Clarifying the term pension fund in the Divorce Act and the Pension Fund Act

July 1st, 2020
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On 3 December 2019 the Supreme Court of Appeal (SCA) delivered a judgment in the case of Nailana v Nailana (SCA) (unreported case no 714/2018, 3-12-219) (Swain JA (Petse DP, Leach and Mbatha JJA and Dolamo AJA concurring)) in which the SCA found that the reference to a ‘pension fund’ in the Divorce Act 70 of 1979 includes both pension and provident funds.

Development of the law with regard to the sharing of pension benefits

More than 30 years ago, the Divorce Act was amended by inserting ss 7(7) and 7(8), which provided for the sharing of pension benefits upon divorce. This followed a recommendation by the South African Law Reform Commission (the SALRC), where in its report the SALRC highlighted the inequalities of non-sharing, especially in relation to women.

However, following this amendment the non-member spouse could not release their share of the pension interest because payment thereof could only occur when the member spouse exited the fund. This prejudiced the non-member spouse severely.

To effect the so called ‘clean-break’ principle, ss 37D(4)(a) and 37D(4)(d) of the Pension Funds Act 24 of 1956 were inserted. Section 37D(4)(a) provides that ‘the portion of the pension interest assigned to the non-member spouse in terms of a decree of divorce … is deemed to accrue to the member [spouse] on the date’ of divorce while s 37D(4)(d) provides that ‘any portion of the pension interest assigned to the non-member spouse in terms of a decree of divorce … granted prior to 13 September 2007’ is ‘deemed to have accrued to the member [spouse] on 13 September 2007’.

In the watershed case of GN v JN 2017 (1) SA 342 (SCA) the SCA clarified the proper interpretation of ss 7(7) and 7(8) of the Divorce Act. In the GN v JN case a settlement agreement, which was incorporated in an order of divorce granted by the regional court provided that ‘the joint estate shall equally be divided between the parties’. Thereafter, the appellant approached the High Court seeking a declaratory order that she and the respondent were entitled to an amount equal to 50% of each other’s pension interest. The High Court dismissed the application. The SCA found that by virtue of s 7(7) of the Divorce Act, the pension interests of both parties automatically falls into the joint estate for purposes of determining the patrimonial benefits to which the parties are entitled to at the date of divorce. The SCA further found that s 7(8) of the Divorce Act provides ‘a mechanism in terms of which the pension fund of the member spouse is statutorily bound’ to effect payment of that portion of the pension interest assigned to the non-member spouse, directly to the non-member spouse.

Therefore, having regard to the judgment in the GN v JN case, it is imperative to obtain an order in terms of s 7(8) of the Divorce Act, from the court granting the decree of divorce that the pension fund concerned makes payment of the non-member spouse’s share of the pension interest directly to the latter. Absent an order in terms of s 7(8) of the Divorce Act, the non-member spouse will have to look to the member spouse for the payment of their share of the pension interest, as the court order would not be enforceable against the pension fund. In the case of a so called ‘blanket division order’ the pension interest of the member spouse, therefore, forms part of the joint estate. However, the non-member spouse would not be able to enforce the same against the pension fund concerned.

At the hearing of the appeal in the GN v JN case, it was further submitted by counsel for the respondent that the appellant’s belated application in the court a quo was doomed to fail, as no such order can be granted post the granting of the divorce order, even at the instance of a liquidator. The SCA held that it was not necessary to decide this point as the counsel for the appellant accepted that it would not be competent for that court to decide the issue for the first time on appeal. However, in the relevant footnote to the judgment, the following was said: ‘8 … The wording of s 7(8)(a) would, however, seem to restrict the grant of such an order to the “court granting a decree of divorce”. But for the present purposes it is unnecessary to express a definite conclusion on this question’.

The Nailana case

In the case of Nailana the SCA clarified the proper interpretation of the term ‘pension fund’ in the Divorce Act.

As far as the facts are concerned, the appellant, Mrs Nailana and the respondent, Mr Nailana’s marriage was dissolved by the North Eastern Divorce Court on 6 December 2004. They entered into a settlement agreement, which was incorporated in the divorce order. The relevant part of the order reads as follows:

‘That the joint estate shall be divided and 50% of the plaintiff’s right and interest in the University of the North Pension Fund when it becomes due and payable to plaintiff be made out to defendant, calculated to date of this order’.

At the time the order was granted, the appellant could not release her share of the pension interest because payment of the pension interest to the non-member spouse could, as previously mentioned, only occur when the member spouse would exit from the fund.

Consequently, in 2011 the appellant lodged a claim with Alexander Forbes Financial Services, the fund administrator of the University of the North Pension Fund, whose name was subsequently changed to the University of Limpopo Retirement Fund, for the payment of the money owed to her in terms of the divorce order.

The response of the fund administrator to the claim of the appellant was that the appellant was only paid from the pension fund section because:

‘The court order clearly states that we should pay from the pension fund section only, should the parties [have] intended for the payment to be deducted from the pension fund and provident fund section the court order should have clearly stated that the defendant (Mrs Nailana) is entitled to a portion from the pension and provident fund section.’

