A lesson for divorcing couples on sharing pension assets
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WORDS ON WEALTH
A recent case to come before the Pension Funds Adjudicator shows how important it is that a divorce agreement is worded correctly when it comes to splitting retirement fund assets between divorcing spouses.
Since 2007, our financial legislation has followed the “clean-break” principle regarding a couple’s finances on divorce. This means that ongoing financial obligations – apart from the payment of maintenance, if part of the agreement – are avoided, and each partner can start life afresh through the immediate, and hopefully fair, splitting of the couple’s assets.
While this is often easier said than done, and there may be various loose ends that may take months to finalise after a divorce, the law is clear on retirement savings: a retirement fund – and that may be a pension, provident, preservation or retirement annuity fund – must pay the non-member spouse an agreed percentage of the member spouse’s “pension interest” if required to do so by a court order, calculated to the day of the divorce. (“Pension interest” is, in essence, the value of the accumulated savings at a particular date.)
Problems arise if there is a lack of understanding – by the divorcing parties and/or by the lawyer drawing up the agreement – of what is required for the divorce order to be enforceable.
Last week, the Financial Services Tribunal upheld a decision by the Pension Funds Adjudicator in a case that left a woman without the money she was expecting from her ex-husband’s retirement fund on his death.
Ms S complained to the adjudicator that her ex-husband’s retirement annuity fund had not acted in accordance with the divorce agreement the couple had drawn up on their divorce. Instead, after her ex-husband’s death in 2019, the entire benefit (two policies totalling more than R1.3 million) had been paid to his new wife (we’ll call her Ms X).
Ms S and her ex-husband were divorced in 2009 after being married for over 29 years. Neither of them, nor their lawyer who drew up the divorce agreement, apparently knew about the “clean-break” principle, which had been introduced into the legislation two years earlier. The agreement instead stated: “...the parties agree that on maturity of the retirement annuity, the plaintiff shall be entitled to 50% of the maturity benefits/value of the retirement annuity as at the date of such maturity. The plaintiff's 50% share of such benefits shall be paid ... into a banking account of the plaintiff's choice.”
When the complaint was forwarded to the retirement fund in question, it responded that it had acted by the book in allocating the death benefit to Ms X, and that Ms S’s divorce order was unenforceable in terms of section 37D of the Pension Funds Act. (This section of the Act describes under what circumstances a fund may make deductions from pension benefits, one instance being on the receipt of a divorce order.)
The Deputy Pension Funds Adjudicator, Matome Thulare, dismissed Ms S’s complaint against the fund, saying that, indeed, the divorce order was unenforceable: “The adjudicator cannot grant the complainant the relief that she seeks, because the court order does not cite the first respondent as a party to the proceedings. Granting the relief being sought would be tantamount to amending the order of the High Court. Therefore, the complaint should be dismissed.”
In other words, not only did the divorce order transgress the clean-break principle (which would have enabled Ms S to be paid out her share at the time of her divorce, 10 years earlier), but it did not name the fund, thus absolving it of responsibility.
This might sound unfair to Ms S, who is surely entitled to her share of the benefit. Theoretically, she could approach the High Court to amend the divorce order, or claim against the deceased estate. The trouble is, it may be too late to have any chance of success. I suppose Ms S could also go after the lawyer who drew up the unenforceable divorce order.
The lesson is that if you and your spouse are getting divorced, you need to ensure that the settlement order is correctly worded.
In an article some years ago by former Personal Finance editor Laura du Preez, the legal adviser at Glacier by Sanlam, Lize de la Harpe, was quoted as saying that the conditions to be fulfilled before funds and administrators may split pension assets can be summarised as follows:
- The divorce order must specifically state that the spouse who is not a member of the fund is entitled to a share of the pension interest, as defined in the Divorce Act;
- The divorce order must specify the non-member spouse’s share of the pension interest as a percentage or rand amount;
- The fund that has to deduct the share of the pension interest must be named or identifiable; and
- The fund must be expressly ordered to endorse its records and pay the share of the pension interest.
For couples married in community of property, the split would automatically be 50-50. However, for couples married out of community of property with accrual, the split is unlikely to be 50-50 if the member spouse had contributed to the retirement fund before the marriage. However, the order can only be made in terms of a percentage of the pension interest as at the date of divorce or a fixed rand amount. So you can order the fund to pay out, say, 40% of the pension interest, or to pay out X rands. What you cannot do is order the fund to calculate and pay out half of the amount accrued between the date of marriage and the date of divorce, which is how you would deal with other assets under this type of marriage regime.
If there are a number of retirement fund benefits from different providers, each fund and the share to be paid out by each fund must be specified in the divorce order.