A retirement fund, is by virtue of its name, mainly seen as a fund in which to accumulate contributions for retirement. Every day retirement fund members pass away enabling the retirement fund to fulfil its alternative role of providing financial support to the deceased member’s loved ones. This article addresses the vital question “How will your death benefits be distributed when you die? A significant portion of complaints lodged with the Pension Funds Adjudicator involves beneficiaries or family members of deceased retirement fund members complaining about the Trustees’ discretion in allocating death benefits.
Your retirement fund death benefit is made up of (1) your member share (member’s and employer’s contributions net of costs plus investment growth) plus (2) any insured life cover which is normally a multiple of salary that are included in the fund (separate group life insurance schemes are excluded). A retirement fund is managed by a Board of Trustees. They have the responsibility to, in terms of Section 37C of the Pension Funds Act 24 of 1956, to manage the pay-out of death benefits. This complex piece of legislation is intended to ensure your financial dependants are looked after financially before any other parties receive any benefits. In effect, this allows the Trustees to overrule your own wishes usually set out in your nomination of beneficiary form in favour of dependants. Section 37C therefor restricts an individual’s freedom of testation. The main reason for this could be to reduce the burden on the state to provide for your dependants in future.
It is important to note, (1) in most cases your death benefits under your retirement fund will not form part of the assets of your estate.(2)Your estate can qualify for a payment of the benefit, or a portion thereof, only in certain limited circumstances. (3) Your dependants have protection against your creditors.
In the event you left your retirement fund death benefits to a charity organisation but you have dependants, Section 37C give preference to your dependants before the nominated charity. In practice, Section 37C presents a challenge to Boards of Trustees as they could be held personally liable should they fail to comply with Section 37C. Trustees are duty bound to identify all potential dependants and nominees and then required to decide on the most equitable distribution of your death benefit amongst the identified beneficiaries and nominees. A nomination of beneficiary form is not binding on the Trustees and it merely guides them as an indication to your wishes.
What is the difference between dependants and nominees?
Dependants may range from legal dependants (an ex-spouse), factual dependants (younger brother who lives with you and is financially dependent on you), your spouse and children or even a future dependant. The Trustees will consider your each of your dependants and nominee’s unique circumstances and then attempt to make an equitable distribution.
Nominees are persons nominated on a valid beneficiary nomination form. They could be anyone, for example a friend or non-dependent family member, like your adult brother.
Section 37C sets out a number of possible scenarios concerning the distribution of death benefits:
If there are dependants only, the benefit will be distributed based on the extent (and period) of dependency. The Trustees will consider factors such as a one-year old child should receive a bigger allocation than an 18-year-old should. They could also consider any other payments a dependant received from other insurance policies or group insurance schemes.
If there are nominees only, then the benefit will be distributed according to your beneficiary nomination form, except if your estate is insolvent. If your estate’s liabilities exceed its assets, payment or partial payment could be made to your estate.
If there are both dependants and nominees, dependents will get preference based on their extent of dependency and only then will nominees be considered.
If you have no dependants or nominees, the benefit will be paid into your estate and if you die intestate, the benefit may be paid to the State’s Guardians Fund.
Trustees have twelve months to trace dependants. A valid nomination form will greatly assist the trustees. If all dependants have been found, payment may be made earlier. The Trustees could consider the information in your final will and testament but they are in no way bound by it. If there are nominees only, payment can only be made after twelve months to allow any dependants to come forward or be found. Payment cannot be made directly to a minor, the Trustees will decide in consultation with all relevant stakeholders to make payment to (1) the child’s legal guardian or caregiver, (2)transfer the benefit to a trust specifically set up for the child or (3)transfer to a beneficiary fund.
The golden rule is that all members of retirement funds should have up-to-date beneficiary nomination forms on record. This will speed up the allocation and ensure your death benefit is distributed equitably.
Finally, your death benefit from your retirement fund plays an important role in your financial planning. Your Financial Planner should include this when assessing your financial needs.