A retirement fund must actively, thoroughly, and independently investigate all potential dependants before allocating a death benefit. This is according to a Constitutional Court judgment that addresses the interpretation of section 37C of the Pension Funds Act (PFA).
The unanimous judgment – delivered on Friday – set aside decisions by the Pension Funds Adjudicator, the High Court, the Full Court, and the Supreme Court of Appeal (SCA).
The applicant, Tshifhiwa Shembry Mutsila, challenged the Municipal Gratuity Fund’s allocation of her deceased husband’s death benefit.
Mutsila’s application for leave to appeal arose from the SCA’s judgment handed down in July 2023.
Read: Adjudicator did not allow retirement fund to respond fully to a complaint
The Constitutional Court’s judgment addresses four key issues:
- Whether the Adjudicator breached the audi alteram partem principle when making findings about the Municipal Gratuity Fund’s investigation without giving the Fund a meaningful opportunity to respond.
- Whether the Fund properly exercised its discretion in terms of section 37C of the PFA.
- Which date governs the determination of dependency under section 37C – the date of the member’s death or the date the fund makes its distribution decision?
- Whether a person must still be a “beneficiary” at the time of the distribution to retain his or her status as a dependant.
The Court’s findings with respect to the third and fourth issues are addressed in a separate article: Apex court clarifies timing of dependency test for death benefit payouts
This article discusses why the Court found that the Fund failed to exercise its discretion properly.
Background to the dispute
Takalani Emmanuel Mutsila, a member of the Municipal Gratuity Fund, died in December 2012. A death benefit of R1 614 434.86 became payable.
The applicant and Takalani Mutsila were married in community of property in 1984. They had five children and were living together at the time of his death.
The Fund identified another claimant, Dipuo Masete, along with her two children.
In April 2014, the Fund allocated the death benefit as follows: 52.5% to Masete and her two children, 22.5% to Mutsila, with the applicant’s five children together allocated the balance of 25%. The Fund based its allocation to Masete on its finding that she and her children were factually dependent on the deceased.
Mutsila commissioned a private investigator, who discovered that Masete was married to Malema Joseph Mphafudi in terms of customary law, and he was the biological father of Masete’s two children.
The investigation triggered a custody battle in the High Court. In the custody proceedings, Masete did not dispute her relationship with Mphafudi and confirmed he was the biological father of her children. Masete alleged that Mphafudi had failed to make meaningful contributions towards the maintenance of the children.
Determination by the Adjudicator
In May 2014, Mutsila lodged a complaint with the Pension Funds Adjudicator. The basis for the complaint was that Masete was neither married to the deceased nor factually dependent on him, and that Masete’s children were not dependent on the deceased.
The Fund asked the Adjudicator to place the complaint on hold until the conclusion of the custody proceedings involving Masete’s children, and to allow it to submit further information thereafter.
In September 2014, before the custody proceedings were finalised, the Adjudicator issued a determination. The Adjudicator set aside the Fund’s allocation and ordered it to conduct a proper investigation to determine the deceased’s dependants and allocate the death benefit accordingly. The Adjudicator made findings that the Fund had failed to carry out a proper investigation, including that it had not verified Masete’s dependency and had ignored relevant evidence.
Decisions by the courts
The Fund took the Adjudicator’s determination on review to the High Court under section 30P of the PFA. It sought a declaratory order that it had conducted a proper investigation to determine the deceased’s beneficiaries and sought to have the Adjudicator’s determination set aside.
The High Court dismissed the application. It found that the Fund’s investigation was “insufficient, lacked particularity, vigour, openness and therefore the outcome of their deliberation [was] improper”. The High Court held that the Fund had failed to properly identify the deceased’s dependants before allocating the benefit.
The Fund appealed to the Full Court. The Full Court dismissed the appeal. It agreed with the High Court’s assessment of the Fund’s investigation. The Full Court observed it was not Mutsila’s responsibility to keep the Fund informed about Masete’s situation; rather, the Fund had an obligation to keep itself informed, particularly because it was aware of Mutsila’s objection to Masete’s dependency.
The Fund was granted special leave to appeal to the SCA. The SCA upheld the appeal. It held that the Adjudicator had infringed the Fund’s right to audi alteram partem by making adverse findings on the Fund’s investigation without affording it an opportunity to respond substantively to the complaint.
The SCA set aside the Adjudicator’s determination and reinstated the Fund’s original allocation. It held that both the High Court and the Full Court failed to recognise the essential issue, namely, whether Masete and her two children were factually dependent on the deceased.
