Lize de la Harpe – Senior Legal Advisor at Sanlam
On 4 March 2024 the Financial Sector Conduct Authority (Authority) published its final interpretation ruling on the application of section 37C of the Pension Funds Act, 1956 (PFA).
The purpose of this communication is to inform stakeholders that the Authority has withdrawn FSCA Interpretation Ruling 1 of 2020 (RF) and replaced it with FSCA Interpretation Ruling 1 of 2024 (RF): Interpretation and application of section 37C of the Pension Funds Act, 1956.
Death benefits payable in terms of the Pension Funds Act
Before going any further, we first need to refresh our memories and take a closer look at section 37C of the PFA and exactly when it applies.
When a member of a retirement fund dies before reaching retirement age (and if the rules of the particular fund permits) the lump sum benefit which becomes payable (hereinafter referred to as the “death benefit”) must be paid to the member’s dependants and/or nominees.
Section 37C of the PFA regulates the payment of death benefits and gives the board of trustees discretion, to be exercised fairly and reasonably, insofar as the distribution of death benefits is concerned. Section 37C applies despite anything to the contrary contained in any law or the rules of a fund. Therefore, in the event that a registered rule is in conflict with section 37C, section 37C prevails.
The primary objective of section 37C is to ensure that those persons who were dependant on the deceased member are not left destitute after his/her death, irrespective of whether or not the deceased was legally required to maintain them.
Section 37C imposes three primary duties on the Board of trustees, namely to:
- Identify and trace “dependants” (as defined in section 1 of the PFA) and those persons, if any, who have been nominated by the deceased member;
- Make benefit allocations on a fair and equitable basis; and
- Determine an appropriate mode of payment of the death benefit.
Background
Previously, Information Circular PF No. 2 of 2010 provided that the provisions of section 37C of the PFA would only be applicable to lump sum benefits which become payable by the fund in terms of its rules as a result of the death of a member.
It further provided that when a member exits the fund as a result of resignation, dismissal, retrenchment or retirement, the relevant withdrawal or retirement benefit accrues in terms of the rules of a fund. Should the member thus die after the date of the accrual of the withdrawal or retirement benefit, but before payment can be made, the legal nature of the benefit would not have changed – thus the provision of section 37C of the PFA would not be applicable.
In 2017 the long-awaited retirement fund default regulations were published, followed by the PFA Guidance Notice No. 8 of 2018 – “Guidance on the application of default regulations contained in regulations 37, 38, 39 and 40”.
Paragraph 4.6 of the Guidance Note dealt with paid-up members and sub-paragraph (e) thereof read as follows:
“(e) Section 37C of the Act is applicable to a paid-up member’s benefit, in the same manner that it would apply to any other death benefit payable by a fund.”
In March 2020, following an extensive consultation process between the Authority and the industry, the Authority issued Interpretation Ruling 1 of 2020 on the application of section 37C of the Act.
Interpretation Ruling 1 of 2020 formally withdrew Information Circular PF No 2 of 2010 and stated that section 37C of the PFA will apply to paid-up members’ benefits, deferred retirees’ benefits (as defined in the Interpretation Ruling) and unclaimed benefits, where no election to withdraw has been made by the member prior to such member’s death.
Final FSCA Interpretation Ruling 1 of 2024 (RF)
Since the publication of Interpretation Ruling 1 of 2020, it was brought to the attention of the Authority that certain aspects of this ruling required amplification and revision, specifically in respect of unclaimed benefits. As such, on 14 August 2023 the Authority published a draft Interpretation Ruling for public consultation.
The Authority has now published the final Interpretation Ruling 1 of 2024 (RF). In its final form, explains the distinction to be drawn between:
- a benefit becoming payable upon the death of a member, in which instances section 37C would apply; and
- a benefit that has already become payable before the member’s death, which falls outside the ambit of section 37C even if the benefit has not yet been paid to the member upon the death of the member.
A key distinction is the cause of the vesting of the benefit. The phrase “payable …upon the death of a member” in section 37C means that it is the death of the member that causes the benefit to be payable. However, where a benefit has already become payable before the member’s death, it falls outside the ambit of section 37C even if the benefit has not yet been paid to the member. If a member has become entitled to claim a benefit and the fund received a written instruction from the member to pay out or to transfer the benefit prior to the member’s death, then it is that written instruction that caused the benefit to be payable (not the death of the member) and accordingly section 37C will not be applicable. Put differently, the benefit vested in the member at the moment when they provided the instruction to the fund and on vesting it became payable. The fact that the member may have subsequently passed away does not alter the fact that the right to payment of the benefit had already vested and had been payable prior to the member’s death.
The same principle applies in relation to unclaimed benefits. An unclaimed benefit by its nature is a benefit that has vested because it is due and payable to the person entitled to it. The nature of the unclaimed benefit does not change when it is paid into an unclaimed benefit fund. If the person entitled to the benefit is traced, the benefit must be paid to them. The unclaimed benefit is not due and payable because of the death of a member, and accordingly section 37C will not be applicable when that member dies. Where the person entitled to an unclaimed benefit dies, the benefit, which has vested in that person, must be paid to that person’s estate and must not be dealt with in terms of section 37C.
Regulation 38(1)(b)(i) of the Default Regulations provides that if a member has not made an election to cause the pay out or transfer their benefits upon leaving the service of a participating employer before retirement, such member is a paid-up member. A paid-up member and a deferred retiree is a “member” as defined in the PFA – as such, section 37C is applicable to a paid-up member and a deferred retiree “upon their death”. However, when a paid-up member or deferred retiree instructs the fund to pay them or to transfer their benefit or to pay it as a retirement benefit, the benefit becomes payable. If the paid-up member or deferred retiree dies after that instruction to the fund is received and before the benefit is so dealt with, the benefit must be paid to their estate.
Conclusion
The FSCA Interpretation Ruling 1 of 2024 (RF) and the consultation report are both available on the Authority’s website at www.fsca.co.za. The ruling came into effect on the date of publication thereof, being 4 March 2024.
ENDS
