A recent court case about a group risk cover payout has highlighted the need for greater consumer awareness about the two fundamental forms of cover and the different laws that govern them.
Group risk cover is life and disability insurance that many South African employees enjoy as a supplementary benefit to their retirement benefits. It typically pays out three or four times an employee’s annual salary on death or provides an income of about 70% of salary until retirement age in the case of permanent disability. Additional benefits may include critical illness cover and cover for the education of a deceased employee’s child.
Unlike individual cover, where the risk to the insurance company varies from person to person, group cover spreads the risk across an entire group – for example, all the employees of a company or all members of a retirement fund – alleviating the need for individual assessment. Because the premiums are typically low – taking into account the risk spread and economies of scale – the policies have gained wide acceptance among employers and employees.
A major factor that is often overlooked, however, is in how the policy has been implemented: through the employer directly or through the employees’ retirement fund. As an employee, you need to know which scenario you fall under, because there are tax implications and, in the event of a claim, differences in the distribution process.
The court case, Machipi v Palabora Mining Company and Others, which was decided by the North Gauteng High Court in February, concerned Section 37C of the Pension Funds Act, which governs the distribution of death benefits. It requires that, in the event of a payout, the fund trustees must consider not only nominated beneficiaries but any other people who were financially dependent on the deceased.
The two applicants, Chaisa and Caliphonia Machipi, as the sole nominated beneficiaries of deceased miner Lunga Kopolo, brought the case against Kopolo’s employer and pension fund. Instead of receiving the full payout between them, they had received only a combined 20%, with the remaining 80% being allocated to a non-nominated child of the deceased. They successfully argued that the group risk policy did not fall under the Pension Funds Act and as such was not subject to the distribution requirements of Section 37C, and they were thus entitled to the full payout.
The decision has come under fire from the pension fund industry. A legal spokesperson for a large umbrella fund says the court failed to take into account the fact that group risk cover can take two forms: “approved risk benefits” and “unapproved risk benefits”, which are treated differently in the event of a claim.
• Approved risk benefits. This is where the retirement fund has contracted with an insurer to supply cover. “It’s a policy between the insurer and the fund, and the benefits are payable in terms of the rules of the fund,” the spokesperson says. “The word ‘approved’ refers to the fact that the retirement fund is tax-approved by SARS in terms of the Income Tax Act and contributions may therefore be deducted from the employee’s pre-tax salary, up to certain legislated maximums. At the employee’s death, the insurer will pay the members’ insured benefits directly to the fund, and the trustees then have the duty to allocate the benefit in accordance with Section 37C.”
• Unapproved risk benefits. This is where the employer has contracted with an insurer without going through a retirement fund, and the policy is therefore not subject to the Pension Funds Act. “It is a separate group insurance policy that is issued to the employer as policyholder. The contributions are not tax-deductible. In the event of an employee’s death, the cover is not dependent on the employee’s membership of a retirement fund, and the benefit must be paid to the nominated beneficiaries,” the spokesperson says.
In the case in question, the benefit was an approved benefit and subject to the Pension Funds Act’s Section 37C provisions. The case is expected to go to the Supreme Court of Appeal.
