The GEPF Divorce Debt System: Is it time for reparation or class action?

November 1st, 2020
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Picture source: Gallo Images/Getty

The Government Employees Pension Fund (GEPF) divorce debt system forced its members into reckless credit, in terms of the National Credit Act 34 of 2005 (NCA), which reduced their pension interest on exiting the fund. This system also unfairly differentiated and subjected members to unfair discrimination.

The credit extended was unlawful for lack of a contractual agreement, hence the GEPF should refund its members.

Sections 3 and 4 of the Institution of Legal Proceedings against Certain Organs of State Act 40 of 2002 Institution of Legal Proceedings against Certain Organs of State Act 40 of 2002 state that no action may be taken against the state, in respect of recovery of debt without prior notice to that relevant organ of the state.

The quest for truth and justice is the primary motive for this article, with the secondary motive being the absolute fear of being branded a liability to mankind.

The clean-break principle led to the amendments of ss 7 and 8 of the Divorce Act 70 of 1979 making provision for pension benefits to be included as property in the joint estate for purposes of the Matrimonial Property Act 88 of 1984.

It is common cause that current developments by the GEPF on this matter may render this article ‘moot’. I Currie and J de Waal The Bill of Rights Handbook 6ed (Cape Town: Juta 2017) at 87 define the concept ‘moot’ as ‘an issue which no longer presents an existing or live controversy’. The court in National Coalition for Gay and Lesbian Equality and Others v Minister of Home Affairs and Others 2000 (2) SA 1 (CC) at para 21, held that a matter is ‘moot’ and not justiciable if it no longer presents a live controversy. The courts have held that the test is in the interests of justice and whether the outcome will have a practical effect either on the parties or on others (see Van Wyk v Unitas Hospital and Another 2008 (2) SA 472 (CC) at para 29 and Independent Electoral Commission v Langeberg Municipality 2001 (3) SA 925 (CC) at para 9, respectively).

By inference and application, it is hoped that the justifiability of the current divorce debts will be addressed and that the affected GEPF members will be judicially relieved of divorce debts in the interests of justice. For settled divorce debts from the past, it is hoped that there will be redress for interest paid on divorce debts.

AJ van der Walt and GJ Pienaar Introduction to the Law of Property 7ed (Cape Town: Juta 2016) at 12 define property as anything that can form part of a person’s estate, while property rights are defined as any legally recognised claims to property. Therefore, pension benefits are property that deserves protection of the law against any infringement.

The divorce debt system

It is common cause that the GEPF implemented the clean-break principle through s 24A, read with r 14.10.6.1 of the Government Employee Pension Law Act 19 of 2011 (the Act), as argued by Keith Peter ‘Amendments to the Government Employees Pension Law’ (2014) 29(4) Income Tax: Insurance and Tax at 2. Lufuno Nevondwe ‘Recent court judgements on pension’s law and Pension Funds Adjudicator determinations’ (2012) 27(2) Insurance and Tax and Makhado Ramabulana ‘Equality in divorce-benefit payments of different pension funds’ 2009 (Sept) DR 53 acknowledge that the divorce debt created by the GEPF emanates from the clean-break principle, while C Marumoagae ‘Concern Regarding the “Debt” created by Rule 14.10.9 of the Government Employees’ Pension Fund Rules’ (2016) 19 PER at 11, in the form of a question, likened the divorce debt to a loan, where he compared the GEPF to a credit provider.

Unlike the Pension Funds Act 24 of 1956, the GEPF created a parallel system for the settlement of the clean-break principle, in that they paid a non-member spouse using the divorce debt system rather than reducing pension benefits or service period of the member.

The court in Cockcroft v Mine Employees Pension Fund [2007] 3 BPLR 296 (PFA) at para 19, held that, due to the clean-break principle, s 37D(1)(e) of the Pension Funds Act accelerates the date of accrual of pension benefits to the member spouse. In Wiese v Government Employees Pension Fund and Others 2012 (6) BCLR 599 (CC) at para 9, the court held that s 24A of the Act ‘authorises the [GEPF] to make payment of a pension interest upon divorce or dissolution of a customary marriage’.

