A recent High Court decision relating to the apportionment of a death benefit of a member of the Transnet Retirement Fund is relevant to all retirement fund members because the fund’s rules and section 37C of the Pension Funds Act (PFA) are almost identical with regards to death benefits.
Almost all retirement funds in South Africa are regulated by the PFA. Some of the funds that are not subject to the PFA are state-guaranteed funds established under specific statutes, including the Government Employees Pension Fund and the funds established in terms of the Transnet Pension Funds Act.
Background to the case
The deceased was survived by “XN”, whom he married in terms of customary law in 1988, and his common law wife, “TN”.
At the time of his death in 2018, the deceased had 10 children, five born from his relationship with XN, two born from his relationship with TN, two adult sons born of another prior relationship, and a minor child born from a relationship with the sixth respondent.
At the time of his death, the member was employed by Transnet and was a member of the Transnet Retirement Fund. In October 2000, the member completed a beneficiary nomination form in which he nominated the following people to receive a portion of the death benefit: XN (60%), two of his children with XN (10% each), and two of his children with TN (10% each).
Notwithstanding the nominees and percentages stipulated in the nomination form, in March 2019 the fund resolved to apportion the death benefit of R3.94 million as follows: 40% each to XN and TN; 3.66% each to the adult sons born of another prior relationship; and 12.69% to the minor child.
The fund’s rule on death benefits
XN sought to review and set aside the apportionment before the High Court in Durban.
In her application, XN contended that the trustees ignored the nominees and their benefits as stipulated in the nomination form, and the trustees were not legally permitted to do so because they were bound by the form.
The trustees disagreed and argued that the nomination form was nothing more than a “non-binding guide” and “the deceased’s wishes are but one factor to be considered in the exercise of the discretion expressly conferred on it”.
They said the fund was entitled to make an independent apportionment of the deceased’s death benefit to his qualifying dependents as defined in terms of the fund’s rules, and specifically Rule 10.4(iii). This rule deals with the fund’s powers when confronted with a member who has nominated beneficiaries to be paid all or part of the death benefit but where the member also had dependants.
Rule 10.4(iii) states: “If a member has a dependant and the member has also designated in writing to the fund a nominee to receive the benefit or such portion of the benefit as is specified by the member in writing to the fund, the fund shall within 12 months of the death of such member pay the benefit or such portion thereof to such dependant or nominee in such proportions as the trustees may deem equitable: provided that this paragraph shall not prohibit the fund from paying the benefit, either to a dependant or nominee contemplated in this paragraph or, if there is more than one such dependant or nominee, in proportions to any or all of those dependants and nominees.”
The High Court said this provision is similar to section 37C(1)(bA) of the PFA regarding the awarding of death benefits.
Fund has a wide discretion
The court found that Rule 10.4(iii) permits the fund to make any distribution to nominees or dependents that it deemed equitable.
The fund’s obligation was analogous to a qualifying fund’s obligations under section 37C(1)(bA) of the PFA, which the Supreme Court of Appeal (SCA) has expressed to be the following:
“The effect of section 37C(1)(a), as read with the definition of ‘dependant’, is to require a fund, within a period of 12 months from the death of the member, to identify the dependants of the deceased who may potentially qualify for an equitable distribution from the deceased’s death benefit in terms of section 37C. Having once identified the potential class of dependants, the board of the fund is vested with a large discretion to determine, in the light of its assessment of their respective needs, in what proportions the death benefit will be distributed among the class of dependants.”
That the fund has a large or wide discretion does not mean that its discretion is unfettered. It meant that if the fund honestly applied its collective mind to the facts placed before it and neither took into account irrelevant, improper or irrational factors nor reached a decision that no reasonable decision-maker properly directing itself could have reached, there is no legal basis on which to set aside or otherwise interfere in its decision, Acting Judge Warren Shapiro said.
Freedom of testation is restricted
Rule 10(4)(iii) plainly endowed the fund with a discretion to make distributions to nominees or dependents that were equitable. The provisions of the rule (or, in analogous situations, section 37C of the PFA) take precedence over any nomination by a member of a fund, Acting Judge Shapiro said.
It has long been held that the section 37C of the PFA – “and, by parity of reasoning, Rule 10(4)(iii)” – was intended to serve a social function and was enacted to protect dependency even over the wishes of the deceased.
The section specifically restricts freedom of testation in order that no dependants are left without support. A fund is expressly not bound by a will, nor is it bound by the nomination form, whose contents are merely a guide to the trustees.
“It is therefore not a sustainable ground of review that the fund applied its own discretion in making the allocations to the deceased’s dependants and ignored the nomination form. It was obliged to do so,” Acting Judge Shapiro said.
When can a reviewing body intervene?
The court held that it could not step in and set aside or otherwise interfere with the fund’s decision simply because it may not agree with that decision. The test has often been applied by the Pension Funds Adjudicator as follows:
“It should be noted that even if I may not necessarily agree with the decision of the board, that in itself is not a ground for setting aside the board’s decision. This is because it is not my role as a reviewing tribunal to decide on what is the fairest and most generous distribution. The test in law is whether the board has acted rationally and arrived at a proper and lawful decision.”
A fund is therefore required to take into account relevant considerations and ignore irrelevant considerations – only if it does not do so, will the reviewing body have grounds to intervene.
Acting Judge Shapiro held that the fund did take into account relevant factors, which included not only the financial circumstances of XN and her children, but also the financial circumstances of TN, the adult children, and the prospects of the minor child. He could not point to the consideration of any irrelevant factors by the fund.
The court accordingly held that the fund’s decision was rational and reasonable, and it had acted equitably in making it.
Implications for retirement fund members
Commenting on the case, Werksmans Attorneys said the decision reaffirms the courts’ approach to the awarding of death benefits and their apportionment.
“Front of mind for retirement fund members must be that although their nomination form should indicate their intended death benefit beneficiaries, the form is not binding on a fund and instead a fund is required by virtue of section 37C of the PFA to look wider and apportion the death benefit equitably among the deceased member’s dependants in terms of its wide discretionary powers,” said directors Armand Swart and Robert Driman.
Furthermore, the Pension Funds Adjudicator or a court faced with a review of the fund’s decision can interfere in such decision only on the very limited grounds of it not meeting the test of being a rational or lawful decision.
Retirement fund members should therefore be mindful of who qualifies as their dependants.
Members who want to protect certain dependants (or other persons) by ensuring they receive a death benefit should not rely solely on their nomination form. Instead, these members should ensure that such persons are adequately provided for by another estate planning mechanism, such as by making them a beneficiary of a life insurance policy, or of a will, or by way of an inter vivos or testamentary trust, Werksmans said.
