Lize de la Harpe – Senior Legal Advisor at Sanlam
The Pension Laws Amendment Bill 2024 was adopted by the National Council of Provinces (NCOP) on 26 April 2024. The bill makes provision for the implementation of the two-pot system which is due to come into effect on 1 September 2024, significantly changing the current retirement regime.
In this article we will do a quick recap on what the two-pot system entails, the background to the aforementioned bill and the impact thereof on the interpretation of “pension interest” in the context of divorces.
Background
In a nutshell, as of 1 September 2024 all funds will consist of three components, being (1) a vested component, (2) a retirement component and (3) a savings component.
The accumulated retirement benefit (as at 31 August 2024) will form the vested component – the current retirement regime will continue apply to this component. To put it differently, the current rules for contributions to funds will continue to apply to the vested component (i.e.: member access to the pension fund benefits at termination of employment as well as the right of preservation fund members to utilise a once-off withdrawal). No further contributions can be made to the vested component after the effective date of these changes, except for members of provident (preservation) funds who were 55 years or older on 1 March 2021 and remained in the same fund.
All contributions made on or after 1 September 2024 will be split as follows –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 contributions to the retirement component prior to retirement.
Amendments to pension fund laws
The initial Pension Funds Amendment Bill (“the first Bill”) was released for comments on 9 June 2023 and public hearings were held on 19 September 2023. It was then revised in accordance with the public comments received.
The first Bill was subsequently withdrawn, and a new bill titled the Pension Laws Amendment Bill (“the second Bill”) was published which, in addition to amendments to the Pension Funds Act, also included amendments to other pension funds laws, namely the Post and Telecommunications Related Matters Act, the Transnet Pension Fund Act and the Government Employees Pension Law.
The public hearing on the second Bill took place in the National Council of Provinces Select Committee on Finance (SeCoF) on 19 April 2024. National Treasury responded to comments and the SeCoF completed the clause-by-cause deliberations. The second Bill was passed on 22 April 2024 and returned to National Assembly for concurrence.
Conflict between Pension Funds Act and the Divorce Act
Section 37D(1)(d)(i) of the Pension Funds Act currently 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).
This section of the Pension Funds Act cannot be interpreted in isolation. The reason for this is simple – the common law position is 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 reason therefore is that 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:
- 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. 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.
- 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 the law currently stands, a fund must calculate the pension interest payable to the non-member spouse in line with the definition thereof in the Divorce Act, which definition remains unchanged.
Despite the enabling provisions set out in the Divorce Act (summarised above), the second and final Bill includes a new definition of “pension interest” which conflicts with the term as defined in the Divorce Act, i.e.: the new definition widens the application to the pension benefits of a member who has already left service or has retired – which is legally not possible.
The wording of section 7(7) of the Divorce Act 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 in that act, which definition is worded such that the member spouse must still hold a pension interest in the fund as at the date of divorce. If a member has already left service or retired, this is no longer the case (*there is ample case law confirming this).
ENDS
