A recent judgment by the Supreme Court of Appeal has provided clarity on the timing of the allocation of death benefits by pension funds.
The court ruled that the allocation of a deceased pension fund member’s death benefit to beneficiaries and/or dependants should be determined not at the time of the member’s death but at the time of distribution.
This means that if circumstances change after the member’s death but before the money is distributed, the fund needs to take this into account in its final decision of who gets what.
Pension funds have a year within the date of a member’s death to trace dependants and distribute the money accordingly. However, section 37C of the Pension Funds Act, which governs the distribution of death benefits, is not clear about the date on which the allocation should be based.
The judgment was made in the case Fundsatwork Umbrella Pension Fund v Guarnieri and Others on May 31. Fundsatwork is Momentum’s commercial umbrella fund.
On the death of member Massimiliano Guarnieri in a car accident, the board of the fund determined that 42% of the benefit of about R1.1 million should be allocated to Guarnieri’s ageing mother, who suffered from Alzheimer’s disease, and the rest should go to his estranged wife and his children.
However, between the date of Guarneri’s death and the finalisation of the distribution, his mother died.
The fund paid Guarnieri’s mother’s portion of the benefit into an annuity set up by his sister, Barbara Swart, who was the sole beneficiary of the annuity.
Guarnieri’s wife, who had begun divorce proceedings against her husband but was legally married to him, and the couple’s two children contested the decision of the board.
They took their case to the Pension Funds Administrator, who ruled the board needed to reapply its mind to the decision, taking into account the change in circumstances.
According to court papers, “the board then made exactly the same decision as previously in regard to the distribution of the death benefit”.
Mrs Guarnieri and her children challenged this by way of an application to the Gauteng Division of the High Court. The court found in the family’s favour, ordering the fund to redistribute the amount allocated to Guarnieri’s mother to Mrs Guarnieri and her children.
Unhappy about having to redistribute the benefits, the Momentum fund took the case on appeal.
In an article in law firm Norton Rose Fulbright’s Financial Institutions Legal Snapshot newsletter, director and pension fund specialist Michelle David, writes: “The Supreme Court of Appeal, after a careful analysis of the tenses used for the verbs in section 37C, found that there was no justification for reading into the definition of ‘dependent’ the qualification ‘at the date of death of the member’.
“The language of the section and the purpose of the section, which is to benefit people entitled to support, means that it is the date of the distribution that is relevant. The fund has 12 months to trace dependants.
“The situation can change during this time in many different ways (for example, the spouse could remarry, children could become self-supporting, dependants might die).
“It was held that the approach of the board was not sensible. The purpose of section 37C is to provide some protection for dependants, both existing and potential.
“The obvious time at which decisions should be taken in that regard is when the determination is made. At that stage the board will have completed its enquiries and will be in a position to assess the relative present and future needs of dependents it has identified.
“The persons who benefit must be beneficiaries at the time the distribution is made.”
The judge dismissed the appeal, with costs.
The amount was reallocated to Guarnieri’s wife and children.