Retirement funds provide financial security after the working years. If a retirement fund member dies, and a lump sum death benefit becomes payable, the trustees of the fund are responsible for distributing the death benefit fairly, in accordance with section 37C of the Pension Funds Act (section 37C). These death benefits do not form part of the deceased estate, and section 37C overrides any provision made in a will relating to them.
The primary aim of section 37C is to protect those who were financially dependent on the member. This includes legal dependants e.g. minor children, spouses with maintenance orders; factual dependants e.g. someone supported without legal obligation; and future dependants e.g. unborn children and other persons the member would have become legally liable to support had the member not died.
The importance of providing written, clear nominations of beneficiaries
While trustees are not bound by beneficiary nominations, members should submit clear, written nominations of beneficiaries and keep them updated. These nominations help guide the trustees, who must conduct an investigation to identify all dependants and nominees, and establish various determining factors before equitably allocating the death benefit.
Providing complete and transparent information assists trustees reduce delays within the 12-month distribution window dictated by section 37C. It also helps to avoid legal complications: In the absence of written nominations and if no dependants are identified, the benefit may be paid into the estate, potentially triggering adverse tax implications and higher estate duty and executor fees.
The death claims process: What dependants/beneficiaries need to do when a member passes away
Although death is a sensitive matter, it helps dependants immensely to have information about the death claims process before the retirement fund member passes away, as summarised below:
1. Notification. Dependants, a financial adviser or the executor must notify the retirement fund of the member’s passing by submitting the relevant forms and documents.
2. Await the trustees’ decision. Trustees must conduct a thorough investigation to identify all dependants and nominees. This may involve contacting family members, dependants, and other third parties, and can take up to 12-months from notification of the death.
3. Submit objections and complaints. Any party who disagrees with the trustees’ decision can submit a complaint to the principal officer of the fund and, if unresolved, to the Pension Funds Adjudicator. Adjudicator decisions may be reviewed by the High Court.
4. Choose a payment option. Beneficiaries may take the benefit as a cash lump sum, purchase an annuity, or combine both. Trustees may also pay benefits into a nominated trust or beneficiary fund on behalf of a dependant or nominee, particularly for minors or vulnerable individuals.
Case study: The importance of regularly updating beneficiary nominations
The below case study highlights the importance of regularly updating beneficiary nominations to reflect current family circumstances.
Background: A retirement fund member passed away suddenly without updating their written beneficiary nominations, which were submitted a decade earlier. The member had since divorced and remarried, with children from both marriages. The original nomination listed only the first spouse and children to receive the death benefit.
Conflict: The trustees faced a complex situation. The member’s first spouse and their children claimed a significant portion of the benefit, arguing not only that they were financially dependent on the member, but also that the member had nominated them to receive the full death benefit, i.e. they were relying heavily on the written nominations, arguing that the member never intended to allocate any of the benefit to the member’s second spouse or children from that marriage. Meanwhile, the second spouse and children – who were not mentioned in the written nominations – also claimed dependency.
The outdated nomination led to disputes and delays in the distribution process, and frustration on the part of the member’s first spouse and children from that marriage, who were under the impression that the written beneficiary nominations were all that mattered. This lack of clarity led to conflict with the member’s second spouse and children.
Outcome: After a thorough investigation, the trustees distributed the benefit between both families, taking the nominations into account and considering the financial needs and dependency of all persons. This decision, while equitable, led to dissatisfaction among the beneficiaries, particularly the first spouse, who felt that their family’s share was insufficient, especially when considering the member’s nominations. The first spouse lodged a complaint with the Adjudicator, who upheld the trustee’s decision as compliant with section 37C.
Lesson: Keeping nominations up-to-date could have gone a long way towards preventing, or reducing the frustration and conflict among loved ones.
