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By Lize de la Harpe, 5 December 2016
Earlier this month the Supreme Court of Appeal ("SCA") delivered a surprising judgment. The SCA determined that, for marriages in community of property that are dissolved by divorce, there is no need to refer to the pension interest when dividing up the joint estate – it interpreted section 7(7)(a) to mean that pension interest is automatically deemed to be part of the joint estate where parties are married in community of property.
The article below looks at the impact of this judgement and what this means for the non-member spouse.
Before going any further, let's first recap.
A marriage in community of property is the automatic matrimonial property regime for most marriages in South Africa. From the start of the marriage all assets and liabilities are incorporated into a single, joint estate and all assets accumulated during the marriage also become part of the joint estate. Both spouses are joint owners and are thus entitled to an equal share of the joint estate, subject to certain exceptions.
When a court grants an order of divorce, the community of property between spouses comes to an end and the joint estate is divided. The Divorce Act governs divorce proceedings in South Africa. Section 7(1) of the Divorce Act specifically empowers the court to make an order in accordance with a written agreement between the parties (so-called "settlement agreement"). Alternatively, in the absence of an agreement between the parties, the court is empowered to order division of the joint estate equally. In doing so, the court will have to determine what assets the joint estate consists of. Assets typically include moveable property (cars, furniture), immoveable property (houses, land) and then less obvious assets such as shares, loan accounts and
It is extremely important that one understands what is meant by "pension interest". Section 1 of the Divorce Act defines pension interest as follows:
"pension interest", in relation to a party to a divorce action who — (a) is a member of a
pension fund (excluding a retirement annuity fund), means the benefits to which that party as such a member would have been entitled in terms of the rules of that 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;(b) is a member of a
retirement annuity fund which was bona fide established for the purpose of providing life annuities for the members of the fund, and which is a pension fund, means the
total amount of that party's contributions to the fund up to the date of the divorce, together with a total amount of annual simple interest on those contributions up to that date, calculated at the same rate as the rate prescribed as at that date by the Minister of Justice in terms of section 1 (2) of the Prescribed Rate of Interest Act, 1975 (Act No. 55 of 1975), for the purposes of that Act;"
Simply put, pension interest refers to the
notional benefit to which such member would have been entitled in terms of the rules of the fund if his membership of the fund terminated on the date of the divorce on account of his resignation from his office.
common law position has always been that the member spouse's pension interest does not form part of the joint estate at all. Therefore, prior to the introduction of section 7(7) of the Divorce Act, the non-member spouse did not have a recognised interest in the pension of the member spouse where such benefit had not accrued yet. This meant that, when determining the patrimonial benefits in the joint estate upon divorce, the pension interest of either spouse could not be taken into account whatsoever. The reason therefore is because pension interest refers to an interest which a member of a fund has in benefits which may accrue in the future, but which does not yet constitute an asset vesting in his estate. In other words, it refers to the amount held by the fund as provision for its future liability towards the member.
The Divorce Amendment Act 7 of 1989 inserted sections 7(7) and 7(8) into the Divorce Act, thereby introducing the concept of the sharing of pension interest upon divorce. As stated above, section 7(7)(a) makes provision for the pension interest (as defined in section 1) of a party to a divorce action to be deemed to be an asset in his estate for the purposes of determining patrimonial benefits at divorce.
This section reads as follows:
"7)(a) In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled,
the pension interest of a party shall, subject to paragraphs (b) and (c),
be deemed to be part of his assets".
Section 7(7) is a deeming provision - it provides a mechanism whereby parties can gain access to the pension interest of either of them for the purpose of achieving an equitable distribution of their assets during divorce proceedings. However, section 7(7)
does not detract from the common law position - pension interest is not automatically part of the joint estate. A spouse seeking a share in the pension interest of the other spouse must apply and obtain an appropriate court order during the divorce proceedings. Section 7(7)(a) must therefore be
invoked during the divorce proceedings so as
to deem such pension interest to be an asset in the joint estate when determining the patrimonial consequences of the divorce. It is only by means of this deeming provision that a non-member spouse would be able to secure a part of the member spouse's pension interest.
Put simply: pension interest is not automatically shared by virtue of the existence of a joint estate. Pension interest will only be shared once deemed an asset for the purpose of division of the joint estate upon divorce.
Over the years the courts have been quite inconsistent in the interpretation of section 7(7):
In the matter of
Maharaj v Maharaj 2002 (2) SA 648 (D) the parties were married in community of property and got divorced in 1996. The divorce order was silent on the division of the joint estate, meaning that the joint estate had to be divided equally. The question before the court was whether the First Respondent's pension interest formed part of the joint estate, to be divided equally between the First Respondent and the Applicant. The First Respondent argued that at the time of the divorce, the Applicant failed to obtain an order in terms of Section 7(8)(a) of the Divorce Act. The court, however, did not agree and held that when the joint estate is to be divided, it is proper to take into account as an asset in the joint estate, the value of the pension interest held by one of them as at the date of divorce.
