When a retirement fund has to distribute a death benefit among a number of beneficiaries, the amount allocated to each must be limited to provable expenses and exclude gratuitous payments. This was pointed out by Muvhango Lukhaimane, the Pension Funds Adjudicator, in a determination in which she set aside a preservation fund’s decision to allocate the largest share of a death benefit to the deceased member’s life partner.
The determination highlights that it is important for trustees to take into account all relevant factors when allocating a death benefit. It also underlines that, when doing so, they are not bound by your will or the beneficiaries you nominate (see “You don’t have the last word”, link below).
DW, a member of the Momentum Provident Preservation Fund, died last year. He did not nominate beneficiaries. The fund distributed R3 082 000 of his death benefit of R6 828 086 to his life partner, EP. His two adult sons each received R882 000, while his minor daughter received R1 982 086. DW’s former wife did not receive anything.
TW, the older of the sons, was unhappy that EP had received 45 percent of the benefit. In June this year, he lodged a complaint with the adjudicator’s office, asking that it set aside the fund’s decision and reduce EP’s share to 10 percent.
TW said the trustees had afforded too much weight to his father’s relationship with EP. His father had lived with EP for only 22 months, and there was no evidence that he had intended to marry her or provide her with long-term financial support. TW said his father’s decision not to change his will to include EP indicated that he wanted his children to be his main beneficiaries.
He said the purpose of section 37C of the Pension Funds Act is to ensure that people who were dependent on a fund member would not be left destitute by the member’s death and not to “hand the winning lottery ticket to anyone based on one simple definition of ‘girlfriend’.” He said that R3 million far exceeded what EP would need to avoid destitution.
TW said his father had nominated his three children as the beneficiaries of his Liberty Life retirement annuity (RA), which had a benefit value of R400 000. However, TW said, there was no guarantee that he and his siblings would each receive a third of the payout, because the trustees of the RA fund had, until an objection was lodged, wanted to allocate half of the benefit to EP.
He said the trustees of the Momentum fund assumed that he and his siblings would benefit from the RA in accordance with his father’s wishes. They should not have considered the RA benefit when deciding how the preservation fund benefit was to be allocated.
MMI Group, the administrator and underwriter of the preservation fund, argued that the board of trustees had properly exercised its discretion when allocating the benefit and had not, as DW alleged, blindly followed a formula. The trustees had considered the monthly expenses of the dependants, their income, their future earning capacity and the amount of financial support provided by the deceased.
MMI said the trustees gave the following reasons for the allocation:
* DW’s former wife was found not to be financially dependent on DW at the time of this death.
* TW was found not to be financially dependent on DW, but he was DW’s legal dependant. In terms of DW’s will, he was to receive one-third of his father’s estate and a third of his father’s RA payout.
* TW’s younger brother, MW, was partially financially dependent on his father, and was also his legal dependant. He was also to receive a third of both the estate and the payout from the RA.
* DW’s daughter, HW, was 15 when her father died and she lived with her mother. She was financially dependent on her mother and father. In terms of a verbal agreement, DW paid his former wife R2 700 a month for HW’s maintenance. In addition, he paid her medical scheme contributions, ad hoc medical expenses and school fees, and gave her spending money. HW will receive a third of the estate and a third of the proceeds from the RA. She intends to further her education after she finishes school.
* EP was DW’s life partner and was financially dependent on him at the time of his death. She was unemployed when DW died, but subsequently found a job that paid R42 000 a year. EP has limited earning capacity because of her age (51). Apart from R150 000 as settlement for the furniture she sold when moving in with DW, she received no other payment from the estate.
In her determination, Lukhaimane dismissed TW’s argument that, because his father’s will said his estate must be divided among his three children, it was “odd” for the fund to have included EP in the distribution of the death benefit. She said the wishes of the deceased are only one of the factors that trustees must consider when making an equitable distribution of a death benefit. Therefore, DW’s will was not the main determinant in how the benefit should be allocated.
However, Lukhaimane ordered that the allocation to EP be set aside, because the evidence indicated that the trustees had failed to consider all the relevant factors, in particular the likelihood that DW’s children were not automatically entitled to a payment from the RA in terms of the percentages stated in the beneficiary nomination form.
In addition, Lukhaimane said, the trustees initially decided to allocate R2 315 000 to EP, but then changed their minds and allocated R3 082 000 to her, reducing the amounts allocated to DW’s children. The trustees did not provide a “cogent” justification for increasing EP’s share, she said.
“The very purpose of section 37C of the Act is to prioritise need and dependency in the distribution of death benefits ... A death benefit payable to [EP] was limited to the extent of her provable dependency. Therefore, any gratuitous payment made to her on top of what had been determined to be the extent of her dependency on the deceased, which had the effect of reducing the initial allocations made to the deceased’s children, is unreasonable and an improper exercise of the discretion vested in the board,” she said.
