that all those who were financially dependent on the deceased during the lifetime of the deceased are not left destitute when he or she dies. The Adjudicator held that being a legal dependant only entitles one to be considered as a beneficiary. Due to the fact that Mr Naidoo was financially independent from his estranged wife, he was therefore excluded from sharing in the death benefit.

 Conclusion

It is obvious that the State had good intentions with section 37C. The intention is to achieve a social outcome so that dependants of a deceased member do not become a burden on the State.[17] In Mashazi v African Products Retirement Benefit Provident Fund[18], the court held that the section was enacted to protect dependency, even over the clear wishes of the deceased. A board of trustees is therefore tasked to achieve this social purpose and, as a result, cannot contemplate making an equitable distribution without also giving consideration to the intention of the legislature – that is, how likely is it that a dependant will become a burden on the State if he or she does not receive a portion of the benefit.[19] Although the Act gives express guidelines as to who should be considered as a dependant, neither the Act nor section 37C expressly indicates what factors to be considered when a board of trustees has to give effect to the provisions of section 37C.[20]

It is common knowledge that the provisions of section 37C are not well understood or known among the general public. This can be remedied by better communication to members informing them of their rights, benefits and duties[21] via member communication which deals solely with section 37C.[22] Trustees must ensure that retirement fund members are given sufficient information regarding the manner in which 37C works and how it affects their freedom of testation.[23] The board of trustees should also ensure that members are given regular opportunities to provide updated indications of their wishes[24] via nomination forms. This, in turn, provides trustees with an opportunity to gain insight into a member’s family situation.[25]

Although it is unfortunate that section 37C does not provide trustees with clear guidelines to distribute benefits equitably among the beneficiaries, 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.

In light of there being no compulsory guidance for boards of trustees on the manner in which section 37C should be applied and the anomalies and uncertainties which have, over time, attached to the application of section 37C, perhaps it is time that the section be interpreted in line with its purpose – to serve a social protection function and protect dependency, and to avoid a strict literal interpretation where it does not serve the social outcome as intended by the legislature.

Disclaimer.

[1]        Singh A The impact of the Constitution on transforming the process of statutory interpretation in South Africa (PhD thesis, University of KwaZulu-Natal, 2014) 1.

[2]        Singh A Impact of the Constitution 9.

[3]        Singh A Impact of the Constitution 9.

[4]        Devenish GE African Christian Democratic Party v Electoral Commission: The new methodology and theory of statutory interpretation in South Africa 2006, SALJ 400.

[5]        Singh Impact of the Constitution 47.

[6]        1950 (4) SA 653 (A).

[7]        David V The legal obligations of retirement fund trustees in respect of section 37C of the Pension Funds Act 2 of 1956 (Master of Law, University of South Africa, 2012) 6.

[8]        Mhango MO An examination of the accurate application of the dependency test under the Pension Funds Act 24 of 1956, 2008 20 SA Merc LJ 126.

[9]        Naidoo v Coca Cola Shanduka Beverage Provident Fund and others [2019] JOL 46217 (FST).

[10]       Naidoo v Coca Cola Shanduka Beverage Provident Fund and others [2019] JOL 46217 (FST).

[11]       Manamela T Chasing away the ghost in death benefits: A closer look at section 37C of the Pension Funds Act 24 of 1956, 2005 17 SA Merc LJ 278 277.

[12]       David V The legal obligations of retirement fund trustees 5.

[13]       2003 (1) SA 629 (W).

[14]       David V The legal obligations of retirement fund trustees 6.

[15]       David V The legal obligations of retirement fund trustees 6.

[16]       [1999] 9 BPLR 29 (PFA).

[17]       David V The legal obligations of retirement fund trustees 18.

[18]       [2002] 8 BPLR 3703 (W).

[19]       David V The legal obligations of retirement fund trustees 59.

[20]       David V The legal obligations of retirement fund trustees 20.

[21]       David V The legal obligations of retirement fund trustees 29.

[22]       David V The legal obligations of retirement fund trustees 29.

[23]       David V The legal obligations of retirement fund trustees 29.

[24]       David V The legal obligations of retirement fund trustees 29.

[25]       David V The legal obligations of retirement fund trustees 29.