Pension interest and divorce – K v K and Another – a critique

September 1st, 2013
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By Johann Davey

The appellant and the first respondent in K v K and Another [2013] JOL 30037 (WCC) were married in community of property during 1978 and divorced on 8 September 2005.

At the time of their divorce, the appellant was a self-employed estate agent. The first respondent was a member of the second respondent (Cape Municipal Pension Fund).

In terms of the judgment, the appellant had sued the first respondent for divorce and the first respondent ‘did not oppose the divorce nor the relief that was sought in respect of the joint estate’, which included a division of the joint estate on the basis that each spouse retained a specified immovable property.

The divorce order made no mention of the first respondent’s pension interest or of any other asset forming part of the joint estate, other than the parties’ two immovable properties.

The appellant, who had apparently fallen on hard times subsequent to the divorce and had become destitute, subsequently applied to the High Court on an urgent basis for an order declaring her ‘entitled to a 50% share in the first respondent’s pension and/or provident funds’ as at the date of their divorce. She also applied for an amendment of the divorce order to provide for such entitlement and for ancillary relief.

The appellant averred in her founding papers that the first respondent had never disclosed to her that he was a member of the second respondent and that the attorneys who represented her in the divorce action did not advise her of her rights as regards to any such pension interest.

The first respondent denied this and, according to the judgment (being the court of appeal), averred in his opposing affidavit that the appellant ‘had deliberately chosen not to make any claim to it because of the concomitant responsibility it would have placed on her to have disclosed her earnings in the estate agency and to have dealt with his claim to a share therein. The first respondent clai­med that had the appellant sought a share in the pension interest in the divorce summons, he would have resisted the claim’ (at para 10).

The court a quo, per Louw J, dismissed the application. The judgment reads: ‘The court a quo found that the first respondent’s version about why the pension interest had not been dealt with in the divorce order did not amount to a bold or uncreditworthy denial …’.

The court a quo, however, granted the appellant leave to appeal.

It appears the court had decided that the factual disputes regarding the division of the joint estate and the first respondent’s denial of the appellant’s allegations as regards her knowledge of his pension interest were of no consequence as ‘[i]t was common cause in the appeal that this contention had essentially crystallised the dispute between the parties, namely, whether, by operation of law, the joint estate of the appellant and the first respondent at the time of the divorce included the pension interest and whether the appellant had an entitlement to a share therein’ (at para 11).

Having considered the submissions by the amicus curiae and the first respondent’s counsel, the court (per Saldanha J, with Traverso AJP and Ndita J concurring) held as follows in para 32: ‘I am of the view that where parties who were married to each other in community of property in subsequent divorce proceedings do not deal with a pension or provident fund interest which either or both of them may have had in separate pension or provident funds either by way of a settlement agreement or by an order of forfeiture, each of them nonetheless remain entitled to a share in the pension or provident fund to which the other spouse belonged to and such share is to be determined as at the date of divorce by virtue of the provisions of section 7(7)(a) of the Divorce Act 70 of 1979’.

The court therefore upheld the appeal and issued the following declaratory order: ‘It is declared that the applicant is entitled to a 50% share of the first respondent’s pension and/or provident funds (the “pension funds”) valued at 8 September 2005.’

Critique of the court’s judgment and order

The finding that there is an automatic accrual of a pension interest on divorce:

The consequence of the judgment, which effectively provides that former non-member spouses who were married in community of property and who divorced after the introduction of s 7(7)(a) in 1989, remain entitled to a 50% interest of their former spouse’s pension interest (as at the date of the divorce) in the absence of a forfeiture order or a settlement agreement providing otherwise, may well be that many such non-member spouses may now wish to institute proceedings against their former spouses for payment of their 50% share of the pension interest.

The judgment is likely to cause many former ‘member-spouses’ (and their legal representatives) sleepless nights.

