THE UNCOMFORTABLE PROCESS OF A DEATH CLAIM ON A RETIREMENT FUND
This article explores the dark side of retirement funds, shedding light on their inner workings and the legislation that governs them.
Retirement funds are excellent structures with many benefits. However, in this article, I aim to explore the “dark side” of retirement funds, shedding light on their inner workings and the legislation that governs them.
For the sake of clarity, I want to point out that the following products are considered retirement funds governed by the Pension Funds Act, particularly regarding how proceeds are handled upon the death of the retirement fund member:
Pension and provident funds
Pension and provident preservation funds
Retirement annuities (RAs)
In all these cases, trustees are responsible for the management and distribution of benefits. They have the ultimate say over which benefits are paid out and to whom.
Living annuities are regulated by several acts, including the Pension Funds Act, the Income Tax Act, and the Long-term Insurance Act. Concerning the distribution of capital upon the member’s death, the Long-term Insurance Act sets out the relevant rules. Both life and living annuities are issued by a licensed life assurance company. This ensures that the issuer of the annuity will honour your wishes regarding the distribution of benefits. There will be no trustee intervention.
To illustrate the complexities and potential pitfalls to avoid, I will again refer to two current scenarios we are handling.
Scenario 1
A prominent community member and company executive – whose retirement fund we advise – recently passed away after a terminal illness. She was a foreign national and had no will, either South African or foreign. Fortunately, she had nominated beneficiaries on her company’s unapproved group risk cover; but she had not done so on her retirement fund.
By definition, unapproved risk cover is a stand-alone death and disability cover that pays out to nominated beneficiaries. Approved risk cover is owned by the retirement fund and pays out to the retirement fund, where the trustees must decide on the final distribution of the proceeds.
Initially, this may not appear to be an issue. However, trustees of retirement funds only regard nominated beneficiaries (called nominees) as a reference for who may ultimately receive the retirement fund benefits.
Trustees are legally obliged under the Pension Funds Act to identify all financial dependents, whether they were nominated or not, of a retirement fund member and to distribute funds based on their financial dependency. Their responsibilities extend further and require them to determine:
Legal dependants – such as spouses, ex-spouses, and all children (including children born out of wedlock);
Factual dependants – individuals who were financially dependent on the member at the time of death, even if there was no legal obligation to provide support (this may include family members, friends, or others); and
Future dependants – any person who may have become financially dependent on the member in future, like an unborn child or a mentally incapacitated sibling.
The trustees have twelve months to identify all dependants, and if no clear financial dependants are found at the time of the member’s death, this period will be extended. There is little room for error, and they must ensure that everyone has been identified and verified before allocations can be made. After payout, little can be done to correct a mistake.
Trustees depend on various sources to collect as much information as possible. This includes analysing wills and scrutinising the Liquidation and Distribution account of estates.
At this point, I must mention the following:
Nominated fund beneficiaries are not automatically recognised as financial dependants. If no financial dependants can be identified, the nominated beneficiaries will be considered to receive payouts; however, this will only occur after the estate’s creditors have been settled. This is regardless of the fact that retirement funds are excluded from your estate. If the estate lacks liquidity, nominated beneficiaries may receive nothing. Financial dependants always take precedence and will be settled first, followed by creditors, and finally nominated beneficiaries.
In the case of the mentioned member who passed away, the trustees’ responsibilities would have been significantly simplified if she had a will. Her status as a foreign national introduces additional complications, as the trustees now need to search more broadly for financial dependants. Numerous “family members” have contacted us regarding the proceeds, but it remains unclear how these will be managed. Without a will, there is no executor, which is causing chaos among various “family members” competing for that role. I am grateful that we do not have to deal with this complicated situation (although we are the first point of call).
We wait with bated breath to see how this unfolds. At the moment, it is a mess…
Scenario 2
In this case, everything was in order. Our client was very organised and meticulous. Sometimes too meticulous, which can create its own challenges due to complicated structures, loan accounts, and offshore trustees… but that’s a story for another article.
In this scenario, the deceased held, among other assets, two sizeable RAs, with his spouse clearly nominated as the beneficiary (the nominee).
The challenge we are facing with this client’s death is not the difficulty of identifying financial dependants, but rather the process that must be followed. As mentioned in the previous case, the trustees of RAs have an obligation under the Pension Funds Act to trace all current and potential future financial dependants. This involves a process that many find intrusive and invasive, and some even consider it borderline insulting. The line of questioning includes asking uncomfortable questions to make sure there are no unknown children, ex-wives, or mistresses or any other potential financial dependant.
Remember that trustees are required to identify all factual, legal, and potential future dependants, as stipulated by the Pension Funds Act.
We need to recognise that the process begins as soon as the administrators receive notice of the member’s death. This may occur just a few days after the member’s passing, while the spouse and children are still mourning. Even under the best circumstances, the experience is unlikely to be pleasant. Beyond the process itself, the time required to finalise the benefits can add to the frustration.
Remember, trustees have a minimum of twelve months to investigate the existence of dependants. This does not mean they must take the full twelve months; however, if a complaint arises from a disregarded dependant after a benefit has been paid out, the trustees may (or will) be considered in breach of their fiduciary duty if their investigation was shorter than twelve months.
In this case, the family felt insulted and accused the administrator of questioning the deceased’s integrity. They were also unhappy that the process took a full year to conclude (the spouse eventually received 100% of the benefit, and the RAs were transferred to a living annuity). The trustees and administrator were simply doing their job. We requested an enquiry, and all telephonic transcripts were analysed, with no missteps found.
Solution:
Ensure you have a valid will. The will serves as a guide for the trustees of retirement funds. Remember that a will cannot nominate beneficiaries for retirement funds; this must be done directly with the retirement fund.
Nominate beneficiaries (nominees) for your retirement funds and, where applicable, for your group risk benefits. Try to avoid approved risk benefits if possible, as their payout processes are cumbersome and lengthy. Unapproved risk benefits pay out to nominated beneficiaries almost immediately, without trustee involvement.
Living annuities pay out benefits according to nominated beneficiaries. To ensure specific individuals receive your retirement fund benefits, convert them to living annuities as soon as possible after retirement or even before retirement if possible.
Discuss the process that trustees will follow with your loved ones. Don’t let them experience the cold face of retirement fund legislation.
Take care, plan well, and be prepared.
