Breaking up is hard to do, or is it? – The clean-break principle explained

October 1st, 2013
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By Clement Marumoagae

This article discusses how spouses married in community of property deal with their pension benefits on divorce. It will be shown that, initially, the pension interest of a member of a pension fund was not regarded as an asset in the joint estate, but the position was changed by the 1989 amendment to the Divorce Act 70 of 1979 (the Act). The 2007 amendments to the Pension Funds Act 24 of 1956 (PFA), which brought about the ‘clean-break principle’ when spouses divorce, will also be discussed to show that these amendments did not apply to all pension funds in South Africa; hence members of the excluded pension funds have approached the courts in order to force their funds to implement the clean-break principle.

1989 amendments to the Act

The clean-break principle can be described as a right or, at the very least, the­ entitlement of the non-member spouse who is married in community of property to receive immediate payment or transfer of the portion of the other spouse’s pension interest allocated to him or her when the couple divorces. Initially, pension interest that non-member spouses would be entitled to on divorce was not regarded as part of the joint estate of spouses married in community of property. As a result, prior to August 1989, the amount held by a fund as provision for its future liability towards a member could not be taken into account in determining the value of the member’s estate on divorce because the provision comprised assets that belonged to the fund rather than to the member (R Hunter, J Esterhuizen, T Jithoo and S Kumalo The Pension Funds Act: A Commentary on the Act, Regulations, Selected Notices, Directives and Circulars (Johannesburg: Hunter Employee Benefits Law (Pty) Ltd 2010) at 725).

It was held in Old Mutual Life Assurance Co (SA) (Pty) Ltd and Another v Swemmer 2004 (5) SA 373 (SCA) that ‘[i]t would appear that, prior to 1 August 1989, the “interest” which a spouse who was a member of a pension fund had in respect of pension benefits which had not yet accrued was generally not regarded as an asset in his or her estate or, where the marriage was in community of property, as an asset in the joint estate. This meant that, in determining the patrimonial benefits to which the parties to a divorce action were entitled, the “pension expectations” of the member spouse were not taken into account’ (at para 17).

However, this position was changed by the amendments to the Act through the Divorce Amendment Act 7 of 1989. These amendments allowed some relief to a spouse from whom the member was divorced who might otherwise receive nothing from the marriage. In 1989, subss 7(7) and (8) were inserted into the Act to allow the member spouse’s pension interest to be regarded as an asset in his or her estate that can be taken into account when dividing the joint estate on divorce.

Section 7(7)(a) of the Act provides that: ‘In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall, subject to paragraphs (b) and (c), be deemed to be part of his assets.’ The Act now entitles ‘the court granting a decree of divorce’ in respect of a member of a pension fund, to make an order that ‘any part of the pension interest of that member which, by virtue of subsection (7), is due or assigned to the other party to the divorce action concerned, shall be paid by that fund to that other party when any pension benefits accrue in respect of that member’ (s 7(8)(a)(i)).

Labe J in De Kock v Jacobson and Another 1999 (4) SA 346 (W) (at 349G – H) held that ‘there was no reason in principle why the accrued right to the pension should not form part of the community of property existing between the parties prior to their divorce’. He further argued that there was no logical reason why both the components of the pension right should not form part of the joint estate (at 350G).

It is worth noting that these provisions envisage an award to the non-member spouse of any part of the member spouse’s ‘interest’ calculated as at the date of the divorce, but with effect from some time in the future when the pension benefit accrues to the member spouse. As such, once the pension benefit has accrued, the provisions of s 7(7) and (8) are no longer applicable (the De Kock case at 349F – G).

It is important to note that, once the benefit has accrued to the member before the spouses divorce and the member defers the pension benefit in the fund, thus becoming a deferred member of the fund, the provisions of the Act will not apply. This is because, as a deferred member, such a spouse no longer has a pension interest in the fund. In Eskom Pension and Provident Fund v Krugel 2012 (6) SA 143 (SCA) the Supreme Court of Appeal held that the non-member spouse could claim her share of the deferred benefit when the deferred member spouse turned 55 and the benefit accrued to him (at para 55).

However, even though the legislature tried to resolve the matter through the amendment, this issue is still a major cause of conflict between divorcing and divorced spouses. Nonetheless, the courts ‘have made strides’ in the interpretation of this difficult issue (C v C (GNP) (unreported case no 27836/06, 7-9-2007) (Raulinga AJ). Accordingly, as the law stands today, a pension interest is an asset of the joint estate of spouses in a marriage in community of property (the C case). This entails that the pension interest of a member of a fund automatically falls into the joint estate of that member and his or her spouse if they are married in community of property.

The same applies if the spouses are married out of community of property subject to the accrual system, if the pension benefits were not expressly excluded in the antenuptial contract before the marriage. This means that either spouse has a claim against the pension fund of his or her spouse on divorce. The court granting a decree of divorce is empowered to order that the non-member spouse be paid out a portion of his or her spouse’s pension fund (Gumede v President of the Republic of South Africa and Others 2009 (3) SA 152 (CC) at para 9).

In order for the court to make such an order, the party claiming a 50% share in the other party’s pension fund must indicate the name of the member spouse’s pension fund clearly in the pleadings. It is important that it becomes one of the prayers sought in the pleadings, failing which the fund will not pay out.

Introduction of the clean-break principle

The clean-break principle for private sector retirement fund benefits on divorce was introduced by an amendment to the PFA, which took effect on 1 November 2008. However, the PFA does not apply holistically and most public pension funds do not fall in its ambit. As such, the clean-break amendments to the PFA did not apply to public pension funds such as the Government Employees Pension Fund (GEPF), Transnet Pension Fund, Telkom Pension Fund and Post Office Pension Fund as well as the Temporary Employees Pension Fund, Associated Institutions Pension Fund (AIPF), and the Associated Institutions Provident Fund. Most of these funds are regulated by their own legislation (ie, the Post and Telecommunication-related Matters Act 44 of 1958 and the Government Employees Pension Law Proclamation 21 of 1996).

