4 of 2021

Pension Funds Adjudicator

Administrator’s failure to take responsibility for incorrect tax directive and failure to provide member with a quote to enable him to make an informed decision

GVE Oosthuizen (Complainant) v The South African Retirement Annuity Fund (the Fund) and Old Mutual Life Assurance Company (SA) Limited (the Administrator)1

The Complainant was a member of the Fund by means of retirement annuity policies issued to the Fund for his benefit. The Complainant is aggrieved with the Administrator’s failure to process his retirement instruction correctly and timeously, resulting in financial prejudice to him.

The Complainant averred that his broker received an email from the Administrator notifying him that they had erroneously processed a one-third cash commutation, instead of the amount of R400 000 that he requested. The Administrator enquired whether they may continue on this basis, but the Complainant requested that they adhere to his original request for R400 000 to be processed. Despite this, the Administrator continued finalising the claim based on the incorrect cash commutation, which was in excess of the R500 000 tax-free threshold. The Complainant further indicated that four months after submitting his retirement election, two-thirds of his retirement benefit had still not been transferred to Glacier  Financial Solutions (Pty) Ltd (Glacier) to purchase an annuity.

The Complainant seeks a refund of the tax that was erroneously deducted from his benefit and the transfer of the remaining retirement benefit to Glacier for purchase of an annuity in accordance with his instructions. In addition, he seeks compensation for the inconvenience caused to him.

Tax directive

The Pension Funds Adjudicator (Adjudicator) found that several tax directives were erroneously applied for in respect of this transaction. However, the Administrator failed to cancel the incorrect tax directives issued, before filing the final application, which resulted in SARS taking these into account when calculating the tax and issuing the last tax directive. The Administrator subsequently deducted the tax indicated on this directive from the cash commutation and remitted same to SARS.

The Administrator initially indicated that they would cancel the final tax directive issued and then reassess the Complainant’s tax affairs. However, the Administrator indicated in their correspondence to SARS their reluctance to cancel the incorrect directives, owing to the tedious nature of the process. SARS replied that the Administrator may not cancel the tax directives and that the Complainant will be refunded upon assessment of his tax.

The Adjudicator found that this is not a suitable solution and ordered that the Administrator should refund the Complainant directly for the excess tax deducted (together with interest thereon), and then recover the amount from SARS, as it is not acceptable that both SARS and the Administrator should benefit from the convenience of administrative processes at the expense  of the Complainant.

Early retirement charges

The rules of the Fund allow for a reduced benefit to be paid to a member, so that the Fund may recover any unrecouped costs as a result of the term being reduced due to early retirement. The policies in this case had maturity dates of 01 May 2025 and 01 June 2026, respectively. In terms of the rules of the Fund, the benefit payable to the Complainant is limited to the reduced value of the retirement annuity. The deduction of an early retirement charge of R10 331.66 from the Complainant’s retirement benefit, when he elected to retire early, was in accordance with the rules of the Fund.

However, due to the Administrator’s failure to provide the Complainant with a quote pertaining thereto, as required by legislation and in terms of its processes, the Administrator agreed to refund the amount of R10 331.66 that was deducted from the Complainant’s retirement value. This was paid to Glacier as part of the Complainant’s annuity purchase. The Adjudicator found that costs and charges must not only be disclosed, but service providers must also ensure that members actually understand them and how they are calculated, so that they can be able to do their own calculations at the inception date of the policy.

¹ GVE Oosthuizen v The South African Retirement Annuity Fund and Old Mutual Life Assurance Company (SA) Limited PFA/FS/00074310/2021/SB

Transfer of the Complainant’s retirement benefit

The Complainant expressed dissatisfaction with the delay in transferring a portion of his retirement benefit to Glacier to purchase an annuity, which was only finalised approximately three months following receipt of the Complainant’s instruction for one policy and approximately five months in respect of the other. The Administrator did not provide details pertaining to the date of disinvestment of the Complainant’s retirement benefit and failed to indicate whether the holding account, following disinvestment, earned any interest. As a result, it is unknown whether or not the Complainant had suffered any loss of investment return as a result of the late transfer. The Adjudicator ordered that the Administrator must place the Complainant in the position he ought to have been in, had the transfer taken place timeously and in accordance with its service level agreement.

