Section 37C and the allocation of fund death benefits – how much weight does a beneficiary nomination really carry?

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Compiled by Lize de la Harpe, Legal Adviser at Glacier by Sanlam

Introduction

In this article we look at the wording of section 37C of the Pension Funds Act No. 24 of 1956 (“the PF Act”) and focus on the impact of the wishes of the deceased as set out in beneficiary nominations.

The primary objective of Section 37C of the PF Act

Before delving into the detail, we need to remind ourselves of the overall purpose of section 37C of the PF Act.

When a member of a retirement fund dies before reaching retirement age (and if the rules of the particular fund permits) the lump sum benefit which becomes payable (hereinafter referred to as the “death benefit”) must be paid to the member’s dependants and/or nominees.

Section 37C regulates the payment of death benefits with the primary objective of ensuring that those persons who were dependent on the deceased member are not left destitute after his/her death, irrespective of whether or not the deceased was legally required to maintain them.

In essence, section 37C imposes three duties on the Board of Trustees, namely to:

Identify and trace “dependants” (as defined in section 1 of the PF Act) and those persons, if any, who have been nominated by the deceased member;

Make benefit allocations on a fair and equitable basis; and lastly

Determine an appropriate mode of payment of the death benefit.

Dependants versus nominees

Section 37C must be read in conjunction with the definition of a “dependant” as set out in section 1 of the PF Act. In essence, the PF Act distinguishes between three categories of dependants based on the deceased member’s liability to maintain such a person, namely legal dependants, factual dependants and future dependants. The fact that someone falls within the definition of “dependant” only entitles him/her to be considered by the Board when making the benefit allocation decision. It does not mean he/she automatically qualifies to share in the death benefit payable.

A nominee, on the other hand, is a person designated in writing by the deceased to receive the benefit, or a portion thereof. As we can see from the wording, section 37C imposes a duty on the Board of Trustees to conduct a proper investigation to determine all the “dependants” of the deceased member. What this means is that the Trustees cannot merely follow the beneficiary nomination made by the member during his/her lifetime – the nomination will merely serve as a guide to the Trustees. The overriding factor will however always be the beneficiary’s dependence on the deceased when he/she was alive.

Although it is accepted that the legislature intended to favour dependants over nominated beneficiaries, it does not mean that the Board of Trustees can unilaterally ignore beneficiary nominations.

This was recently highlighted in the matter of Swart N.O and Others v Lukhaimane N.O and Others (54157/2019) [2021] ZAGPPHC 124 discussed here below.

Swart N.O. and Others v Lukhaimane N.O. and Others [2021] JOL 49952 (GP)

In the matter of Swart N.O and Others v Lukhaimane N.O and Others (54157/2019) [2021] ZAGPPHC 124 (12 February 2021), the High Court considered aspects of section 37C, including the significance of the wishes of the deceased as set out in a beneficiary nomination.

The member died leaving behind a wife aged 39 (they were married for less than four years at the date of death) and two major children from a previous marriage. The children had received regular cash payments from the deceased, and he had also paid certain monthly expenses such as their medical aid and insurance premiums. After the member’s death, the wife remarried. She also instituted a maintenance claim against the deceased estate.

During his lifetime the deceased completed a nomination form in which he nominated his wife and a family trust (of which the two major children were beneficiaries) to each receive 50% of his death benefit. Concluding that the maintenance needs of the children had been met by the proceeds of the trust and other life policy payments, and that the wife’s maintenance needs took precedence over the children’s claim, the Fund awarded 100% of the death benefit to the wife.

Aggrieved by the Fund’s decision, the major children approached the Pension Funds Adjudicator (“PFA”). The PFA found that the Fund had not conducted a proper investigation in terms of section 37C and ordered the Fund to reconsider its decision. After requesting additional information from the dependants, the Fund made exactly the same decision as it had made previously, allocating 100% of the benefit to the wife. Upon the children again complaining to the PFA, they were told that the PFA regarded herself as functus officio, and that if they were to take the matter further, it would have to be by way of a review application. The children and trust accordingly approached the High Court, seeking an order that the Fund’s decision be set aside and that the deceased’s wife pay 50% of the death benefit to the trust.

The children argued that the Fund had failed to give proper consideration to the deceased’s wishes as expressed in the nomination form and that the Fund failed to make the necessary enquiries into the value and solvency of the trust (more especially given the fact that there was a cash shortfall of some R11 million in the Trust, and that assets would have to be liquidated to restore the trust to solvency). The Fund simply accepted, without any basis in fact, that the trust would be able to meet the children’s maintenance needs. They also argued that the Fund had failed to conduct proper enquiries into the maintenance requirements of the wife, specifically as she had already received some R4.3 million from the deceased’s life policies, the fact that she was relatively young, had remarried, and was employed.

The Fund in response submitted that there was no evidence that the children were dependent on the deceased.  It further submitted that it was not required to consider the solvency of the estate when making a decision.

At paragraphs 31 and 32 the court held as follows:

“[31]      The Fund’s basic approach to the matter was flawed. Its view, that the solvency of the trust was irrelevant, and the argument that the maintenance claim proved fourth respondent’s dependency were both irrational, in my view.

[32]      Finally, although I accept that the Fund is not bound by the wishes of a deceased person, the wish expressed in a nomination form or in a will is not to be lightly ignored. It is one of a number of factors to be taken into account, but it is a substantial factor. Therefore, before the Fund decided to ignore the nomination, it should have considered whether there were compelling reasons to do so. If it would result in an injustice or be inequitable should the deceased’s wishes be given effect to, then the Fund would be justified in deviating from the deceased’s wishes. Here there is no evidence that the Fund placed any weight at all on the nomination”.

(my emphasis)

Interestingly, the Fund also (in a last desperate attempt?) tried to argue the trust was not a “dependant” as defined in the PF Act, and as such the relief sought was therefore not legally competent. The court rejected the Fund’s argument and referred to the wording of section 37C(2)(a) of the PF Act which states that a death benefit can be paid to a trust on behalf of a dependant or nominee.At paragraph 36 the learned judge held as follows:

“[36]     It is consequently not the trust that is the dependant, but the person who receives a benefit by way of payment to the trust. Payment to the trust is regarded as a payment to the dependant. There is no merit to this argument.”

(my emphasis)

The court accordingly found that the Fund had not investigated the wife’s and children’s circumstances sufficiently to conclude that the wife was in need of maintenance and the children were not and ordered that the Fund’s decision to allocate 100% to the wife be set aside.

Conclusion

Here are some key take-aways from the Swart-case discussed above:

The Board of Trustees has the discretion to award any proportion of the death benefit to any dependant, even in the face of a nomination by the deceased, depending on what is equitable in each case.

What exactly “equitable” means is not defined in the PF Act – however, the PFA has identified certain factors that should be considered in the decision-making process, including but not limited to:

age of the dependants;

their relationship with the deceased;

the extent of the dependency;

the wishes of the deceased;

the financial affairs of the dependants and their earning potential; and

the amount available for distribution.

Although the Board of Trustees is not bound by the wishes of the member, the “wish” expressed in a nomination form is a substantial factor to be taken into account when allocating death benefits.

As such, the Board would need compelling reasons to ignore the nomination form, for example, where it would result in an injustice or be inequitable should the member’s wishes be given effect to.