Section 4(1) of the PFA provides that every pension fund shall apply to the registrar for it to be registered under the PFA. Section 4A of the PFA further makes provision for those funds to which the state contributes financially to apply to be registered in terms of the PFA. Before such funds can seek registration, the Minister of Finance must first by regulation provide for a management board for the pension fund. Secondly, the Minister must consent to the pension fund making application for registration in terms of s 4.

However, s 4A (3) makes it clear that if these conditions are not met, the provisions of the PFA, shall not apply to pension funds to which the state contributes financially (The Retired University of Natal Staff Association v The Associated Institutions Pension Fund and Another (unreported case no PFA/KZN/27/98, 11-11-1998) at 9).

It is therefore evident that the PFA does not prohibit any pension fund from registering; it actually invites pension funds to register with it in terms of s 4. However, certain funds choose not to register, even though their specific statutes make provision for registration in terms of the PFA. For instance, s 13(1) of the Transnet Pension Fund Act 62 of 1990 provides that ‘the Registrar of Pension Funds may, on request by the fund, register the fund in terms of section 4 of the Pension Funds Act,1956, and may, for the purposes of such request, regard the Transport Pension Fund as a “pension fund organisation” as defined in section 1(1) of that Act’. After such registration the whole of the PFA shall become applicable to the fund. It is not entirely clear why pension funds regulated by their own statutes, especially public pension funds, do not register in terms of the PFA. It might be argued however, that the reason might be historical more than anything else or to serve some governmental purpose.

The clean-break principle was therefore initially restricted to funds governed by the PFA, which sparked controversy and raised constitutional concerns. The matter was brought before the Western Cape High Court in Wiese v Government Employees Pension Fund and Others [2011] 4 All SA 280 (WCC), where the difficulties previously experienced by non-member spouses of members of the GEPF who are married in community of property on divorce were highlighted. The GEPF law, as it was, did not give effect to the clean-break principle and it was challenged on the basis of the equality provision of the Constitution on the ground that it did not afford non-member spouses of members of the GEPF the same advantages afforded by the PFA’s clean-break principle provisions to non-member spouses of members of funds subject to the PFA. However, the court was advised that the legislature was in the process of amending the GEPF law in order to introduce, among others, the clean-break principle.

Even though the court found the challenged GEPF law provisions to be unconstitutional, it did not read the clean-break principle provisions of the PFA into the GEPF as was requested by the applicant, but instead gave the legislature 12 months to remedy the defect. This decision was then taken to the Constitutional Court for confirmation of a declaration of constitutional invalidity. However, the court held that it was not in the interests of justice to pronounce on the validity of the GEPF or the appropriate constitutional remedy on appeal because substantive cause of the complaint by the applicant had been removed by legislative intervention.

The resolution of the validity of the GEPF and the appeal after that intervention will therefore have no practical effect on the parties. The substantive issues between the parties have thus become moot (Wiese v Government Employees Pension Fund and Others 2012 (6) BCLR 599 (CC) at paras 23 and 24). The legislature then promulgated the Government Employees Pension Law Amendment Act 19 of 2011, which amended the GEPF law and s 3 of the amended Act introduced, among others, the clean-break principle to the non-member spouses of members of the GEPF who were divorcing, making it possible for them to be allocated their portion of the pension interest immediately on divorce.

However, even though the GEPF law was amended, there are some public pension funds that did not amend their own legislation by introducing the clean-break principle. The same matter arose in Ngewu and Another v Post Office Retirement Fund and Others 2013 (4) BCLR 421 (CC), in which the court was called on to address the anomaly arising from the failure to afford divorcees of members of the Post Office Retirement Fund similar rights and advantages afforded to former spouses of members of funds subject to the PFA and the Government Employees Pension Law Amendment Act. The court found the provisions of the Post Office Act dealing with the administrative and financial matters of the fund to be unconstitutional to the effect that they omitted the clean-break principle. However, the declaration of invalidity was suspended for eight months to allow the legislature to cure the defect.

The assigned portion of the pension benefit is deemed to accrue, subject to certain provisos, on the date of the divorce order. At that time, the non-member spouse can choose to be paid the assigned amount directly or to have it transferred to an approved pension fund.

Conclusion

It is high time that all public pension funds that have not yet considered having their specific legislation that do not make provision for the clean-break principle amended, to submit them to parliament for them to be amended accordingly. Expensive litigation can be avoided in this regard because the Constitutional Court has shown that if a particular statute is not in line with s 9 of the Constitution it will be declared unconstitutional and invalid.

I am of the opinion that the Ngewu case should not have been taken to court in the first place, if after the Wiese case, the Post Office Retirement Fund caused its law to be amended accordingly to follow the lead of the GEPF. The Post Office Retirement Fund did not have a case and the best they could do was to settle at the Constitutional Court. Van der Westhuizen J in the  Ngewu case held that ‘at the hearing, the legal representatives of the parties indicated that they were able to reach an agreement and submitted a proposed order to the court. This order included a suspended declaration of invalidity of the omission of the clean-break principle from the Post Office Act. In addition, an extensive reading-in of s 24A of the GEPF embodying the clean-break principle into the Post Office Act was proposed’ (see para 15).

Clement Marumoagae LLB LLM (WITS) LLM (NWU) AIPSA Diploma Insolvency law (UP) is an attorney at Marumoagae Attorneys in Johannesburg.

This article was first published in De Rebus in 2013 (Oct) DR 38.