The lump sum death benefit payable by a pension or provident fund normally consists of two portions. The first portion represents the pension savings made up of the member and employer contributions (less costs) plus investment returns. The second portion is commonly known as the ‘insured or risk’ portion. The insured portion of the benefit is generally a multiple of the member’s salary. The retirement fund will usually incept policy with an insurer to fund its liability to the member for the insured benefit portion.

It has generally been accepted by retirement funds that as the entire death benefit (member and employer contributions plus insured portion) is payable by the fund in terms of its rules, and that s 37C of the Pension Funds Act 24 of 1956 regulates the distribution of the benefit. However, in Machipi and Another v Palabora Mining Company Board of Trustees of Palabora and Others (GP) (unreported case no 2023-062156, 6-2-2025) (Mazibuko AJ), the High Court adopted a different view.

The fund had reinsured its risk benefits with an insurer in terms of a fund policy issued to the fund by the insurer for the insured portion of the benefit. On the death of the member, the insurer paid the insured benefit to the fund, who in turn exercised its discretion under s 37C of the Act. The allocation of the benefit by the trustees was different to the nomination completed by the member. The disgruntled applicants challenged the distribution on the basis that as this is a benefit payable by an insurer in terms of an insurance policy issued under the Long-term Insurance Act 52 of 1998, and that s 37C is not applicable. In essence, the applicants argued that the insured portion of the benefit is to be paid by the insurer to the nominees in terms of the nomination completed by the member.

The court accepted the applicants’ argument and after referring to the rulings in other judgments of Xaba and Others v Xaba NO and Others (GP) (unreported case no A279/2013, 15-10-2014) (Tuchten J) and Pieterse v Shrosbree and Others; Shrosbree NO v Love and Others [2006] 3 All SA 343 (SCA), held as follows (at paras 20 and 21):

‘[20] … The second and third respondents argue that the Fund rules govern all the death benefits; therefore, the trustees, as empowered by section 37C, must allocate the benefits. In my respectful view, their submission is misplaced when regard is had to the relief sought, Xaba and Pieters[e] supra.

[21] I have no grounds to disagree with the applicants, as the benefits payable in the PFA does not determine the terms of the GLIP [Group Life Insurance Policy]. Therefore, the issue of determination and allocation of benefits is not in the purview of the Fund trustees like other benefits, though they can be referred to as death benefits or are administered by the same insurer. It is uncontested that the death benefits are from the Fund and the GLIP. This, therefore, requires to be administered differently as they, respectively, have unique consequences.’

The rationale and reasoning adopted by the court in the Machipi judgment are respectfully, questionable for a number of reasons outlined below:

• Firstly, to cover its risk of paying insured death benefits to members, the fund enters into a policy with a licensed insurer to underwrite this liability. The insurer, in turn issues a fund policy to the fund (not the members) to cover this liability. Thus, the fund as the policyholder or owner of the policy is entitled to claim the benefit on the death of a member. Put differently, the fund is claiming the insured benefit in its capacity as the policyholder and not in terms of any beneficiary nomination completed by the member.
• Secondly, the member or his or her beneficiaries’ legal claim to any benefit arises from the fund rules and not the insurance policy. There is no privity of contract or contractual nexus between the member/beneficiary and the insurer. Thus, there is no legal or factual basis on which the insurer can pay the beneficiary directly.
• Thirdly, the Insurance Act 18 of 2017 now defines the classes of business an insurer is authorised to conduct. Policies entered into with a pension fund (as the policyholder) either fall under Class 1: Risk (as a group policy) or under Class 2: Fund Risk (as an individual policy). Table 1 of sch 2(a) of the said Act specifically defines ‘Fund Risk – Death’ as:
  • ‘Lump sum or, specified or determinable equal or unequal sums of money payable at specified intervals payable to a fund on the happening of a death event relating to a member of the fund for the purpose of funding in whole or in part the obligation of a fund to provide benefits to its members in terms of its rules, other than a policy relating exclusively to a particular member of the fund or to the surviving spouse, children, or nominees of a particular member of the fund.’
  • The risk portion of the benefits are payable to the fund and not the beneficiaries (directly) on the death of a fund member to cover the fund’s liability outlined in its rules. This falls under the meaning of an individual policy covering a specific fund risk and, therefore, such a benefit can only be paid to the fund.
• Fourthly, the reliance placed on Xaba and Pieterse, is misplaced, as in Xaba, the court was seized with a matter dealing with benefits payable in terms of a group life policy issued by an insurer to an employer (and not a fund). The principal issue in dispute was whether a nomination completed with a previous insurer can be used by the new insurer. Moreover, in Pieterse, the issue in dispute was whether the trustee of an insolvent deceased estate is entitled, in preference over nominated beneficiaries, to the benefits of insurance policies for distribution to the deceased’s creditors and the interpretation of the then s 63 of the Long-term Insurance Act. The court held that s 63 does not purport to divert the proceeds of an insurance policy from the nominated beneficiary to the insolvent estate and s 63 does not vest the trustee with any entitlement to the proceeds. The principles applicable in each of these cases should not be conflated to the matter in question and must be viewed in the context of the policies applicable in the respective matters and the relevant facts, which are different to the facts in the Machipi
• Fifthly, if the reasoning in this ruling is accepted, it would result in an anomalous scenario, whereby a death benefit payable by a fund, is regulated by two different Acts of Parliament, with the pension savings or fund credit portion being subject to the Pension Funds Act (distributed in terms of s 37C of the Act) and the insured portion being distributed in terms of the nomination, in accordance with the Insurance Act. The legislature did not intend for the same benefit payable by the fund to be apportioned in this manner.

In light of the above, the reasoning and ratio in the Machipi judgment remains questionable, and if applicable, it will lead to unintended and inequitable consequences for retirement funds.   

Naleen Jeram BA LLB LLM (UCT) is a Legal Advice Manager at Momentum Corporate and Adjunct Professor at the University of Cape Town Law Faculty.        

This article was first published in De Rebus in 2025 (May) DR 63.