The Complexities of Death-Benefit Payouts From Pension Funds

Privately held life policies are relatively straightforward when it comes to payouts on the death of the person insured: the money is paid to the beneficiaries nominated on the policy’s nomination form. If that is not possible because no beneficiaries have been listed or the nominations are invalid, the money is paid into the deceased estate.

Thus it is important to ensure that your beneficiary nominations on your life policies are up to date, as discussed in previous articles (“Are your beneficiary nominations up to date?” and “The importance of reviewing beneficiary nominations on your policies”).

However, the process is more complex when it comes to death benefits from retirement funds, which may include a group risk cover payout. These fall under the Pension Funds Act, which has clear rules on how fund trustees must distribute the money. Section 37C of the Act, “Disposition of benefits upon death of member”, requires the trustees, within 12 months of the death of the member, to consider dependants of the member of whom they “become aware” or are able to trace, in addition to nominated beneficiaries (who may be dependants or not), and to distribute the benefits to the dependants and/or nominees in proportions that are “deemed equitable”.

This means that the distribution may not be made in accordance with the wishes of the deceased member. Priority is given to people who have been financially dependent on the member and most deserving of the money.

This applies to benefits from occupational pension and provident funds, preservation funds, and retirement annuity funds and payouts from “approved” group risk cover. (See “Know the difference between ‘approved’ and ‘unapproved’ group risk cover”.)

Adjudicator ruling

The complexities of distributing death benefits from retirement funds are well illustrated in a recent case to come before the Pension Funds Adjudicator, Muvhango Lukhaimane, about which she stated: “A death benefit nomination form is a guideline for a [retirement] fund when distributing benefits, as the fund has the discretion to allocate the benefit as it deems equitable, even if it deviates from the nomination.”

She said funds are required to investigate and consider numerous factors, including the deceased’s dependants and their financial needs, before making a final decision.

The case involved a member of the Larimar Group Provident Fund, Mr X, who died in May 2023. He was survived by his customary wife, two adult sons, adult nephew, estranged civil-marriage wife and adult stepdaughter.

A death benefit of R1.4 million became available for allocation to his beneficiaries. The fund trustees allocated 70% of the benefit to Mr X’s customary wife, and 10% each to the two sons and nephew.

Mr X’s stepdaughter complained to the adjudicator’s office that she and her mother had been excluded in the distribution, despite having been named as beneficiaries on Mr X’s nomination form. She said that, although estranged, her mother and Mr X had still been legally married.

In response to the complaint, the fund said it had conducted an investigation in terms of section 37C of the Pension Funds Act and established the following: the two sons were unemployed, not living with Mr X at the time of his death and not financially dependent on him; the customary wife lived with Mr X until his death, was unemployed and financially dependent on him; the nephew lived with Mr X and was also financially dependent on him.

The fund submitted that it had considered the beneficiary nomination form. However, the complainant and her mother were not financially dependent on Mr X at the time of his death.

In her determination, Lukhaimane said the board was not bound by the nomination form. The complainant and her mother were not living with Mr X and had not been financially dependent on him for more than 15 years. On the other hand, his customary wife, who was unemployed and shared a household with him, as well as his two sons and nephew, were all dependent on him.

Lukhaimane said the fund did not abuse its discretion in the allocation of the death benefit, which was properly allocated to the dependents. The complaint was dismissed.