Once the board had determined EP’s financial needs, “the only plausible and rational decision for the board to take was to allocate the remaining benefit to the deceased’s children”.
If EP’s provable dependency had exceeded the amount available, the board would have been within its rights to allocate the entire amount to her, Lukhaimane said. “It is imperative, therefore, that where there are other beneficiaries, dependency be limited to provable expenses and not gratui-tous payments.”
She ordered the trustees, within four weeks of the date of her determination, to reconsider its allocation of DW’s death benefit and to inform TW and her office of its decision within two weeks of making it.
YOU DON’T HAVE THE LAST WORD
As a member of a retirement fund, you have no doubt nominated one or more beneficiaries – and your fund probably asks you to review your nominations regularly. But did you know that you don’t have the final say in the matter?
The allocation of your fund’s death benefits is entirely at the discretion of the trustees, and section 37C of the Pension Funds Act compels them to consider beneficiaries not nominated by you, Kobus Hanekom, the head of strategy, governance and compliance at Simeka Consultants & Actuaries, says.
“The golden rule to remember when nominating beneficiaries is this: the trustees will not be able to honour and respect your nomination if persons dependent on you will be left destitute as a result,” Hanekom says.
If you nominate as a beneficiary a person who is not dependent on you and you are survived by a spouse or life partner who is dependent on you, it is likely that the trustees will override your nomination. This is unless you provide them with further information and explain why the dependant will not be left destitute.
As Muvhungo Lukhaimane, the Pension Funds Adjudicator, said in a recent determination, a nominee is not entitled to a death benefit by virtue of having been nominated. The fund’s board of trustees is not bound by the nomination form you completed; the form serves merely as a guide to assist it when it exercises the discretion granted by the Pension Funds Act.
Hanekom cites an example where a fund member nominated her son to receive her entire death benefit. After her death, an investigation by the trustees found that she was survived by a life partner who was financially dependent on her, and a portion of the benefit was allocated to him.
“The son argued that the full death benefit should have been paid to him in accordance with his mother’s nomination. He said his mother’s life partner of 30 years (who happens to be his father) abused his mother physically, emotionally and verbally. This man relied on and exhausted his mother financially with demands for liquor and food.
“Once the trustees identify a person as a dependent, however, they are duty bound to consider the person for a benefit allocation. Whether or not the dependant is worthy of receiving a benefit is not taken into consideration at all.”
So what can retirement fund members do to ensure their wishes are taken into account when their death benefits are allocated?
Hanekom says the best you can do is to provide enough information and guide the trustees to understand their planning and strategy.
“You should, therefore, not stop at making a beneficiary nomination. You should write a motivation (on the nomination form or an attachment) that will assist the trustees to see the full picture and guide them to an outcome aligned with your own objectives,” he says.
HOW TRUSTEES ALLOCATE A DEATH BENEFIT
The payment of lump-sum death benefits from a retirement fund is regulated by section 37C of the Pension Funds Act. Muvhungo Lukhaimane, the Pension Funds Adjudicator, says the main purpose of this section is to protect people who were financially dependent on a fund member during his or her lifetime.
She says section 37C imposes three duties on a board of trustees when it distributes a death benefit. The board must:
* Identify and trace all the members’ dependants and nominated beneficiaries;
* Effect an equitable distribution of the death benefit; and
* Determine an appropriate mode of payment.
Section 37C gives trustees discretionary powers, which must be exercised fairly and reasonably, when distributing a death benefit, Lukhaimane says.
A determination by the adjudicator in 2000 sets out what trustees must consider when making an equitable distribution among dependants:
* The age of the dependants;
* Their relationship with the deceased;
* The extent of their dependency;
* The wishes of the deceased, either in the nomination form and/or his last will; and
* The financial affairs of the dependants, including their future earning capacity potential.
The Act defines “dependant” as:
* 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 person:
- Was, in the opinion of the board, on the death of the member, in fact dependent on the member for maintenance;
- Is the spouse of the member; or
- Is a child of the member, including a posthumous child, an adopted child and a child born out of wedlock.
* A person in respect of whom the member would have become legally liable for maintenance if the member had not died.
The Act recognises three categories of dependants based on the deceased member’s liability to maintain such a person: legal dependants, factual dependants and future dependants.
* Legal dependant: a person who, by law, is entitled to be maintained by the deceased fund member because of his or her relationship to the deceased. An example is a spouse or a child. In terms of the Pension Funds Act, a “spouse” is a person who is the permanent life partner or spouse or civil union partner of a member in accordance with the Marriage Act, the Recognition of Customary Marriages Act, or the Civil Union Act, or the tenets of a religion.
* Factual dependant: a person who was in some way dependent on the fund member, even though the member did not have a legal duty to maintain him or her. The person alleging to be a factual dependant has to prove that he or she was dependent on the member at the time of his or her death.
* Future dependant: a person who would have become dependant on the member had the member not died.