M Botha, L du Preez, W Geach, B Goodall, J Palframan, L Rossini and P Rabenowitz Fundamentals of Financial Planning 2019 (Durban: LexisNexis 2019) at 501 defines pension interest as ‘the benefits to which a member of a pension fund … would have been entitled in terms of the rules of that fund’ on termination of their membership.

Case studies: The divorce debt model compared to the service reduction model
  • The divorce debt model
The example provided by the GEPF on their website (members’ guide) is as follows
When John resigns from public service and leaves the GEPF, the benefit due to him is: R 1 945 044
The amount awarded to Sally (his non-member former spouse) paid out two years earlier was: (R 747 202)
The divorce debt interest in terms of the Act amounts to: (R 115 294)
Therefore, the total divorce debt against John is (R 747 202 + R 115 294) (R 862 496)
A tax directive from the South African Revenue Service (Sars) reflects: John’s tax payable on his benefit of (R 1 945 044 –
R 862 496) is:
(R 166 000)
Total received by John after deductions: R 916 548
  •  The service reduction model
Using the facts of the case above and the current SARS Annual Deduction Tables for 2020 (www.sars.gov.za, accessed 16-10-2020)
When John resigns from public service and leaves the GEPF, the benefit due to him is: R 1 945 044
The amount awarded to Sally (his non-member former spouse) paid out two years earlier was: (R 747 202)
Therefore, the total amount due to John is: R 1 197 842
A tax directive from Sars reflects: John’s tax payable on his benefit of R 130 500 + [36% x (R 1 197 842 – R 1 050 000)] is: (R 183 723)
Total received by John after deductions: R 1 014 119
Interpretation and conclusion from the case studies calculation examples

These examples reflect that the divorce debt model attracts interest amounting to R 115 294, which makes this debt a loan to the GEPF member. The interest rate on divorce debt was not mutually agreed to, according to s 101(d) of the NCA. Marumoagae (op cit) at 2 correctly argues that GEPF rules do not prescribe the percentage of interest attracted by the ‘divorce debt’.

Alternatively, Marumoagae (op cit) at 2 argues that the GEPF is investing in its members through divorce debts, because it derives interest on its investment. This could be an indication that there is differentiation between the GEPF and private sector pension funds, where the pension interest and the service reduction model are used and members are not charged any interest. This differentiation may lead to unfair discrimination that should be determined using the test in Harksen v Lane NO and Others 1998 (1) SA 300 (CC) at para 53.

A comparison between these two calculations reflects that John ended up R 97 571 (R 1 014 119 – R 916 548) poorer when applying the divorce debt, with the effect that he ends up worse off than members of other pension funds.

The GEPF 2015/16 AFS, reflects divorce debt interest received amounting to R 290 929 million. I submit that this interest received must be refunded to the relevant members in the interests of justice because according to Marumogae (op cit) at 2 it is unjustified, because ex-spouses could be paid from existing pension interest.

Beyond the scope of this article is the possible defence used by the GEPF is that since inception, the interest received from divorce debt prescribed. For this defence, the Prescription Act 68 of 1969 will have to be applied together with the purposive interpretation of the Constitution when it comes to restitution.

The NCA

From the Preamble of the NCA, we can deduce that the new constitutional democracy intended to –

  • regulate access to credit;
  • protect the credit consumer;
  • promote responsible credit granting; and
  • prohibit certain unfair credit and credit-marketing practices.

The divorce debt system is a non-negotiated credit facility, unilaterally imposed on the members, with interest charged. The GEPF is not registered as a credit provider with the National Credit Regulator, with the effect that the divorce debt system debtors, as argued by M Mhango ‘The right to equality and access to courts for government employees in South Africa: Time to amend the Government Employees Pension Law’ (2019) 19 African Human Rights Law Journal 337 at 341, unconstitutionally do not have access to neither the National Credit Tribunal, the Pension Fund Tribunal nor the National Consumer Tribunal for dispute resolution. Only the Board of Trustees, as empowered by r 10 of the Government Employees Pension Law, 1996 have the absolute power to resolve the members’ disputes.

