Section 37C of the Pension Funds Act: a deviation from the freedom of testation

Busisiwe Bam takes a look at section 37C pf the Pension Funds Act and how it in fact restricts the wishes expressed in a will.

Section 37C makes provision for the disposition of pension benefits upon the death of a member. In terms of this section any benefit payable by a fund upon the death of a member shall not form part of the assets of the deceased estate of such member but shall be dealt with by the board of trustees of that particular fund in the manner prescribed in terms of said fund.

The section is therefore a deviation from the idea that freedom of testation takes precedence above all else. This article looks at whether or not section 37C is justifiable given that the express wishes of a testator can be ignored and also the circumstances under which those wishes can be ignored.

Is it fair?

A common misconception that is made by parties nominated by a member of a pension fund is that they have a right to claim from the fund upon the death of a member. This is incorrect. A nomination form is regarded by the trustees as a guideline that assists the trustees when identifying persons that would potentially qualify as dependants. The nominated beneficiary is only paid out after the expiration of 12 months and no dependants other have come forward or been identified.

A number of cases have been brought to the Pension Funds Adjudicator where the complainants challenge the board of trustees’ decision with regard to the distribution of the proceeds of a member. In C Kole v Sambro’s Retirement Annuity Fund & Southern African Music Rights Organisation Limited, the complainant, the daughter of the deceased member, challenged the trustees’ decision to pay each of the deceased’s member’s dependants 25% of the benefit. This included the deceased’s wife and his two sons, stating that the board of trustees ignored the deceased’s expressed instruction as per his last will that the full proceeds of his retirement fund be paid out to her. The Adjudicator in the matter stated that “…the main object of section 37C is to ensure that those persons who were dependant on the deceased during his lifetime, irrespective of whether the deceased was legally required to maintain them or not, are not left without support after his death. Put differently, the purpose of section 37C is to protect dependency over the wishes of the deceased.”

This was confirmed in the South Gauteng High Court in Mashazi v African Products Retirement Benefit Provident Fund, where the judge stated that “section 37 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…”

In Berge v Alexander Forbes Retirement Fund (Pension Section) & The Pension Fund Adjudicator an application setting aside the first respondent’s final distribution of the deceased’s death benefit as well as a relief setting aside the second respondent’s ruling and dismissal of the applicant’s complainant was brought. The applicant was the only biological relative of the deceased. At the time of the member’s death he was unhappily married to his third wife, Molly. Molly had a daughter, Tracy. Upon the member’s death he left out his wife Molly from his last will and bequeathed his entire estate within the republic equally between the applicant and Tracy, his stepdaughter. The trustees, however, distributed the death benefit as follows: 82% to Molly; 10% to the applicant and 8% to Tracy his stepdaughter.

The court had to determine whether grounds existed to interfere with the decision of the trustees and the second respondent, the Pension Fund Adjudicator. The judge held that the board of trustees had a broad discretion in terms of the Act. The judge was satisfied that the objects and social purpose of the section were considered and factors such as the fact that Molly was a legal dependant of the deceased and that, that she did not inherit from the deceased estate, as the applicant did. The applicant was also, unlike Molly, younger, employed and earning a relatively good salary. The court found that the first respondent exercised its discretion lawfully, rationally and reasonably and would thus make it unwarranted for the court to interfere with the exercise of their discretion. The application was dismissed with costs.

 Identifying dependants.

The word “dependant” in the Act was defined as follows:

Dependant, in relation to a member, means-

• A person in respect of whom the member is legally liable for maintenance
• A person in respect of whom the member is not legally liable for maintenance, if such a person-

• Was, in the opinion of the Board, upon the death of the member in fact dependent on the member for maintenance;
• Is the spouse of the member;
• Is a child of the member, including a posthumous child, an adopted child and an illegitimate child;

(iv)         A person in respect of whom the member would have become legally liable for maintenance, had the member not died

One of the questions that arose from the above definition was who could be considered to be “the spouse” of a member. Two conflicting rulings were handed down in this regard.

In Van der Merwe v Southern Life Association the adjudicator ruled that the board of management of a pension fund has the discretion to accord to same-sex couples and cohabitants the same rights as are accorded to heterosexual married couples. Subsequent to this decision came the ruling of Van der Merwe v Central Retirement Annuity Fund where the adjudicator ruled that a person who could have married a deceased pension member but chose not to, could not be granted the rights of a spouse of the deceased member. He, further, added that the surviving cohabitant, in order to qualify as a dependent, had to prove that the deceased was the dominant financial provider in the relationship.

The aforementioned cases created a grey area as a result of the different interpretations. Many pension funds either opted to seek clarity from an Adjudicator or simply refused to consider surviving cohabitants as dependants. This uncertainty went on to be clarified in Hlathi v University of Fort Hare Retirement Fund. The complainant was the deceased’s mother who lodged a complaint after the board of trustees identified and allocated the deceased’s funds to a Ms Hanise, who was cohabiting with the deceased, and his mother. The complainant received 33% of the proceeds and Ms Hanise received 66%. The complainant objected to the proposed distribution stating that Ms Hanise was not the deceased’s wife and that she had a high paying job.

The Adjudicator had to determine whether there was a distinction in law between a cohabitant and a common law spouse. Ms Hanise was disqualified as a spouse because they had not solemnised their relationship in accordance with the Civil Union act. The Adjudicator had to then determine whether Ms Hanise could be considered as a factual dependent. The adjudicator found that Ms Hanise and the deceased’s had an inter-dependent relationship and ruled that in cases involving a surviving cohabitant it was sufficient to prove that the party seeking benefits in a permanent relationship of mutual dependence or interdependence and ran a shared and common household with the deceased and as a consequence of the other party’s death he/she was financially worse off.[1] Due to the fact that the parties mutually supported each other and were in a relationship for a period of seventeen years and that since the deceased’s death Ms Hanise’s financial position had changed drastically, the Adjudicator ruled that Ms Hanise fell into the scope of the definition of a factual dependent and was correctly regarded as a dependent by the Board of trustees.

In conclusion it can be said after taking into consideration the duties of the board trustees which are namely to:

1. Identify and trace dependents and those persons, if any, that have been nominated by the deceased member;
2. Make allocations on a fair and equitable basis and;
3. Determine an appropriate mode of payment of the death benefit;

and the underlying purpose that the legislature had when drafting this Act which was for the benefit of the deceased member’s dependants which would in turn reduce the state’s liability and promote social protection. It can be said that although a nominated member could find that it is unfair not to receive the entire amount as per the member’s request other dependants of the deceased member are as a result of this section looked after in circumstances where they would not otherwise have been.