The parties were married in community of property. On 25 May 2012 their marriage was dissolved. The divorce order granted by the trial court incorporated a provision that
"... the deed of the settlement between the parties... [annexed thereto] is made an order of the court." The parties' deed of settlement in turn provided, inter alia, that their joint estate would be divided equally between them. The appellant asserted that they incorporated this clause into their settlement agreement because at that stage they could not agree on the method of division of the joint estate. The court a quo held in favour of the respondent, stating that in the absence of a court order by the divorce court declaring the pension interest of the member spouse part of the joint estate, such pension interest did not form part of the joint estate. Aggrieved with the outcome, the appellant appealed to the SCA.
The primary issue in this appeal concerned the proper interpretation of s 7(7) and (8) of the Divorce Act - whether a non-member spouse in a marriage in community of property is entitled to the pension interest of a member spouse in circumstances where the court granting the decree of divorce did not make an order declaring such pension interest to be part of the joint estate.
After considering section 7(7)(a) and 7(8) of the Divorce Act, the court held that the intention of the legislature in inserting section 7(7)(a) into the Divorce Act was to enhance the patrimonial benefits of the non-member spouse over that which, prior to its insertion, had been available under the common law. In paragraph 26 the SCA held as follows:
 ... The language of s 7(7)(a) is clear and unequivocal. It vests in the joint estate the pension interest of the member spouse for the purposes of determining the patrimonial benefits to which the parties are entitled as at the date of their divorce. Most significantly,
the legislature's choice of the word "shall" coupled with the word "deemed‟ in s 7(7)(a) is indicative of the peremptory nature of this provision. The section creates a fiction that a pension interest of a party becomes an integral part of the joint estate upon divorce which is to be shared between the parties…"
The SCA also distinguished between the automatic application of section 7(7)(a) and an order in terms of section 7(8) – it interprets the latter as purely necessary in order to create the mechanism in terms of which the Pension Fund of the member is statutorily bound to effect payment of the portion of pension interest (as at date of divorce) directly to the non-member spouse as provided for in s 37D(1)(d)(i) of the Pension Funds Act 1956 ("PFA").
So in a nutshell, the SCA found that for marriages in community of property that are dissolved by divorce, there is no need to refer to the pension interest of the non-member spouse when dividing up the joint estate – the pension interest of each party is automatically included in the deed of settlement that is made an order of the court. The SCA did, however, point out that a specific order in terms of section 7(8) of the Divorce Act is still required if spouses want a retirement fund to make a deduction and payment to the non-member spouse in terms of section 37D(1)(d)(i) of the PFA.
Whether or not one agrees with the SCA's reasoning on this aspect, the
Ndaba determination is a Supreme Court of Appeal judgment, which means it carries the weight of legal precedent. My advice to parties embarking on divorce thus remains to rather be safe than sorry. Pension funds are very strictly regulated, so one should rather follow a conservative approach and specifically plead division of the pension interest in terms of sections 7(7) and 7(8).
Remember, the fund in question will
only be in a position to deduct a portion of a member's pension interest in terms of an order granted in terms of section 7(8) of the Divorce Act. Section 37A of the Pension Funds Act protects a member's benefit and states that a fund may only make a deduction from such benefit if such a deduction is allowed in terms of the
Pension Funds Act, the Income Tax Act and the Maintenance Act.
Section 37D(1)(d)(i) of the Pension Funds Act makes provision for divorce as an exception and states that a registered fund may deduct any amount assigned to a non-member spouse in terms of a divorce order granted in terms of
section 7(8)(a) of the Divorce Act (or any order made by a court in respect of the division of assets of a marriage under Islamic law). Section 7(8)(a) of the Divorce Act, in turn, specifically enables the court granting a decree of divorce to order the fund in question to make payment of a portion of the member's "pension interest" to the non-member spouse and add an endorsement to the member's records.
Section 7(8) of the Divorce Act, read together with section 37D(4)(a) of the Pension Funds Act, sets out certain conditions with which a divorce order
must comply in order for the fund concerned to be able to give effect to a non-member spouse's claim. These conditions can be summarised as follows:
If the divorce order does not strictly meet the above requirements, it will not be in compliance with the Divorce Act read together with the Pension Funds Act, and will therefore
not be enforceable against the fund. The fund in question has no discretion in this regard since it is strictly bound by the provisions of the Pension Funds Act.