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The distribution of death benefits in a retirement fund under Section 37C of the Pension Funds Act

When a member of a retirement fund dies before reaching retirement age (and if the rules of the particular fund permit), the lump sum benefit which becomes payable (hereinafter referred to as the “death benefit”) must be paid to the member’s dependants and/or nominees.

Section 37C of the Pension Funds Act 24 of 1956 (“the Act”) regulates the distribution and payment of lump sum benefits payable on the death of a member of a pension fund, provident fund, pension and provident preservation fund and retirement annuity fund.

The primary objective of section 37C is to ensure that those persons who were dependent on the deceased member are left with adequate support, irrespective of whether or not the deceased was legally required to maintain them.

Section 37C imposes a duty on the trustees of the fund to allocate and pay the benefit in a manner that it deems fair and equitable. This duty requires that the trustees identify the dependants and nominees of the deceased member, effect an equitable distribution of the benefit amongst the said dependants and nominees, taking into account relevant factors, and to select an appropriate mode of payment for the benefit.

In terms of section 37C the Board has the duty to conduct a proper investigation to determine all the “dependants” of the deceased member. What this means is that the trustees cannot merely follow the beneficiary nomination made by the member during his/her lifetime – the Board must establish who the persons are who fall within the ambit of “dependant” as defined in the Act. Once the Board has identified all the dependants the next stage of the enquiry would be to examine the needs of each dependant so that it can make an equitable distribution amongst them.  In doing so, it has to consider all the relevant facts to the exclusion of irrelevant facts. Once the trustees have established the needs of each identified dependant they will distribute the death benefit accordingly.

Who will qualify as a dependant?

  • Persons the deceased was legally liable to maintain, such as children, parents, and grandparents.
  • Spouses, including permanent life partners, civil union partner, customary marriage or religious union partners.
  • Factual dependants, such as same sex partners, step-children, foster-children, illegitimate children, adopted children, unborn children.

To whom can the death benefit payments be made?

  • To the nominee or dependent.
  • To a guardian or caregiver.
  • To a beneficiary fund.
  • To a trust.

As regards trusts, the Trustees of the Fund may no longer nominate a trust as the beneficiary of the benefits unless the trust is also nominated by either:

  • the deceased member, or
  • a major dependant or nominee; or
  • a person recognized in law or appointed by a Court as the person responsible for managing the affairs or meeting the daily care needs of a minor dependant or nominee or a major dependant or nominee who is not able to manage his affairs or meet his daily care need; or
  • a person recognised in law or appointed by a Court as the person responsible for managing the affairs or meeting the daily care needs of a dependant or nominee; or
  • a Beneficiary Fund registered in terms of the Act.

What happens if no beneficiaries were nominated by the deceased?

If the member left dependants, the dependants will be paid. If the member left no dependants the benefit will be paid to the member’s deceased estate or the Guardian’s Fund.

In practice problems can arise where there are in fact multiple dependants and the member only nominated one dependant. In this instance, payment will be made to all the dependants in such proportions as may be deemed equitable by the trustees.

If a non-dependant is nominated as a beneficiary payment will only be made 12 months after the death of the member, since the trustees want to ensure that there are no dependants.

Where a non-dependant is nominated and there are other dependants, the trustees must pay the benefit to the dependant and/or the nominated beneficiary in such proportions as they deem equitable.

How will the death benefit be awarded to minor children?

  • Paid to the legal guardian,
  • Paid to the minor in instalments;
  • The death benefit will be placed in a trust,
  • Paid into a Beneficiary Fund.

In conclusion, section 37C overrides the freedom of testation, and the board of management is not bound by the wishes of the deceased as expressed in the nomination form. For this particular reason, the death benefit subject to the exceptions outlined in section 37C is excluded from the estate of a deceased member, and placed under the control of the retirement fund. The board is not bound by the last testament of the deceased or the nomination form. Although the deceased may have expressed an intention to benefit a certain nominated beneficiary in his nomination form, this does not necessarily imply that the whole amount of the benefit will in fact be awarded to him, because the deceased’s intention as contained in his nomination form is only one of the factors taken into consideration when allocating a death benefit.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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