A fund’s discretion: the legal framework
Justice Leona Theron, writing on behalf of the Constitutional Court, said section 37C “enjoins the trustees of the pension fund to exercise an equitable discretion”. A fund’s discretion is exercised in two principal ways: by deciding who are factual dependants, and by allocating and distributing the death benefit among the legal and factual dependants.
The Court described the three main stages a fund must follow when dealing with a death benefit under section 37C:
- The fund must “actively” investigate to identify and trace potential dependants and to assess each potential dependant’s degree of dependence on the deceased. The “burden to do so falls exclusively on the board of the fund.”
- The fund must make an “equitable distribution” of the benefit, taking into account relevant factors such as age, relationship with the deceased, extent of dependency, the deceased’s expressed wishes, and the financial position/earning capacity of the dependants.
- The fund must decide how to effect payment (for example, to a beneficiary fund for a minor).
The Court also reiterated established authority that although a fund’s discretion is wide, it is “heavily dependent on the factual circumstances” of each case, and “only if the exercise of discretion was unreasonable or improper may the decision be reviewed”.
Justice Theron quoted earlier SCA authority for the proposition that a board must take care when relying on evidence: “[Section 37C] imposes upon a board an obligation to check carefully that the information it has is accurate and to ensure that when it makes distributions the intended beneficiaries will be the persons who benefit from them.”
Why the Fund’s investigation fell short
It was common cause that when the Fund made the allocation decision in April 2014, it did not know that Masete was married to Mphafudi. The Fund was not aware that he was the biological father of her children, that he was still alive, and that he could support the children financially.
The Court held that the Fund’s investigation was not properly done. In Justice Theron’s words, the High Court had correctly concluded that the Fund’s investigation was “insufficient”, and the outcome of the Fund’s deliberation was therefore “improper”.
The Court recorded and relied on the Full Court’s finding that: “It was not Mutsila’s responsibility to keep the [Fund] informed of the situation with Masete and her children. It was the [Fund]’s obligation to keep itself abreast of the situation, especially as it was well aware that there was an objection to her dependency.”
The Court identified concrete respects in which the Fund’s inquiry fell short:
- The Fund relied on what it had been told (a lobola letter, relatives’ affidavits, and the funeral plan nomination), but there was no evidence it had independently verified whether Masete and her children were in fact dependent on the deceased for maintenance, or that it had established the true nature of the relationship between the deceased and Masete or her children.
- “When the Fund was confronted with evidence that cast doubt on the status of Ms Masete as a spouse of the deceased, it identified her as a factual dependant without further investigation.” The Court emphasised that the Fund’s identification of Masete and her children as factual dependants “was flawed in that it was not supported by credible evidence demonstrating that they were dependent on the deceased for maintenance”.
- The Fund did not produce evidence that the deceased had maintained Masete’s children (for example, by paying school fees or providing them with shelter) or that the Fund had satisfied itself as to the extent of any factual dependency.
The Court concluded that because the Fund had not established the extent of the factual dependency of Masete and her children – a central fact for making an equitable allocation – “the inadequate investigation regarding the extent of the factual dependency of Ms Masete and her children tainted the allocation and distribution decision”.
Check and verify
Justice Theron reiterated that a fund’s discretion is wide but must be exercised in a judicially compliant manner: a fund must check carefully the accuracy of the information it relies upon and must not be “too inclined to accept the correctness of one-sided information”. The Court applied this principle to the Fund’s reliance on unverified material and on the Fund’s apparent shortcut of treating Masete as a factual dependant when doubts had been raised.
The Court noted the Fund itself accepted that post-decision evidence (Mutsila’s investigation and the custody papers) “could have a direct impact” on the distribution – a concession the Court regarded as supporting the conclusion that the Fund’s pre-distribution investigation had been inadequate.
A new investigation
The Court set aside the Fund’s allocation and ordered that the matter be remitted to the Fund rather than substituted by the Court or remitted to the Adjudicator.
Substitution would not be appropriate because the Court was not in a position to place itself in the shoes of the Fund and make a fresh determination. If the matter were remitted to the Adjudicator, the Adjudicator would likely conclude that the Fund failed to conduct a proper investigation and therefore remit the matter to the Fund.
The Court directed the Fund to conduct its investigation afresh, considering all the relevant facts, and to identify the dependants and determine an equitable allocation. Dependency, as at the date of Mr Mutsila’s death, “is decisive”. The Court ordered that the Fund should conclude its investigation within three months from the date of the judgment.
The Court said the finding that the Fund failed to conduct a proper investigation justified awarding costs in favour of the applicant.
Click here to download the judgment.
