On the death of a loved one, it often comes as a shock to the bereaved family to discover that the trustees of a retirement fund have the ultimate say over how the deceased fund member's death benefits are distributed.
Many members of retirement funds do not realise that the distribution of benefits when they die is not determined by their will, but by the trustees of the retirement fund that is paying out the benefits.
Naleen Jeram, an assistant to the Pension Funds Adjudicator, says this is because the death benefits payable by retirement funds on the death of a member do not form part of the member's estate, whether the deceased left a will or not.
Speaking at the annual conference of the Pension Lawyers Association, Jeram discussed cases involving the distribution of death benefits that have been dealt with by the office of the Pension Funds Adjudicator and the courts over the past six years.
The Pension Funds Act, which deals with the distribution of death benefits from retirement funds, overrides the freedom of testation of fund members insofar as the death benefits are concerned. The Act also takes precedence over the laws of intestate succession, which rule in cases where a person dies without leaving a will.
Despite this, the Pension Funds Adjudicator often receives complaints from executors and administrators of deceased estates that the death benefits have not been paid into the estate, he says.
Under the Pension Funds Act the board of trustees of a retirement fund has three duties to perform when a member dies, Jeram says.
The board must:
- Identify the nominees and dependants of the deceased member;
- Divide the benefits among these beneficiaries ; and
- Determine an appropriate mode of payment.
Who can receive benefits
You are entitled to the death benefits of a person who supported you before they died, but you can also receive death benefits from somebody who nominated you as the beneficiary of their pension fund savings.
There are three categories of dependants:
1. Legal dependants
If a member has a legal duty to support someone, that person is a legal dependant. Examples include spouses, minor children and possibly elderly parents who are unable to support themselves and who receive assistance from the member. Jeram says former spouses who are entitled to maintenance in terms of a divorce order are also legal dependants.
2. Factual dependants
This category includes people who were dependent on the deceased member for maintenance at the time of his or her death. It includes customary and Asiatic spouses and major children. Essentially, these are the people who do not fit the definition of a legal dependant, but who were receiving maintenance from the deceased member in some form or another.
However, Jeram says, to qualify as a factual dependant, the maintenance payments by the deceased member would have to have been made at regular intervals. Single or isolated payments are not considered maintenance, unless a lump-sum payment is intended to cover regular payments over a considerable length of time.
For spouses joined under customary and Asiatic unions to qualify for benefits, trustees first have to establish whether a customary union has been celebrated, and secondly, that it continued to exist.
3. Future dependants
Any person to whom the deceased may in the future become legally liable for maintenance should also be regarded as a dependant.
In one case that came before the office, the adjudicator ordered a fund to regard the 83-year-old mother of a fund member as a dependant even though she owned her own property, received an income from investments and was not dependent on the member for maintenance.
At the time of the member's death, his mother's health was rapidly deteriorating and she had required several operations. Considering her age, there was more than a reasonable possibility that she would have become dependent on her son, Jeram says.
Nominees
Besides establishing who the dependants of a fund member are, the board has to consider anybody the member nominated to receive his or her benefits. Typically fund members are asked to fill in a nomination form to indicate their choice of nominees.
Jeram says the nomination of a beneficiary does not automatically entitle that nominee to receive death benefits, it merely entitles that person to be considered as a beneficiary by the board of trustees when death benefits are distributed.
The only exception to this rule is when the fund member dies with no dependants. In this case, if the member's estate is solvent, the nominee will be entitled to receive the benefits.
How long before benefits can be distributed?
Jeram says the trustees are given a year to trace dependants before they make payment exclusively to a nominee. But this does not mean that trustees are prohibited from distributing benefits within a year of the member's death, nor does it compel a distribution to a nominee once a year has passed.
Instead, the deciding criterion is whether the board has taken all reasonable steps to fulfil its duty to trace dependants before it pays out benefits to nominees.
If the board is in doubt about the circle of dependants, it is well advised to postpone the distribution until all reasonable steps have been taken to remove that doubt, Jeram says.
Distribution
The classification of a beneficiary as either a dependant or a nominee is important because the Act distinguishes between the way in which benefits can be distributed to each.
One of the many distinctions is that the solvency of the deceased's estate is not relevant when trustees make distributions to dependants.
However, in the case of distributions to nominees, the trustees are obliged to settle any shortfall in the estate before paying benefits to the nominees.
The legislation gives trustees five methods to distribute death benefits.
- If there is only one dependant, the entire benefit will be paid to that dependant.
- If there are two or more dependants, the board has to distribute the benefits fairly and has to consider, among other things, the age of the beneficiaries, the relationship they had with the member, the wishes of the member, the amount available for distribution, the financial status of each dependant and the future earnings capacity/potential of each dependant. All the factors must be considered equally, Jeram says.
- If there are no dependants and only one nominee and the member has nominated that the entire benefit should go to the nominee, then the full benefit should be paid to the nominee by the trustees.
However, if there is a deficit in the member's estate, it must first be settled, and the balance of the benefit paid to the nominee. Trustees have a legal duty to first make payment to the member's estate if there is a deficit, before paying the nominees.
There is a misconception among nominees that the nomination is sufficient for them to receive the entire benefit (in cases where there are no dependants). But, Jeram says, if the member has indicated that a nominee is to receive only a portion of the benefit, then the board may only pay the specified portion to the nominee. The balance needs to be paid into the deceased's estate.
If the member has dependants as well as nominees, the board has to distribute the benefits fairly among all the beneficiaries.
In the case where the board cannot trace or locate any dependants of a fund member and there are no nominees, the entire benefit must be paid into the member's estate.