Two Pot System changes
As of 1 September 2024, all funds will consist of three components, being (1) a vested component, (2) a savings component and (3) a retirement component.
The accumulated fund credit (as at 31 August 2024) will form the vested component to which the old rules will continue to apply. All contributions made after 1 September 2024 will be split – one third to the savings component with the remaining two thirds to the retirement component. Members will be allowed to make one withdrawal per tax year from the savings component, subject to prescribed minimums. Members will not be allowed to access the retirement component before retirement.
One of the biggest changes of this new regime is the member’s options at termination of employment (by reason of resignation or retrenchment). Before 1 September 2024, at termination of employment, members of a pension fund or provident fund could take their entire fund benefit as a cash lump sum payout. From 1 September 2024 onwards this is no longer the case. Members will only have access to the savings component and the vested component at termination of employment – not the retirement component, which must stay locked in until retirement.
The Pension Funds Act, 1956
As we know, retirement funds are strictly regulated. Section 37A of the Pension Funds Act protects a members’ pension benefits 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 Tax Administration Act, the Income Tax Act and the Maintenance Act.
Section 37D of the Pension Funds Act sets out certain exceptions to the above rule, one of which relates to divorce orders.
To be enforceable against the fund, the divorce order must meet very strict requirements as set out in section 37D of the Pension Funds Act read together with the applicable sections of the Divorce Act.
The Divorce Act, 1979
Section 37D of the Pension Funds Act cannot be interpreted in isolation. The reason for this is simple – the common law position has always been that the member spouse’s pension interest does not form part of a persons’ estate. 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 estate upon divorce, the pension interest of either spouse could not be taken into account whatsoever.
The Divorce Amendment Act, 1989 inserted sections 7(7) and 7(8) into the Divorce Act thereby introducing the concept of the sharing of pension interest upon divorce:
a) Section 7(7)(a) makes provision for pension interest as defined in section 1 of the Divorce Act to be deemed to be an asset in the member’s estate for the purposes of determining patrimonial benefits at divorce. It thus 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.
b) Section 7(8)(a), in turn, 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 make an endorsement in the member’s records.
As we can see from these two sections, the non-member spouse is only entitled to a portion of pension interest as defined in the Divorce Act.
Section 1 of the Divorce Act defines a pension interest in a fund (other than a retirement annuity fund) as the benefits to which such a member would have been entitled in terms of the rules of the fund if his membership of the fund had been terminated on the date of the divorce on account of their resignation from office.
The Pension Funds Amendment Act, 2024
Section 37D(1)(d)(i) of the Pension Funds Act has been amended to state that a registered fund may deduct from a members’ individual account any portion of pension interest assigned to a non-member spouse in terms of a divorce order.
A new definition of “pension interest” has been added to the Pension Funds Act itself which is worded as follows:
“’pension interest’, in relation to a court order granted under section 7(8)(a) of the Divorce Act, or a court order granted in respect of the division of assets of a marriage according to the tenets of a religion, means, in relation to a party who is a member of a fund, that member’s individual account or minimum individual reserve, as the case may be, determined in terms of the rules of that fund, on the date of the court order;”
A members’ individual account refers to the member’s fund credit (i.e.: contributions plus returns minus allowable expenses).
The problem
When approaching a court for a claim against your spouse’s pension interest as part of your divorce, the court will turn to the provisions of the Divorce Act. Any order assigning a portion of the member’s pension interest to the non-member spouse as granted in terms of section 7(8) will thus refer to the definition of pension interest as set out in section 1 of the Divorce Act – not the Pension Funds Act.
To put it differently: in making an award, the court will calculate such pension interest in line with the definition of pension interest as set out in the Divorce Act. And that definition remains unchanged.
As explained above, the Divorce Act defines a pension interest in a fund (other than a retirement annuity fund) as the amount the member would be entitled to had his membership to the fund terminated on the date of divorce due to termination of office.
From 1 September 2024, this will be the amount available in the savings component and vested component only – not the retirement component.
This was clearly not the intention of the legislature. The industry (commenting via various industry bodies) highlighted the above concern to Treasury while the Pension Funds Amendment Act was still in bill form. In an attempt to address this contradiction, the Pension Funds Amendment Act includes a trumping provision stating that “in the event of a conflict between the provisions of this Act and the Divorce Act, the provisions of this Act prevail”.
Conclusion
Ideally, the Divorce Act should have been amended to align it with the Two-Pot changes. The legal uncertainty that spouse’s and members alike now face is whether or not, in calculating the pension interest payable, the fund in question will use the definition as per the Divorce Act or the new definition as per the Pension Funds Amendment Act. It still remains to be seen how the courts will interpret this anomaly.