However, I submit that the judgment is erroneous and that the correct legal position is that, although a pension interest is deemed to be part of the assets that constitute the patrimonial benefits of a marriage, a non-member spouse only becomes entitled to such a share thereof as a court may assign in terms of s 7(8).

While it is correct that a pension interest is deemed to be part of the assets of a joint estate and  must be taken into account when the joint estate is divided, I submit that s 7(7)(a) does not provide any basis for the finding that if the spouses ‘do not deal with a pension or provident fund interest, which either or both of them may have had in separate pension or provident funds either by way of a settlement agreement or by an order of forfeiture’ the non-member spouse automatically becomes entitled to 50% of the member spouse’s pension interest.

Section 7(7)(a) of the Divorce Act provides: ‘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 [or her] assets’ (my emphasis).

I submit that s 7(7)(a) merely provides that the pension interest (as defined) of a member spouse is deemed to form part of the assets of the joint estate, which includes the  immovable, movable property and other incorporeal assets, which stand to be divided.

Put differently, the value of the respective spouse’s pension interest in a pension or provident fund as at date of divorce must be added to the value of the other immovable, movable and incorporeal assets in the estate.

I also submit that if the legislature intended to grant a non-member spouse an automatic share of a member spouse’s pension interest, subject to a forfeiture order or a renunciation of such a right by the non-member spouse in terms of a settlement agreement, s 7(7) would have been worded very differently and s 7(8) would not have provided that a court granting a decree of divorce ‘may make an order that’ a percentage of a pension interest is assigned to a non-member spouse.

A division of the joint estate simply means that each party becomes entitled to an equal share of the joint estate, as is envisaged in s 20(1) of the Matrimonial Property Act 88 of 1984, which provides: ‘A court may … order the immediate division of the joint estate in equal shares or on such other basis as the court may deem just’ (my emphasis).

Although it is correct to say that ‘where parties were married in community of property a division of the joint estate automatically ensued’ on divorce, and that, failing a forfeiture order in terms of s 9 of the Divorce Act, each party becomes entitled to a 50% share of the joint estate, this does not mean that on divorce each party automatically becomes entitled to a half share in each and every asset forming part of the joint estate – for example the house, holiday flat, motor cars, furniture and investments.

The difficulty with the court’s finding is apparent from the inherent question it poses as regards the other assets forming part of the joint estate – that is, if 50% of a pension interest automatically accrues to a non-member spouse on divorce, what is the position regarding all the other immovable, movable or incorporeal assets that actually form part of the assets of the joint estate?

The finding that a s 7(8) order is not required for the accrual of a pension interest:

The court heard various arguments regarding the decision in Sempapalele v Sempapalele and Another 2001 (2) SA 306 (O), where the court, per Musi J, held that a party in divorce proceedings must apply for and obtain an order in terms of s 7(8) of the Divorce Act in order to obtain a share of the member spouse’s pension interest.

The judgment reads: ‘Mr Burger to the contrary argued that the finding of Musi J … was wrong for a number of reasons, amongst others, that … section 7(7)(a) stood by itself and there was no basis for reading into the statute a requirement that there had to be an endorsement of the right in terms of section 7(8) before section 7(7)(a) was operative. Moreover, he submitted section 7(8) dealt with the endorsement to protect an interest or a right and not with the conferral of the right’ (at para 21).

In the matter of Eskom Pension and Provident Fund v Krugel and Another 2012 (6) SA 143 (SCA) (which is not referred to in the judgment) the Supreme Court of Appeal, per Maya JA, held as follows at para 8: ‘A pension fund’s right to make deductions from a pension benefit is highly circumscribed and may be exercised only as expressly provided by s 37D and s 37A of the PFA [Pension Funds Act 24 of 1956]. Relevant for present purposes is s 37D which, in s (1)(d)(i), allows a fund to “deduct from a member’s benefit or minimum individual reserve, as the case may be … any amount assigned from such benefit or individual reserve to a non-member spouse, in terms of a decree granted under section 7(8)(a) of the Divorce Act, 1979” … . The first respondent’s entitlement, if any, must therefore derive from the provisions of s 7(7) and s 7(8) of the Divorce Act, which deal with the pension benefits of a divorcing member of a pension fund’.