In terms of s 8(3) of the NCA, a credit facility, as agreed to, obliges the consumer to repay the debt periodically or at a later date with an agreed to rate of interest, charged on the capital borrowed from a credit provider.

The keywords applicable to the divorce debt system from the provision of s 8(3) is the payment of interest and the directive that there must be an agreement.

According to PM Nienaber and MFB Reinecke Life Insurance in South Africa: A Compendium (Durban: LexisNexis 2009) at 253 – 255), a policy may provide either an interest-bearing or a non-interest-bearing loan, in accordance with its constitution, and such a loan should be a separate contract from the policy agreement.

The GEPF’s divorce debt is interest bearing, hence it must be treated as any other conventional loan and must have a separate contract.

JM Otto and R-L Otto The National Credit Act Explained 4ed (Durban: LexisNexis 2015) and the court in African Bank Ltd v Additional Magistrate Myambo 2010 (6) SA 298 (GNP) at paras 22 to 30, list the important statutory duties of credit providers, among which is to avoid reckless credit by assessing the consumer in terms of s 80(1) and s 81(2) and (3) of the NCA.

There is neither an indication that a risks, costs or obligations assessment was done by the GEPF prior to the divorce debt being granted, nor a reflection that the divorce debt may over-indebt a member, because there is no credit agreement in existence. This leads to a divorce debt that is not justified, because the member may be unfairly disadvantaged by that credit.

The courts, in National Credit Regulator v Hirst [2015] ZANCT 18 (29 October 2015) at para 13, Albert v Standard Bank of South Africa Limited (GP) (unreported case no 21841/14-9-2015) (Tlhapi J) at para 13, and National Credit Regulator v Mega Financial Services (NCT/18888/2014/57(1)) [2015] ZANCT 24 (27 May 2015) at paras 10 and 36, held that credit providers are obliged to undertake a compulsory consumer assessment prior to extending credit.

The irony of the divorce debt system is that National Treasury, on its website, released ‘A Safer Financial Sector to Serve South Africa Better’ (www.treasury.gov.za, accessed 6-1-2020) in which it outlined how the ‘introduction of the National Credit Act protected households and consumers from reckless lending practices’. This protection is not enjoyed by the GEPF members, because they are exposed to reckless credit, in the form of a divorce debt. All this in contravention of the Act and the protection provided by s 33 of the Constitution.

Findings and recommendations

Section 2 of the Constitution states that the ‘Constitution is the supreme law of the Republic; law or conduct inconsistent with it is invalid’. Therefore, the credit created by the divorce debt system is invalid.

The GEPF members are granted reckless credit, which is in contravention of the NCA and the protection provided by s 33 of the Constitution.

The GEPF treated its members differently to pension fund members of private pension funds, which different treatment is harmful and results in unfair discrimination, according to the test in Harksen v Lane.

I submit that the GEPF should reverse all existing divorce debts and redress the injustice of reducing the accrued pension interest of the affected members in having charged interest on divorce debts.

Conclusion

The Constitution advocates for redress where there is injustice of the past. While the discourse on land restitution is still unfolding, some property that is not so complex to identify must be returned where it was unjustly expropriated.

This article reflected on the unconstitutionality of the divorce debt system, which contravened the NCA, Pensions Fund Act and, by default, the Constitution, including the resultant unfair discrimination.

The adverse financial implications to GEPF members were quantified. The plea is for an amicable resolution that amounts to the reparation of unfairly dispossessed property of the GEPF members, in an attempt to avoid a possible class action to redress this injustice.

All this accountability, redress and reparation is necessary in an endeavour to ensure that poverty does not become transgenerational inheritance, while it was the intention of s 197(2) of the Constitution to ensure that GEPF members retire comfortably.

Gaopalelwe Walter Molelekwa BTech Cost and Management Accounting (UNISA) BIuris Financial Planning Law (UFS) Bachelor of Laws (LLB) (UFS) is a Director of Asset Management at the Northern Cape Treasury in Kimberley.

This article was first published in De Rebus in 2020 (Nov) DR 15.

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