Consequently, the appellant instituted application proceedings in the Polokwane Regional Court, for an order varying the order granted by the divorce court, to read as follows:

‘50% of the plaintiff’s rights and interest in the University of Limpopo Retirement Fund, (Pension and Provident Section), be paid out to the defendant, calculated as on date of divorce, … and that the University of Limpopo Retirement Fund, (Pension and Provident Section), be ordered to effect such payment to the defendant as on date of divorce, in terms of section 7(7) read with (8) of the Divorce Act 70 of 1979.’

The application was opposed by the respondent on three grounds:

  • Firstly, that it was agreed between the parties that 50% of his pension interest would accrue to the appellant, but that it was never agreed that the appellant would have a share in his provident fund.
  • Secondly, that ss 7(7) and 7(8) of the Divorce Act only dealt with a pension benefit and not a provident fund.
  • Thirdly, that the definition of ‘pension fund’ in s 1(1) of the Pension Fund Act, did not include a provident fund.

The regional court dismissed the application with costs, inter alia, on the basis that it found that the Pensions Fund Act provides separate definitions for ‘pension preservation fund’ and ‘provident preservation fund’ and consequently the one did not include the other.

Aggrieved by the dismissal of her application, the appellant appealed to the Limpopo Division of the High Court, Polokwane. The appellant submitted that the divorce order did not state that the appellant was entitled to 50% of the respondent’s pension interest in the ‘pension fund section’, but that she was entitled to 50% of the respondent’s pension interest in the University of the North Pension Fund, which at all relevant times was the one and only fund, albeit that its name was subsequently changed to the University of Limpopo Retirement Fund. Therefore, the administrator of the fund was bound to make payment from the pension fund, which by definition, encompassed the provident fund as well. This argument was rejected by the High Court on the basis that the order was perfecta and could not be varied. The High Court further found that the divorce court had ordered the fund to pay as per the parties’ settlement agreement and it was not suggested that the order was granted by mistake. The appeal was dismissed with costs on the attorney and client scale.

Thereafter, special leave to appeal was granted by the SCA.

At the hearing of the appeal in the SCA, counsel for the respondent submitted that the order granted by the divorce court had to be interpreted in the context of the settlement agreement concluded between the parties. In particular, that it was never agreed that the appellant would have a share in the respondent’s provident fund. The SCA stated that the reliance by the respondent on the fact that the parties never agreed that the appellant, would have a share in his provident fund amounted to no more than an opportunistic reliance by the respondent on the erroneous interpretation placed on the order by the fund administrator. The SCA further stated that no variation of the order of the divorce court was necessary because the reference to ‘the plaintiff’s right and interest in the University of the North Pension Fund’ included not only his right and interest in the pension fund, but also the provident fund.  This conclusion was motivated in para 20 of the judgment as follows: ‘This is because s 7(8)(a)(i) of the Divorce Act, refers to “any part of the pension interest of that member” in respect of which the court may make an order that it be paid to the non-member spouse.

“Pension interest”, in relation to a party to a divorce action who –

(a) is a member of a pension fund (excluding a retirement annuity fund), means the benefits to which that party as such a member would have been entitled in terms of the rules of that fund if his membership of the fund would have been terminated on the date of the divorce on account of his resignation from his office. (Emphasis added.)

“[P]ension [F]und” is defined in the Divorce Act as follows:

“… means a pension fund as defined in section 1(1) of the Pension Funds Act, 1956, irrespective of whether the provisions of that Act apply to the pension fund or not.”

The [Pension Funds Act] must then be consulted to ascertain the meaning of “pension fund”, which in turn is defined as follows:

“[P]ension fund means a pension fund organisation.”

“[P]ension fund organisation”, is then defined in the PFA as follows:

“(a) any association of persons established with the object of providing annuities or lump sum payments for members or former members of such association upon their reaching retirement dates, or for the dependants of such members of former members upon the death of such members.” (Emphasis added.)’

In para 23 the SCA stated as follows: ‘As correctly pointed out by A B Downie Essentials of Retirement Fund Management, (2019) para C2 at 12: “It is important to note that the differences between Pension and Provident Funds do not stem from the Pension Funds Act which does not distinguish between the two types of fund. The Pension Funds Act treats both pension and provident funds the same under the description of a “pension fund organisation” … . The differences between pension funds and provident funds … stem from the Income Tax Act.”’

The SCA then concluded that ‘properly interpreted, the reference in the court order to “… 50% of the plaintiff’s right and interest in the University of the North Pension Fund” …, includes both the pension fund section, as well as the provident fund section, of the University of Limpopo Retirement Fund.’

Consequently, the appeal was upheld with costs.

Conclusion

Having regard to the uncertainty with regard to the proper interpretation of the ‘court granting a decree of divorce’ in s 7(8) of the Divorce Act as alluded to above, it is imperative that legal practitioners ensure that provision is made for an order in terms of s 7(8) of the Divorce Act in all divorce orders.

Magdaleen de Klerk BA (Hons) BProc (UFS) Cert Human Rights (UP) is a legal practitioner at DDKK Attorneys in Polokwane. DDKK Attorneys acted on behalf of the appellant in the Nailana matter.

This article was first published in De Rebus in 2020 (July) DR 25.