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6 June 2014
Section 37D(1)(d) of the Pension Funds Act formerly allowed for deductions (in terms of a divorce order as contemplated in section 7(8) of the Divorce Act) to be made from the member’s benefit or minimum individual reserve.
The said section was recently amended by the Financial Services Laws General Amendment Act. As of 28 February 2014, Section 37D(1)(d) of the Pension Funds Act states that a registered fund may:
In essence, the deductions in section 37D in respect of maintenance and divorce orders as well as income tax have been extended to the
“member’s interest and capital value of a pensioner’s pension after retirement”.
The question now raised is whether
“capital value of a pensioner’s pension after retirement“ includes annuities purchased post-retirement, for example an Investment-Linked Living Annuity (ILLA). If so, does this mean a non-member spouse may now claim from such annuities as part of a divorce order?
No, it does not. Let’s look at the applicable legislation as a whole:
As a general rule a fund may only make a deduction from a member’s benefit if such a deduction is allowed in terms of the Pension Funds Act, the Income Tax Act and the Maintenance Act. This general rule is, however, subject to the exceptions set out in section 37D.
As stated above, Section 37D(1)(d)(i) as amended now reads that a registered fund may deduct from “a member’s or deferred pensioner’s benefit, member’s interest or minimum individual reserve, or the capital value of a pensioner’s pension after retirement as the case may be) any amount assigned from such benefit or individual reserve to a non-member spouse in terms of a decree granted under section 7 (8) (a) of the Divorce Act, 1979 (Act No. 70 of 1979)”.
Now let’s look at the following key terms (as highlighted in bold above) which are defined in the Pension Funds Act:
When a member retires and purchases a member owned annuity, he is no longer a member of the fund – he has effectively received all the benefits which may be due to him from the fund and his membership will thereafter be terminated in accordance with the rules of the fund.
Furthermore, the words
“the capital value of a pensioner’s pension after retirement” specifically refers to
“pensioner” as quoted above, which in turn refers to
Even if one could argue that this aims to include a pension paid by the fund (i.e. a fund owned annuity), where the fund still has obligations to the member, it would still not have any force or effect until the definition of
“pension interest” in the Divorce Act is amended accordingly to include this.
It’s also interesting to note that section 37D(6) of the Pension Funds Act has been amended only to add the reference to
Section 7(7) of the Divorce Act provides that a 'pension interest' (as defined in section 1) will be deemed to be a part of the assets at divorce:
The wording of section 7(7) makes it clear that the non-member spouse is only entitled to a portion of the member spouse’s notional benefit if it qualifies as “pension interest” as defined.
“Pension interest” is defined in section 1 as referring to the benefits to which such member would have been entitled in terms of the rules of the fund if his
membership of the fund would have been terminated on the date of the divorce on account of his resignation from his office, i.e. the member spouse must still hold a
pension interest in the fund as at the date of divorce.
If a resignation benefit had already become payable to him before the divorce, he could not again be deemed to become entitled to a resignation benefit at the date of divorce. He would therefore no longer have a “pension interest” for the purposes of sections 7(7) and 7(8) of the Divorce Act read together with section 37D(4)(a) of the Pension Funds Act.
The Financial Services Law General Amendment Act has
not made any amendments to the definition as quoted above. Accordingly, annuities purchased post-retirement remain excluded.
It might have been the intention of the legislature to close the “loophole” whereby someone can retire from a fund and purchase an annuity thereby effectively excluding it from the scope of section 7(7) and 7(8) of the Divorce Act. However, until the definition of
“pension interest” in section 1 of the Divorce Act is accordingly amended, the changes will not affect annuities purchased upon retirement.