The Adjudicator also remarked that the Administrator failed to act in accordance with the Treating Customers Fairly principles by failing to process the Complainant’s retirement claim correctly and timeously, provide him with a quote to enable him to make an informed decision and with their recalcitrant attitude towards rectifying same.

Ex gratia offer

The submissions indicate that the Administrator offered the Complainant an ex gratia offer of R2 500 as a gesture of goodwill for the delay in processing his retirement instruction. The Complainant has not yet accepted the offer and was awaiting guidance from the Adjudicator. The Adjudicator found that it is not uncommon for financial institutions to offer ex gratia payments as a gesture of goodwill and there is nothing that legally precludes it from doing so. Although the Adjudicator normally does not comment on ex gratia offers (as it is not a benefit payable in terms of the rules of the Fund nor in terms of the Pension Funds Act), given the behaviour of the Administrator in this matter and the time spent plus aggravation endured by the Complainant and his consultants, the Adjudicator remarked that an amount of R2 500 is a mere pittance and a slap in the face for the Complainant. The offer remains at the discretion of the Administrator and the acceptance of same is entirely the Complainant’s decision.

Financial Services Tribunal

A decision by the board of management can only be interfered with if shown that the board has taken irrelevant, improper and irrational factors into consideration

BK Sokoyi N.O. (obo a minor child) (Applicant) v Pension Funds Adjudicator (the Adjudicator) and Allan Gray Retirement Annuity Fund (the Fund)2

In this matter the Applicant brought an application to the Financial Services Tribunal (Tribunal) for reconsideration of the decision of the Adjudicator. The Applicant was the biological father and legal guardian of the minor child. The deceased was the mother of the minor child, and she nominated the minor child to receive 100% of the benefits payable by the Fund. In the exercise of its discretion in terms of section 37C of the Pension Funds Act (the Act), the board of management identified other dependants of the deceased and resolved to deviate from the deceased’s nomination form and to allocate the available benefit to the dependants and nominee. The Applicant was dissatisfied with the Fund’s decision to deviate from the nomination form by not allocating 100% of the benefit to the minor child. In addition, the Applicant further averred that the Fund was not entitled to consider the proceeds from other insurance policies in determining the percentage benefit to be allocated to the minor child.

Deviation from the nomination form

The Tribunal held that it is common cause that section 37C provides a limitation on a person’s freedom of testation. In this regard, the Act makes it clear that a member’s will or beneficiary nomination cannot override the provisions of section 37C and the distribution of a member’s benefit remains the responsibility of the board of management. Thus, a fund is not bound by the nomination form and has an obligation to consider whether there are other dependants. As a result, a fund can deviate from the nomination form if it is established that there are other dependants and to make an equitable allocation of the benefit to those other dependants.

2 BK Sokoyi N.O. (obo M. Nkuhlu) v Pension Funds Adjudicator and Allan Gray Retirement Annuity Fund Case PFA98/2020

To this end, the primary goal is to ensure that no one who was financially dependent on the deceased member is left without adequate support. Accordingly, the Tribunal held that the Applicant’s grievance as it relates to the Fund’s deviation from the nomination form, was flawed.

The Fund did take into account proceeds from other insurance policies in determining the amount to be allocated to the minor child. Here again the Tribunal held that the Applicant’s grievance is flawed. The Tribunal referred to the matter of Stacy (Koevert) v Old Mutual Protektor Pension Fund and Another [2005] 1 BPLR 73 (PFA), in which the Adjudicator pointed out that the financial affairs of the dependants (including their future earning capacity / potential) is one of the factors to  consider in making a distribution. In the determination the Adjudicator said that:

“It is not clear why the trustees failed to consider the payment of the proceeds of the Old Mutual Policy to Miss Boshoff. Any receipt of a cash benefit directly impacts on the financial status and future earning capacity of the dependant, which is two of the relevant considerations  to be taken into account when making an equitable distribution.

