Whether a person is a dependant should be determined with reference to when a retirement fund member died, not the date on which the fund decides on how the death benefit should be distributed, the Constitutional Court has found.
On Friday, the Court handed down a unanimous judgment in an application for leave to appeal a judgment by the Supreme Court of Appeal (SCA) in 2023 concerning the interpretation of section 37C of the Pension Funds Act (PFA), and the equitable allocation and distribution of death benefits.
Read: Funds must fully verify dependency before allocating a death benefit
The Constitutional Court’s landmark judgment overturns the precedent set by the SCA in Fundsatwork Umbrella Pension Fund v Guarnieri and Others (2019). The judgment is the first time the Court has interpreted and applied section 37C, which governs the equitable distribution of death benefits to dependants of deceased members of retirement funds governed under the PFA.
South African retirement funds distribute billions of rands upon the death of their in-service members to people who were dependants of a deceased member, Justice Leona Theron wrote on behalf of the Court. These benefits are distributed in terms of section 37C – “a far-reaching and relatively unique statutory provision”.
The Court noted the matter raised issues that transcend the narrow interests of the parties. “Any judgment handed down by this Court will impact other funds and beneficiaries, and the industry at large,” Justice Theron said. Moreover, retirement fund statutes similar to the PFA have analogous or comparable death benefit provisions to section 37C, which may also be impacted by the apex court’s interpretation.
The Constitutional Court’s judgment addressed two key questions regarding the timing of dependency determination under section 37C:
- Should dependency be assessed as of the date of the member’s death or the date of the fund’s distribution decision?
- Must a person still be a dependant at the time the distribution is made?
These questions had been previously addressed by the SCA in Guarnieri, which held that dependency should be determined at the time of the distribution decision and that the person must still be a beneficiary when the distribution is made.
The Constitutional Court ruled that dependency must be determined as of the date of the member’s death, rejecting the SCA’s interpretation in Guarnieri. The Court’s reasoning rested on the text of the PFA, its social security purpose, and practical considerations.
The Court said the status of a dependant – whether legal or factual – is established based on the circumstances at the time of the member’s death.
“The determination of dependency is based on the facts at the date of the member’s death (this accords with section 1 paragraph (b)(i) of the definition of ‘dependant’ of the Act). An equitable distribution is usually made some time later. An equitable distribution may consider changed circumstances, if any, after death,” Justice Theron said.
Assessing dependency at the distribution date could lead to untenable outcomes, such as including individuals who were not dependent during the member’s lifetime or excluding those who were dependent at death but whose circumstances later changed.
The SCA’s interpretation was also contrary to the plain language contained in the definition of “dependant” in section 1 of the Act, which refers to the “death of the member” and includes wording such as “had the member not died”.
“This textual reading suggests that the determination of dependency is made at the time of death of the member, while giving a fund a 12-month period to conduct a proper investigation.”
The Court said its interpretation also accorded with the social security purpose of section 37C. The purpose of the provision is to protect those who were dependent on the member at the time of his or her death. At the same time, using the date of death to determine dependency does not mean that a retirement fund cannot take changed circumstances into account when the equitable allocation is made.
Must a person still be a dependant at distribution?
The Court also found there is no legal basis for the proposition in Guarnieri that a person must still be a “beneficiary” at the time the distribution is made.
Judge Theron said the use of the word “beneficiary” in Guarnieri was confusing. It appeared that “beneficiary” was used as an umbrella term that might include dependants and nominees.
She said section 37C gives funds up to 12 months to conduct investigations, and circumstances can change during that period. “The changed circumstances should only impact the distribution decision and not the identification of who was a dependant at the date of the member’s death (that is, determination of dependency).”
The Court held that legal dependency is a matter of status that does not change over time. Factual dependency, however, is determined at the time of the member’s death, according to the PFA.
“Once an individual is identified as a dependant, whether legal or factual, that status as a dependant does not change. If, at the distribution stage, there are changed circumstances that alter the needs of the dependant – for instance, if they inherited or won a large sum of money that rendered them no longer reliant on the deceased member, or passed away, as was the case in Guarnieri – the fund may have regard to these circumstances when determining an equitable distribution,” Justice Theron said.
