The challenges of S37C for retirement fund trustees
- The reality is that Section 37C death claims can be a long and difficult exercise
- This can also be an expensive exercise, which is ultimately paid for by other retirement fund members
Section 37C was introduced into the Pension Funds Act in 1976.
It is viewed as a social security measure to ensure that dependants of deceased retirement fund members are not left without financial support, which in turn feeds into a policy objective of alleviating a potential burden on the state.
Section 37C achieves these objectives by:
• Overriding the rules of pension funds, legislation, a member’s freedom of testation and a member’s wishes (contractually or otherwise) as to whom he or she may want to benefit from a death benefit lump sum.
• Prescribing a scheme of distribution.
• Placing the distribution burden on trustees to allocate, at their discretion, the death benefit lump sums to dependants and nominees of a deceased member.
We know from the FSCA’s Interpretation Ruling 1 of 2020 (RF) and Communication 10 of 2020 (RF) that they are finally looking to address some of the difficulties with the interpretation of Section 37C. This initiative is welcomed and, as can be seen from the numerous S37C cases referred to the Pension Funds Adjudicator (PFA), Financial Services Tribunal and the courts, there are many issues with how this section is interpreted. One example is the interpretation of dependant and spouse. Even if you are able to identify the dependants, there are still difficulties as to the date on which an individual must be a dependant in order to receive a death benefit. The May 2019 Supreme Court of Appeal case of FundsAtWork v Anna Marie Guarnieri & others brought this issue to the fore. Whilst on the face of it the decision may seem logical, the reality is that it brings with it many more practical difficulties that boards of trustees may need to deal with.
In the Guarnieri matter, the deceased fund member was survived by his estranged spouse, two adult children and his mother. The mother in this matter was identified as one of the dependants by the board of trustees along with the estranged spouse and children. Four days prior to the allocation of the member’s death benefit, the mother passed away. The board of trustees was unaware of her death and allocated 42% of the death benefit to her.
The deceased member’s widow challenged the distribution. The PFA set the ruling aside and referred the matter back to the board of trustees of the fund, who proceeded to make the same allocation as before. The late member’s widow challenged this in the High Court, which also set the allocation aside. The fund lodged an appeal with the Supreme Court of Appeal (SCA), which dismissed the appeal.
The issue in the case was at what stage must someone be a dependant to participate in a distribution i.e. date of member’s death or date of allocation decision (trustee decision as to who the dependants are) or date of distribution (date of payment)? The fund argued that it should be on the date of death. The SCA disagreed. It decided as follows:
“Given all these considerations of language, purpose and practicality, in my view, the proper construction of s 37C(1)(a) is that the time at which to determine who is a dependant for the purpose of distributing a death benefit is when that determination is made, and furthermore, the person concerned must still be a beneficiary at the time when the distribution is made. That is the only way in which to ensure that the persons identified as dependants are those whose interests the section seeks to protect.”
This view effectively means that not only should the mother have been a dependant at the time of death, but also at the time of the allocation decision and at the time of distribution. Whilst many may see this as logical (surely the dependant still needs to be alive to receive the benefit?), unfortunately in my view it fails to properly consider the practical implications for retirement funds in enforcing such a view, which has now become a binding precedent.
The reality is that Section 37C death claims can be a long and difficult exercise to identify dependants and conduct extensive investigations into the financial implications/needs of all possible dependants. This can also be an expensive exercise, which is ultimately paid for by other retirement fund members. Larger retirement funds can deal with hundreds of death claims in a month. How will these funds ensure that an identified dependant is still a dependant at the time of allocation and distribution (i.e. reconfirm all information)? Furthermore, changes in financial circumstances, and not solely the death of a dependant, can result in an identified dependant no longer being viewed as a dependant.
The question then is whether a board of trustees can rely on their current processes (or any processes for that matter) to ensure compliance with the precedent set in the Guarnieri SCA case?