The Tribunal held that the Fund was bound to consider the proceeds of insurance policies received or accruing to the minor child in determining an equitable allocation of the benefit between dependants and nominees and as a result, the exercise of the board’s discretion in this regard cannot be faulted or interfered with, as it took this factor into account along with other relevant factors.

Circumstances under which the Adjudicator can interfere with the Fund’s decision

It is trite law that the boards of funds have a wide discretion when they make their allocation in the distribution of a death benefit. The Tribunal stated that there are only limited circumstances under which a board’s discretion can be interfered with by the Adjudicator. The Tribunal confirmed that a decision of a board can only be interfered with:

“where it can be shown that the Trustees have taken irrelevant, improper, and irrational factors into consideration, where it can be shown that no reasonable Board of Trustees, properly directing itself would have reached such a decision.”

In light of this, the Tribunal held that the Applicant’s belief that the allocation is unfair and unreasonable to the minor child is not a ground for interfering with the Fund’s decision. In dismissing the application for reconsideration, the Tribunal ruled that because the determination of the Adjudicator cannot be faulted, it would be inappropriate for the Tribunal to interfere with the decision of the Fund.

Unreported High Court Case

A fund is only bound by a divorce order when it is specifically directed in the order to pay the non- member spouse

M [….]1 M[….]2 E[….] M [….]3 (Applicant) v SALA  Pension Fund (Fund)3

The Applicant and the deceased member of the Fund were previously married and got divorced in 2000. In terms of the settlement agreement, which was incorporated in the divorce order, 50% of the pension fund of the defendant (the deceased member) accruing from the date of divorce to the date of payment was awarded to the Applicant.

The Applicant did not attempt to claim her portion from the Fund until the passing of the deceased member whilst in service, almost 20 years after the date of divorce. The Applicant was not a dependant at the time of the deceased member’s passing.

The Applicant approached the Fund after the passing of the deceased member and demanded her portion of the deceased’s pension. She explained that she did not claim earlier, because she and the deceased member had agreed that she would claim only upon the deceased member going on pension.

The Fund advised her that the divorce order was not binding on the Fund, because it did not identify or direct the Fund to make payment to her and as a result the divorce order does not comply with the requirements set out in the Divorce Act and section 37D of the Pension Funds Act. She was informed that she should rather submit a claim against the estate.

3 M[….]1 M[….]2 E[….] M[….]3 v SALA Pension Fund (unreported judgment of the High Court of South Africa (Gauteng Local Division, Johannesburg) case no. 2021/5781 delivered on 31 August 2021)

The Applicant’s explanation was that she was not aware at the time of the divorce that the Fund had to be named or identifiable from the order. She further argued that the absence of a direction to the Fund does not itself deprive her of the entitlement to her portion of the pension interest, as they were married in community of property, and it was an asset in the joint estate. She is therefore entitled to 50% of the deceased member’s pension interest as at date of divorce, irrespective of whether the divorce order  specifically directed the Fund to make payment or not.

The High Court agreed with the Fund that in terms of the Divorce Act, a divorce court may order that a part of the pension interest must be paid by the pension fund concerned to the non-member spouse. The Divorce Act merely creates the mechanism in terms of which a fund will be bound to make payment of a portion of the pension interest of a member directly to a non-member spouse.

The mechanism is absent in this matter, because the divorce court did not direct the Fund to make payment to the Applicant. Although she is entitled to a divorce order granting her a portion of the deceased member’s estate, she is not necessary entitled to be paid a portion of pension interest by the Fund. To be binding on a fund, it should meet certain criteria.

The High Court held that the Fund was not a party to the divorce action, and it was not identified in the court order as the relevant pension fund. The divorce order further does not direct the Fund to make payment to the Applicant. In the absence of such identification and direction, the Fund is not bound by the divorce order. The Applicant has to seek satisfaction for the benefit assigned  to her in the divorce order directly from the deceased member’s estate.