I submit that the SCA’s dicta, read with the relevant statutory provisions, constitutes a finding (or at the very least a very strong intimation) that although a pension interest of a member spouse is deemed to form part of the assets that constitute the patrimonial benefits of the marriage, a non-member spouse becomes entitled to a percentage of the pension interest only when it is assigned to him or her in terms of s 7(8).

The finding that the parties did not deal with the pension interest:

Although the judgment does not expressly stipulate that spouses need to expressly deal with a pension interest in a written settlement agreement, I submit that, in view of the genuine factual dispute regarding the division of the joint estate and the reasons why no specific mention was made of his pension interest in the divorce order, it can be the only basis on which the court could have upheld the appeal.

In my opinion, the provisions of s 7(7)(a) do not lend themselves to an interpretation that the parties must deal with a pension interest in a written settlement agreement, failing which 50% of a pension interest automatically accrues to the non-member spouse in the absence of a forfeiture order. Such a finding is further not in accordance with the well-established legal principles and practice regarding the division of the joint estate.

The division of the joint estate is normally left in the hands of the spouses. While spouses may agree (or be advised) to record their decision regarding the division of the estate in a settlement agreement (which may then be incorporated in the divorce order in terms of s 7(1) of the Divorce Act), they need not do so and there are probably hundreds of thousands of divorce orders in existence in which the court had simply ordered a division of the joint estate.

I therefore submit that, in view of the factual dispute regarding the division of the joint estate, the court should either have dismissed the appeal or have referred the matter back to the court for the hearing of oral evidence if such an order was appropriate in view of the pertinent facts and applicable legal principles. The first respondent may rightfully wonder why his version regarding the division of the joint estate was considered immaterial.

The import of the order granted

It is not clear what exactly the import and practical effect of the order is, namely: ‘the applicant is entitled to a 50% share of the first respondent’s pension and/or provident funds (the “pension funds”) valued at 8 September 2005’.

Aside from the fact that the order does not refer to the first respondent’s pension interest as at the date of the divorce, it is to be noted that, as the first respondent had in fact retired and used his pension benefits to purchase an annuity, no such pension interest existed as at the date of the order.

Conclusion

In my opinion the judgment is erroneous, but it does underscore the fact that the present legal uncertainty resulting from the various (and often conflicting) reported judgments regarding the import of s 7(7)(a) and s 7(8) on the rights of non-member spouses, needs to be clarified by the Supreme Court of Appeal or by the legislature.

I submit that the correct legal position is (or should be) that although a pension interest is deemed to be part of the assets that constitute the patrimonial benefits of a marriage, a non-member spouse becomes entitled only to such a share thereof as a court may assign in terms of s 7(8).

I submit that such a dispensation will provide certainty as regards the claim a non-member spouse has to a pension interest of a member spouse and will be in line with the so-called ‘clean-break’ principle, which the legislature sought to introduce with the amendments to s 37D of the Pension Funds Act.

It is, however, clear from the Eskom decision that the judgment has no impact on retirement funds (ie, pension funds, provident funds or retirement annuity funds), as a retirement fund may not, by virtue of the provisions of ss 37A and 37D of the Pension Funds Act, deduct any portion of a member’s pension interest in the absence of a s 7(8) order.

In my view, if an order issued by the court granting the decree of divorce does not incorporate a s 7(8) order, another court cannot subsequently assign a percentage of the pension interest to a non-member spouse, except and unless the requirements for the variation of such a court order are met.

Johann Davey BA LLB (UP) is an advocate in Cape Town.

This article was first published in De Rebus in 2013 (Sept) DR 26.

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