DIVORCE BENEFITS

Ringing the changes

Spouses, who aren’t members of retirement funds, will receive more equitable treatment on divorce. NALEEN JERAM sets out a guide on the overhauled system for fund trustees, members and divorce practitioners.

Jeram...much better

Payments by retirement funds of divorce benefits, awarded by court order, have been subjected to several rulings by the Pension Funds Adjudicator and the courts. Amendments to the Pension Funds Act, and other tax-related changes, now achieve clarity.

A divorce court is entitled to award pension interest (deemed to form part of the assets for distribution on divorce) to one of the parties. Without a divorce order, parties are not entitled to share in the pension benefit of their spouses whilst the member-spouse remains in service and a member of the fund. Under these circumstances, the non-member spouse simply acquires a claim against the fund for the member spouse’s pension interest.

Occupational pension and provident funds

Pension interest, in relation to an occupational fund, is the notional benefit the member would have received under the rules of the fund if his/her membership had terminated on the date of divorce because he/she had resigned from service. Put differently, the pension interest in a pension or provident fund is essentially the withdrawal benefit the member spouse would have notionally received at date of divorce had he/she resigned from service.

Retirement annuity funds

The pension interest of a member is the total contribution made to the fund up until the date of divorce, plus simple interest. Last November the definition of pension interest was modified; in effect, the total amount of annual simple interest payable may not exceed the return achieved by the fund on the pension interest.

Preservation funds

Previously, the Divorce Act made no provision for the meaning of ‘pension interest’ in a preservation fund. Now the pension interest is the benefit to which the member would have been entitled, in terms of fund rules, had his/her membership been terminated on date of divorce.

When ‘pension interest’ accrues

Any pension interest assigned to the non-member spouse in terms of a divorce order granted prior to 13 September 2007 is specifically deemed to accrue to this spouse on 13 September 2007. Regardless of when the order was issued, following amendment to the Act, the non-member spouse is now entitled to receive his/her share of the pension interest in accordance with the court order.

Timeframes

Within 45 days of receiving the divorce decree, the fund must request the non-member spouse to elect a cash payment or transfer of the benefit to another fund. The non-member spouse then has 120 days to make the election and to furnish the fund with details of how payment is to be effected.

Once the fund has received this information, it will have a further 60 days to make payment or transfer the divorce benefit to another fund nominated by the non-member spouse.

If the non-member spouse fails to make an election or to identify a fund for transfer of the benefit, the fund must pay the due amount directly to the non-member spouse within 30 days of the 120-day period’s expiry.

If the fund cannot reasonably ascertain how to pay the non-member spouse, then the fund must (until it receives a proper instruction on how to effect payment to the non-member spouse), retain the divorce benefit amount and any return on the amount earned from the expiry of the 120-day period until it receives proper instruction for payment.

The Act confirms that the non-member spouse is not a member or beneficiary of the fund. He or she will only be entitled to the fund return (interest) on the divorce benefit amount, calculated from expiry of the 120-days until date of payment. No other or further rate of interest or growth will be applied.

Rank of competing claims

Where there are multiple court orders against a member spouse, and subject to the overall maximum of the member’s pension interest, the hierarchy of claims against the member’s pension interest is:

• The home loan or guarantee granted prior to the under-mentioned court orders;
• An order in terms of the Maintenance Act;
• Any decrees of divorce or for the dissolution of a customary marriage.

Identification and citation of fund

To have a valid divorce order claim against the fund, it is unnecessary to join the fund as a party to the divorce proceedings. Neither is it necessary any longer to cite the registered name of the fund, provided that the fund is identifiable from the divorce order.

Nevertheless, for the sake of clarity, practitioners involved in divorce proceedings are advised to obtain the correct name of the fund from the administrator, the participating employer or the Registrar.

Conclusion

Recent amendments to the Act have created a more equitable treatment of the divorce benefit for the non-member spouse than was previously the position. Practitioners involved in divorce actions should familiarise themselves with the changes and ensure that their clients are aware of the ramifications.