High Court case

A trust is not a dependant but rather the person who receives a benefit on behalf of a dependant

Swart N.O (neé Van der Merwe), Johannes Gerhardus van der Merwe and others v The Pension Funds Adjudicator (Adjudicator), Fundsatwork Umbrella Provident Fund (the Fund), MMI Group Limited, Teresa Bornman (Spouse) and Dolf van der Merwe Familie Trust (The Trust)4

 The deceased member was survived by his Spouse and two adult children from his previous marriage. The deceased’s children received regular cash payments from the deceased and he paid certain monthly expenses such as their medical aid and insurance premiums. The deceased created the Trust a few years before his death and also completed a nomination of beneficiary form, wherein he nominated his Spouse and the Trust to each receive 50% of his pension benefit upon his death.

Upon his death, the Fund allocated 100% of the deceased’s pension benefit to the Spouse. The trustees of the Trust consequently lodged a complaint with the Adjudicator, seeking the setting aside of the Fund’s decision.

⁴Swart N.O (neé Van der Merwe) and others v Lukhaimane N.O and others [2021] JOL 49952 (GP)

The deceased’s Spouse was unemployed at the time of death of the deceased, so she therefore qualified as both a legal dependant (spouse) and a factual dependant. The deceased’s children were employed, but were to some extent dependent on the deceased. The Spouse had received three lump sum payments from two life policies and a funeral benefit, whereas the deceased’s children had received a payment of another life policy and were nominated to receive 50% of the proceeds of the Trust.

The Fund had concluded that the maintenance needs of the children had been met by the proceeds of the Trust and the life policy payment, and that the Spouse’s maintenance needs took precedence over the children’s claim and therefore awarded 100% of the death benefit to the Spouse.

Aggrieved with the Fund’s decision to award 100% of the benefit to the deceased’s Spouse, the children lodged a complaint with the Adjudicator. The Adjudicator had considered the fact that the deceased’s children were legal dependants, that the deceased had provided regular maintenance payments to them in the form of medical aid and insurance premiums and that there was a close relationship between the deceased and his children. She further said that the Spouse was gainfully employed, had prospects of remarrying and that she had filed a claim for maintenance in excess of R10 million against the deceased’s estate. She found that the Fund had failed to consider the liquidation and distribution account and the distribution of the assets to the various beneficiaries.

The Adjudicator further found that the Fund had unduly fettered its discretion and had not considered all the facts properly and referred the matter back to the board for re- consideration.

The Fund requested further information from the children, including a copy of the liquidation and distribution account, details of the maintenance claim that the Spouse had lodged against the estate, and information regarding a life policy. It also sought information regarding the Trust’s capital value and whether the Trust was making maintenance payments to the children. The information was provided to the Fund, notwithstanding which, the Fund made exactly the same decision as it had made previously, allocating 100% of the pension benefit to the Spouse.

The deceased’s children and Trust approached the High Court, seeking an order that the Fund’s decision be set aside and that the deceased’s Spouse pay 50% of the death benefit to the Trust as the entire benefit had already been paid to her.

The deceased’s children argued that the Fund had failed to give proper consideration to the deceased’s wishes as expressed in the nomination form, that the Fund failed to make the necessary enquiries into the value and solvency of the Trust, more especially given the fact that there was a cash shortfall of some R11 million in the Trust, and that assets would have to be liquidated to restore the Trust to solvency. The Fund simply accepted, without any basis in fact, that the Trust would be able to meet the children’s maintenance needs. They further argued that the Fund had failed to conduct proper enquiries into the maintenance requirements of the Spouse, specifically as she had already received some R4.3 million from the deceased’s life policies. The Fund had also failed to properly consider that the Spouse was relatively young, had remarried, and was employed.

The Fund submitted that there was no evidence that the children were dependent on the deceased, even though their needs would be served by the Trust. It further submitted that it did not have to consider the solvency of the estate when making a decision. The court found this to be a strange submission given that section 37C is intended to “protect the dependency”.

