Henré Prinsloo, Head of Employee Benefits at Momentum Corporate

A recent ruling by the Pension Funds Adjudicator is a reminder that when it comes to retirement fund benefits, a member’s written will or nomination form is not the final word.

Section 37C of the Pension Funds Act (24 of 1956) is a complicated and often misunderstood piece of legislation. The case that the Pension Funds Adjudicator ruled on, involved a dispute over who the beneficiaries of a R1.58 million estate should be. In this case, the late member’s ex-wife raised a complaint when their 18-year-old son was excluded from the retirement fund death benefit, as he had received the proceeds of a separate life insurance policy. The trustees had deemed his financial position did not require additional financial support from the fund’s death benefit.

Many South Africans assume that their retirement savings will be distributed exactly as stipulated in their will, or will automatically accrue to their spouse or children. However, the reality of Section 37C is quite different, placing responsibility on retirement fund trustees to ensure that death benefits are distributed equitably, with a primary focus on dependency.

The logic of legislative oversight

The intention behind Section 37C is social protection. Its purpose is to ensure that those who were financially dependent on a deceased member are not left destitute, regardless of what a nomination form might say.

This means that while a member may nominate a specific person to receive 100% of their benefit, the trustees are legally obligated to conduct an investigation. They must identify all legal and factual dependents such as spouses, children, life partners, and anyone else the member was financially supporting, and then allocate the funds based on fairness and the degree of need.

Why outcomes may differ from intentions

This legislative framework creates a protection gap between what a member perceives will happen and what actually occurs after their death. There are three key reasons why these outcomes are often different:

• Dependency is regarded as more important than nomination for benefits provided by the retirement fund: A nomination form is a guide for trustees for benefits , not a binding contract. If a member nominates a self-sufficient adult sibling but leaves behind a minor child or a financially dependent ex-spouse, the trustees are required to override the nomination to provide for those in greater need.

• The scope of the estate: It’s a common misconception that retirement benefits form part of a deceased person’s distributable estate. In reality, pension, provident, and retirement annuity benefits are governed by the Pension Funds Act, not the Law of Succession. Therefore, these benefits are paid directly to dependents or nominees and do not necessarily follow the instructions left in a will.  A further complication is that some employer-owned policies are administered through the retirement fund, but are not subject to the Pension Funds Act, and therefore do form part of the member’s estate.

• Product choice dictates the rules: Different financial products follow different rules of distribution. While death benefits provided by retirement funds fall under Section 37C, other benefits such as those arising from life insurance policies (including employer-owned policies that may be administered under the retirement fund) or certain types of living annuities may allow for direct beneficiary nominations that are not subject to trustee discretion. This can lead to a fragmented inheritance where different assets are distributed according to different legal standards.

Strengthening your legacy through alignment

The potential for conflict and financial strain on survivors is high when expectations don’t match the legal reality. S37C disputes remain among the top complaints received by the Pension Funds Adjudicator and are often subject to legal challenge. To mitigate these risks, a proactive approach to estate and retirement planning is required.

Protecting your dependents must mean more than just having a plan in place; it must mean having a plan that works in practice. This starts with aligning your beneficiary decisions across all your financial products and making sure you understand how each benefit will be distributed and taxed.

It’s not enough to simply sign a nomination form once and store it away. As your risk landscape changes – through marriage, divorce, or the birth of children – your nominations must be updated to reflect your current dependency circle. While you cannot opt out of Section 37C, providing trustees with clear, updated information and a documented rationale for your choices can help them make an equitable decision that aligns more closely with your wishes.

The bottom line is that retirement planning is not just about the accumulation of wealth; it’s also about the responsible distribution of it. Understanding the role of Section 37C is key to ensuring greater stability for your dependents in the future.

ENDS

Ed’s note: EBnet is hosting a webinar on 22 April at 9am, to discuss Section 37C and some of the more tricky cases. Register here.