Retirement fund trustees' decisions on how to allocate benefits to beneficiaries after the death of a fund member are increasingly being disputed and often end up as complaints at the office of the Pension Funds Adjudicator (PFA) or even at the High Court.
At this week's Pension Lawyers Association conference, Karin MacKenzie, a former senior assistant adjudicator with the PFA's office and now a director and the head of pension law at Herold Gie Attorneys, said that when the trustees' decision on how to award pension fund benefits is disputed, funds are faced with the dilemma of whether or not to pay out.
If the trustees pay out and the party that contests the allocation is successful, the fund may be unable to recover the benefits paid and it may cost the fund - and therefore other members - to make a new award, MacKenzie says.
The Pension Funds Act places an obligation on trustees to identify a deceased fund member's dependants and to distribute the member's benefits to those dependants and those nominated by the member in a manner the trustees regard as equitable.
In identifying possible dependants, your fund's trustees need to consider not only obvious dependants such as your spouse and minor children, but also former spouses, parents, parents-in-law, children born out of wedlock, major children and anyone who was financially dependent on the member, even though there was no legal duty to support that person (factually dependant).
The trustees must consider, but are not obliged to follow, your wishes as expressed either in your will or on a beneficiary nomination form you completed as a fund member.
Increasingly complex family arrangements and the inclusion of factual dependants as potential beneficiaries of retirement fund death benefits have resulted in an increase in disputes about the way trustees allocate these benefits.
Preliminary decision
Trustees can consider making a preliminary decision on how to allocate benefits, because disputes can then be identified before a final decision is made, MacKenzie says.
However, she says, the trustees must then make sure the potential beneficiaries understand that the decision is only a preliminary one and subject to change, and the trustees must be sure they convert the preliminary decision into a final one within a reasonable period.
Some funds request potential beneficiaries to renounce their rights, for example, major children from a previous marriage where the trustees wish to award the benefit to the surviving spouse.
MacKenzie says, it is questionable whether such a waiver of rights would be enforceable if it was disputed later. It should be considered whether obtaining such a waiver does not amount to inappropriate pressure, she says.
If a fund's trustees have decided how to allocate death benefits, the beneficiaries in whose favour the decision was made have enforceable rights. This may make it difficult for the trustees of the fund to then withhold benefits if it comes to their attention that their decision will be contested, MacKenzie says.
Strictly speaking, she says, to justify withholding benefits, the trustees would need the permission of all the beneficiaries or a court interdict that prevents them from paying the benefits. However, in practice allocated benefits are frequently withheld to protect the fund pending resolution of a dispute, MacKenzie says.
It can take up to three years for a claim about a disputed allocation of death benefits to be settled, she says.
The best defence the trustees can have, she says, is to conduct an appropriate investigation of the deceased's dependants and to take a sound decision based on the information uncovered.
A court or the PFA should not lightly interfere with the trustees' decision if it was taken properly, MacKenzie says.
If the trustees' decision is challenged, but the trustees are of the view that the complaint is unfounded, they can pay the benefit, or consider a partial payment of the amount they are confident will be confirmed, she says.
Other options
MacKenzie says the other options funds may consider are:
- Interpleader proceedings requesting a court to direct who the fund must pay the allocated benefit to; and
- Requesting security from any beneficiaries who are seeking to compel the fund to pay an allocation of death benefits in their favour in case a court or the PFA comes to a different decision on how to award the benefit. This may not be possible or appropriate in some cases, MacKenzie says.