Disposition of and Distribution of Death Benefits: Retirement Funds
By Tamara Jacobsen, Director, Applied Learning Academy
What is a death benefit under a retirement fund?
A death benefit means the lump sum that becomes payable in the event of death of a member of a retirement fund, i.e. pension and provident funds, preservation and retirement annuity funds. The actual death benefit comprises the deceased member’s retirement savings and may include an additional lump sum if provision has been made in the particular retirement fund’s Rules. When a retirement fund member passes away, the member’s death benefits must be paid out – this process is called either a disposition or distribution of death benefits.
Why is this a concern?
Considerable levels of complaints in relation to the disposition of retirement fund death benefits are submitted each year to the office of the Pension Funds Adjudicator, with over 1000 cases being lodged in relation to the distribution of death benefits in the last decade. While some of the complaints in relation to the disposition of death benefits are dismissed, the general ongoing level of complaints of this nature are of concern as they are largely avoidable, if the correct process and legal provisions are applied.
Who makes the decisions?
Where a retirement fund is free-standing, i.e. it has its own rules and Board of Management and members are all part of a related group, the Board of Management comprising the trustees and Chairperson are responsible for all decisions in relation to the particular retirement fund, including how to dispose of death benefits arising as a result of a fund member passing away.
Where a retirement fund is part of an umbrella fund arrangement or where it is an individually owned retirement product, e.g. a retirement annuity, the administrator usually formulates a proposal on the distribution of death benefits.
If a participating employer of an umbrella fund has formed its own Management Committee, the committee members may also be involved in preparing the proposal. Once a proposal has been formulated, it is presented to the umbrella or retirement annuity fund’s Board of Management for approval because the Board remains responsible for fund related decisions.
What laws apply?
The Pension Funds Act, 1956 as amended, outlines the duties of the Board of Management of a retirement fund. Certain definitions in the Pension Funds Act and Section 37C relate specifically to the distribution of benefits arising as a result of the death of a fund member.
Although not law, various Pension Funds Adjudicator determinations provide further guidelines on what to take into consideration and how the provisions of Section 37C provisions should be applied in practice.
Why are there so many complaints?
The Board of Management of a retirement fund has full discretion on how to dispose of death benefits, within the provisions of the relevant legal framework. The process that should be followed is summarised in the diagram below:
For each of the steps, tasks and duties need to be undertaken and legal provisions need to be applied correctly. Only some of the provisions are clearly outlined in the Pension Funds Act whilst there are little or no legal guidelines provided in other areas.
In many of the cases dealt with by the Pension Funds Adjudicator, the Board has applied the law incorrectly. Further, a systematic process must be applied to arrive at an equitable distribution and select a suitable mode of payment. As there are no legal guidelines to follow in these steps, mistakes are made. However, through various Adjudicator cases, guidelines have been provided on factors to consider, and when and why a particular method of payment is suitable. Unless guidance or training has been provided to Board members (trustees) or administrators, they are often not aware of the additional guidelines provided through the cases, and pitfalls to avoid.
What happens if there is a mistake?
An aggrieved family member or someone else who believes that a death benefit should have been distributed differently to the decision taken by the Board of Management of a retirement fund can either approach the office of the Pension Funds Adjudicator, or lodge a court case. Both the Adjudicator and the courts can determine that the original distribution be set aside.
If a determination is made to set aside the Board’s decision on how to distribute death benefits, payments already made will be difficult if not impossible to retrieve. The knock on effect is significant, with possible legal action being taken against the Board of Management, and/or members’ retirement savings being reduced.
What can be done?
Section 31 of PF Circular 130 states that Board members should be educated on an ongoing basis to ensure that they acquire and maintain an understanding of fund matters. Being educated on the distribution of death benefits should be included in any Board training and education. As administrators and Management Committees are involved in formulating proposals on the distribution of death benefits, training should be extended to include anyone who may be involved in these decisions.
What should be included in training on how to distribute death benefits?
When considering training for administrators, Management Committees and/or Board members (trustees), the minimum information that must be included is:
- The duties of the Board of Management/Trustees in terms of the Pension Funds Act
- Death benefits that fall under the duties of the Board of Management
- Calculating the distributable amount by applying allowable deductions and income tax
- Dependants and spouse definitions as per the Pension Funds Act
- Applying the dependant definition and which children qualify and when a partner is considered to be a spouse (as per law)
- The beneficiary nomination form and nominees
- Section 37C of the Pension Funds Act and dependants versus nominees
- How the 12 month period in which to trace dependants should be applied
- Gathering information on dependants and their extent of dependency including appropriate evidence
- Selecting relevant information, e.g. where the deceased was married, the extent of the member’s financial dependency should be the focus, not their marital regime
- Equitable distribution taking the Pension Funds Adjudicator guidelines into account:
- Wishes of the deceased, age and extent of dependency of dependants, relationship to the deceased member and financial affairs of the dependants
- Identifying a suitable method of payment and additional requirements that may apply
- Communication with dependants and nominees
- Recording decisions and retaining evidence in relation to the disposition of death benefits
- Learning derived from selected Pension Funds Adjudicator cases
In reality, as there is money involved, family members or nominees often approach the courts or the office of the Pension Funds Adjudicator to see if they can get a larger slice of the deceased member’s death benefit, or be awarded a portion if they have been excluded altogether. Some of these people are simply taking a chance while others have a valid grievance. The result is that for any distribution of death benefits, the Board may be required to defend its decision, even if it has been fair and legal. Therefore, it is imperative that every death claim is dealt with correctly – evidence must exist to prove that the Board has correctly applied the various legal provisions and Adjudicator guidelines as well as a systematic process in arriving at their decision.
Applied Learning Academy has developed a comprehensive one day course on the distribution of death benefits under a retirement fund. The information listed above is discussed in detail, and attendees receive a manual outlining a step by step process and interpretation of legal provisions in plain language. If you would like to enquire about the course, you can contact Tamara on 011 452 8829.
For more information about Applied Learning Academy and our other courses on offer, visit our website at www.appliedlearning.co.za.
 The purpose of the Pension Funds Adjudicator is to investigate and determine on complaints relating to abuse of power, maladministration, disputes of fact or law and employer dereliction of duty in respect of retirement funds. This includes the manner in which death benefits have been distributed.
 A Management Committee is a voluntary committee formed by a participating employer to deal with day to day retirement fund matters under an umbrella fund arrangement but they do not have power in law.
 PF Circulars are issued by the Pension Funds Registrar and supplement or provide additional requirements in relation to retirement fund matters.
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