The High Court held that one would have expected the Fund to have obtained financial statements, bank statements, proof of income, proof of expenses, and the likes from all the parties. Also, that the Fund should have investigated the impact of the Spouse’s marriage on her financial affairs, but instead, all it has is an unsubstantiated statement that the Fund believes that the Spouse is in need of maintenance. There is no evidence that the Fund investigated whether the Spouse still had the insurance money, whether she has invested the money, and whether she received any dividend from any investments.

The same concerns apply equally to the children. What is their monthly income? What are their monthly expenses? The Fund knew that the Trust had a cashflow problem and could not make payments to the children. The Fund should have investigated whether they had managed to make up the shortfall left by the deceased’s passing. Instead of conducting a detailed investigation into the financial affairs of both sides, the Fund seems to have taken a very superficial approach, amounting essentially to a thumb suck. The High Court found that the Fund had made its decision on flawed information, as the Spouse was employed since the passing of the deceased.

The mere fact that a maintenance claim has been lodged does not mean that is well founded, and definitely does not mean that the Spouse was, or is dependent on the deceased estate. The court was of the view that the Fund should have conducted a proper assessment of Spouse’s needs. It would then have realised that she was in fact employed, a factor which would likely have had a substantial impact on the Fund’s decision.

The most important factor that the Fund seems to have ignored when it made the second decision, was that the Spouse had remarried. Obviously, her remarriage would have changed her financial situation and her maintenance requirements. Simply ignoring the Spouse’s changed circumstances is unreasonable and irrational. The High Court held that the Fund took the view that the Trust had assets and that it could therefore provide for the children’s needs. This argument does not take account of the fact that the Trust had a substantial cash shortfall. Simply because the Trust has assets does not make it solvent. The children had written an email to the Fund advising that the Trust had a cash-flow problem, that it was not making a maintenance contribution to them and that the Fund had evidently ignored the email when it made its decision.

The High Court found that the Fund’s basic approach to the matter was flawed. Its view that the solvency of the Trust was irrelevant, and the argument that the maintenance claim proved the Spouse’s dependency was irrational. Although the Fund is not bound by the wishes of a deceased person, the wish expressed in a nomination form or in a will is not to be lightly ignored. It is only one of a number of factors to be taken into account, but it is a substantial factor. Therefore, before the Fund decided to ignore the nomination, it should have considered whether there were compelling reasons to do so. If it would result in an injustice or be inequitable should the deceased’s wishes be given effect to, then the Fund would be justified in deviating from the deceased’s wishes. Here there is no evidence that the Fund placed any weight at all on the nomination.

The High Court agreed with the Fund that the Trust is not a dependant, but the High Court found that the Trust is rather the person who receives a benefit. Payment to a trust is therefore regarded as payment to the dependant.

The High Court held that the decision to allocate 100% to the Spouse must be set aside and reordered the Fund to conduct a proper investigation taking the following into  account:

• the maintenance requirements of the children,
• to determine whether the Trust is solvent and capable of bearing the children’s maintenance requirements,
• the Spouse’s maintenance needs, taking into consideration her employment, her remarriage and the payment of the life policy following the death of the deceased,
• the Spouse’s maintenance claim against the Trust, and
• whether the Spouse’s maintenance claim against the estate has an impact on the proceeds available to the children from the Trust and the estate and how, if any, it will affect their maintenance

Funds must do a proper investigation into the maintenance needs of all the beneficiaries, taking into account their employment status, amounts available from other policies, the solvency of the estate and consider the nomination forms.

A trust is not a dependant for purposes of a death benefit and may therefore not be allocated a portion of a death benefit. Only a natural person may be allocated a portion of a death benefit, because only a natural person can be a dependant or a nominee. A trust may however, receive payment on behalf of a beneficiary. The board has a discretion regarding the mode of payment of an allocated death benefit and one of the modes is paying into trust. The fact that the Trust was in this instance nominated, does not mean the Trust becomes the dependant. The nomination of the Trust merely reflects the wishes of the deceased member, which in this case meant the deceased member’s wish for his major children to receive  50% of the benefit.

Disclaimer