In last week’s column I wrote about how only three percent of non-member former spouses are preserving the retirement benefits they receive in a divorce settlement.
Sometimes it is not easy for a non-member former spouse to access a share of his or her former partner’s retirement savings, particularly when the matter involves defining a pension interest.
A few months ago, I wrote a column about a financial adviser who, in strong language, told me – incorrectly – that I did not know what I was talking about when I said that once you buy a pension with your proceeds of an occupational retirement fund, the money is no longer subject to the Pension Funds Act. As such, on your death you can decide how the residue to which you were entitled must be distributed.
While money is in a retirement fund, the trustees of the fund decide who receives the benefits when you die. You can guide the trustees by nominating beneficiaries, but in the end it is the trustees who, in terms of the Pension Funds Act, decide how to distribute the benefits, based on whom they determine to have the greatest financial need.
Simply put, when you pay your contributions to a retirement fund, you are in effect placing your money in a trust fund – hence the need for trustees. You do not “own” the money, but you do have a pension interest.
Once you leave a fund, for whatever reason, you again in effect “own” your savings, even though you may not be able to access them because of the type of investment vehicle you chose.
It is this pension interest that is one of the issues that can cause a problem in divorce settlements.
The Supreme Court of Appeal recently ruled that Elizabeth Krugel was not entitled immediately to receive a share of her ex-spouse’s retirement savings accumulated in the Eskom Pension Fund. This was despite a divorce settlement that awarded her a share of the savings and a determination by the Pension Funds Adjudicator that the pension fund must pay up.
However, the Eskom Pension Fund, firm that its interpretation of the law was correct and concerned that if the member went to court it may have to pay out twice, took the matter all the way to the Supreme Court of Appeal.
The case hinged on what is meant by a pension interest.
Krugel’s husband had resigned from both Eskom and the fund by the time the divorce settlement was reached and endorsed in court.
He had chosen to leave his accumulated savings in the fund as a deferred pensioner, to be used as a pension when he retired (normally, this is a very good thing to do).
On divorce, Mrs Krugel went to the fund to collect what she believed was her due.
But the pension fund said in effect: “No, we cannot pay up. Your husband is no longer a member of the fund and as such he has no pension interest. The law under which you are asking for the money does not apply in this case. He may have left his money here for us to look after, but that does not give him a pension interest. He simply made an investment choice.”
The Supreme Court agreed with the fund.
Pension lawyer Johan Esterhuizen, a director at Hunter Employee Benefits Law, says the judgment confirms a number of important considerations when settlements are prepared during divorce proceedings.
“This is especially important when deciding on the division of pension benefits. To simply insert a standard clause in an agreement (not that it was done in this instance) regulating the division of pension benefits without having confirmed the member’s status in the fund can be extremely prejudicial for the non-member spouse.
“In this case, the member’s benefit had not yet accrued, as he had not reached retirement age. But had the benefit already been paid, the non-member spouse could face extreme difficulty in enforcing a judgment,” Esterhuizen says.
The Supreme Court of Appeal has confirmed that if a fund member leaves a fund before a divorce, there is no longer a pension interest that can be claimed from the fund, he says.
Importantly, the court also confirmed that although the non-member former spouse cannot enforce the divorce settlement against the fund, she retained her right to enforce it against her ex-husband, Esterhuizen says.
One of the problems, I would suggest, is that divorce lawyers are not pension lawyers. They need to improve their skills in this all-important area, because it could affect the investment returns that their clients’ will eventually receive and how much tax they will pay.
Erring divorce lawyers could very well – and justifiably – be sued for providing the wrong advice!