‘Divorce debt’ created by the Government Employees Pension Fund

April 25th, 2016
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Divorce Debt

By Clement Marumogae

The Government Employees Pension Fund (the GEPF) is Africa’s largest pension fund with more than 1,2 million active members, some 360 000 pensioners and beneficiaries; as well as assets worth R 1 trillion (www.gepf.gov.za). The GEPF is the only fund in South Africa which, when its members are divorcing, pays out the members’ former spouses’ divorce claims and creates ‘divorce debts’ for its members. Members are required to pay back to the fund when they exit the fund, which debts attract interest. This article evaluates the rationale behind the creation of ‘divorce debts’ and evaluates whether such debts have the potential of prejudicing divorcing members of the GEPF.

Clean-break principle

In 2007, progressive amendments were made to the Pension Funds Act 24 of 1956 (the Act), which is the main statute regulating private pension funds. These amendments ensured that a non-member spouse was able to claim his or her share of his or her spouse’s pension interest immediately on the date of divorce, thereby introducing the so called ‘clean-break’ principle. Later on, public pension funds such as the GEPF also had to align their practice with the clean-break principle and the necessary amendments were made to the legislation regulating such funds in order to bring about the clean-break principle. It has been correctly argued that ‘[i]n the public sector pension funds, the clean-break principle was introduced by the enactment of the Government Employees Pension Law [Amendment Act], 19 of 2011 (section 24A), South African Post Office SOC Ltd [Amendment] Act, 38 of 2013 and the amendment of the Transnet Pension Fund Rules. These legal prescripts provides that a pension interest accrue[s] to the non-member spouse on the date of divorce in terms of the decree of divorce granted under section 7(8)(a) of the Divorce Act [70 of 1979] or a decree for the dissolution of a customary marriage under the Recognition of Customary Marriages Act [120 of 1998]’ (Lufuno Nevondwe Divorce orders: Issues for pension funds (www.pensionlawyers.co.za, accessed 23-3-2016) at 9, paper presented at the Pension Lawyers Association Conference held at Cape Town on 3-3-2014).

Divorce debts

Rule 14.10 of the GEPF rules generally assigns a share of a member’s pension interest to his or her former spouse. It is surprising, however, that what the fund ultimately pays to the former spouse is not an amount taken from the member’s pension interest, but the fund itself pays this amount from its reserves and creates a ‘debt’,
which the member is obliged to pay back to the fund. If the amount paid to the former spouse was taken from the member’s pension interest, there would not be a need for the former spouse to repay anything to the fund. In terms of r 14.10.9 of the GEPF rules:

‘When a benefit becomes payable to the member in terms of these rules –

14.10.9.1 the amount of the gratuity, if any, then payable to the member must be reduced by the amount of the divorce debt; and

14.10.9.2 if the amount of the divorce debt exceeds the amount of the gratuity and there is an annuity payable to the member then –

(a) the capital value of the annuity must be determined by the actuary;

(b) the value determined by the actuary must be reduced by an amount equal to the balance of the divorce debt then remaining; and

(c) the capital value that results from this calculation must be annuitised by the actuary on a basis determined by the board in consultation with the actuary to determine the amount of the annuity which will then be payable.’

This rule should be read together with r 24a(2)(d), which was introduced by the Government Employees Pension Law Amendment Act, which reads:

‘(d) The amount of any pension benefit that is subsequently payable to the member in terms of the rules will be reduced by the equivalent of the amount of the share of the pension interest of the member which –

(i) was deemed to accrue to the member as a benefit in advance of the benefit ordinarily payable in terms of the rules; and

(ii) was assigned to the member’s former spouse, less the amount of any additional voluntary contributions, if any, paid by the member to the Fund from time to time, and accumulated over the period from the date on which payment to the former spouse or transfer to the approved fund as referred to in paragraph (e) took place to the date on which the member first became entitled to a part or the whole of the balance of the benefit, with interest as the Board from time to time deems appropriate.’

