If a loved one – a spouse, parent or friend – has nominated you as the beneficiary of their retirement fund savings when they die and they die after they reach retirement age, don’t bank on receiving the risk portion of their death benefit, even if your loved one was employed at the time of their death.
The risk portion of a death benefit usually falls away once a fund member reaches retirement age, so if a member is older than the retirement age when he or she dies, life cover is not paid to the beneficiaries, even if the member was employed at the time of death.
A retirement fund death benefit is a sum of money paid to a beneficiary (or beneficiaries) on the death of a member of the fund. Typically, the death benefit comprises two components: the fund credit and the risk portion – also known as group life cover.
The fund credit comprises the contributions made by the member and the member’s employer to the retirement fund up until the day the member dies or retires from the fund – whichever happens first.
Group life cover is life assurance for the member’s dependants or beneficiaries in the event of the member’s death before retirement. It will also pay out should the member become disabled and unable to work before reaching retirement.
The purpose of group life cover is to address the shortfall between the member’s retirement savings at the time of death and what the member would have saved had they reached retirement age.
For a member of an occupational retirement fund, your retirement age is determined by the rules of the fund. It may be any age, but it is most likely between 60 and 65.
The office of the Pension Funds Adjudicator (PFA) recently handed down two determinations relating to the risk portion of the death benefits paid to beneficiaries. In both cases, the PFA dismissed complaints by beneficiaries who thought they were entitled to the risk portion of the death benefit.
Mrs H’s husband died at the age of 64 – five months after retirement age – while still employed and a contributing member of his employer-sponsored retirement fund.
After Mr H’s death, the fund paid Mrs H, who was his nominated beneficiary, a death benefit that comprised only Mr H’s fund credit.
Mrs H complained to the PFA, contending that she was entitled also to the group life assurance, because her husband was employed at the time of his death.
Mrs H submitted that a member benefit guide issued by the fund had stated that if a member died while in service, the death benefit payable to the member’s beneficiaries should be retirement savings plus group life assurance cover. However, the benefit guide was not dated and it was not provided to the PFA.
Elmarie de la Rey, the acting adjudicator, dismissed Mrs H’s complaint, citing the rules of the fund.
The rules state that if a member dies while in employment, the retirement savings plus the lump sum assurance benefit are payable “provided the member dies before the last day of the month in which he attains the insurance benefit age” – in other words, as long as the member dies before retirement date.
De la Rey also said that in the event that there is a conflict between the information in a member benefit guide and the rules of a fund, the rules will prevail.
In another case relating to the payment of life cover, three adult children of a deceased member complained to the PFA because the death benefit payout comprised the fund credit only.
The member, Mr S, died more than 18 months after reaching the retirement age of his fund. Although Mr S was employed at the time of his death, the rules of his fund do not allow for risk cover to be paid to the beneficiaries of “members who die after attaining the normal retirement age of 65 years”.
Mr S’s children argued that a member benefit statement confirmed that risk cover was payable to the deceased’s dependants.
But De la Rey found that the statement read: “The death cover shown on this statement is based on the maximum cover you may be entitled to. Payment of the insured portion of your death cover is subject to acceptance by underwriters, and may be restricted.”
This provision was not inconsistent with the fund’s rules, the acting adjudicator said. “The general rules and the policy confirm that the normal retirement age is 65 years. The insured benefit could not be paid to the deceased’s beneficiaries, as he had passed the age of 65 at the time of his death. Therefore, the claim cannot succeed,” she says.
CONTACT
The Acting Pension Funds Adjudicator is Dr Elmarie de la Rey.
Telephone: 087 942 2700
Website: www.pfa.org.za