It is clear from this rule that, in actual fact, the GEPF is granting ‘divorce loans’ to its divorcing members in order to create the so-called ‘divorce debt’. Unlike private pension funds mandated by s 19(5) of the Act, which are able to grant home loans to their members, it is well known that the GEPF rules do not empower it to grant any sort of loans to its members. While this ‘divorce debt’ is not referred to as a loan, it nonetheless has characteristics of a loan in the sense that the fund charges interest on it from the day the payment was made to the former spouse to the date the divorcing member would be exiting the fund. On its website, the GEPF sought to clarify the position by stating among others that: ‘The new rules state that on the date of payment of a divorce benefit GEPF will create a debt against the member that is equal to the amount payable to the non-member spouse. The debt amount will build up, with interest, until the member exits the Fund’ (www.gepf.co.za, accesed 23-3-2016). The amount payable by the member when he or she would be exiting the fund would be determined by the fund’s actuaries because it has accumulated interest.

This is problematic in the sense that the divorcing member is not provided an opportunity to decide whether he or she agrees to the ‘divorce debt’ or he or she is comfortable that, at the time of his or her divorce, the fund could reduce his or her pension interest as directed by the divorce order. Secondly, the precise percentage of interest attracted by the ‘divorce debt’ is not prescribed in the GEPF rules. This is disturbing because, in terms of  r 14.10.9(2) of the GEPF rules, the ‘divorce debt’ can exceed the benefit which the member should receive. If the interest is so high that it enables the fund to repay itself by taking a substantial amount of the divorcing member’s pension benefits, this goes against the very reason why pension funds are established. The divorcing member might not be left with enough to support himself or herself after retirement. This indeed will infringe on the divorcing member’s right to have access to the social security guaranteed by s 27(1) of the Constitution. It is further concerning that the GEPF is the only fund that makes its divorcing members indebted to it in this way and, as such, this could only make the fund vulnerable to a constitutional challenge based on unfair differentiation in terms of s 9(1) of the Constitution.

I submit that r 14.10 in its entirety does not comply with s 7(8) of the Divorce Act, which specifically provides that:

‘Notwithstanding the provisions of any other law or of the rules of any pension fund

(a) the court granting a decree of divorce in respect of a member of such a fund, may make an order that –

(i) 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; …’ (my italics).

This simply entails that the portion of the pension interest due to the non-member spouse should be paid directly from the pension benefits of the member spouse, not from any other source, except if the member has agreed otherwise with the fund. This may be the case if the member has entered into an agreement with the fund not to pay from his or her benefits, but to provide him or her with a loan, which would be used to cover the non-member spouse’s claim. But this has to be by agreement, and not something which is orchestrated by the fund without involving the member. Ultimately, this rule effectively widens the investment options of the fund unreasonably, by making divorcing members investment vehicles by forcing a debt onto them and further requiring them to pay interest. There seems to be no justification for this arrangement, given the fact that the member already has a financial vehicle which enables him or her to cover his or her ex-spouse’s claim against his or her pension interest. The mere fact that this is not a negotiated process makes the whole arrangement irrational and outright unreasonable.

Conclusion

I submit that r 14.10.9 of the GEPF rules should consider removing the rule which allows it to grant loans to its members, thus making them indebted to it. It is important that the fund complies fully with divorce orders, which directly order it to reduce its divorcing members’ pension interest and thus settle their former spouses’ divorce claims directly from its members’ pension benefits, even if this will affect their pensionable service if they remain active in the fund. Such would be a direct financial consequence of the marital regime they have chosen to enter into when they conclude their marriages.

Clement Marumoagae LLB LLM (Wits) LLM (NWU) Dipl in Insolvency (UP) is an attorney at Marumoagae Attorneys in Itsoseng.

This article was first published in De Rebus in 2016 (May) DR 24.

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