New amendments to the Pension Funds Act (PFA), consequential of the two-pot retirement system, have sparked confusion around both the definition of “pension interest” in divorce settlements and whether a fund can now deduct a lump sum for future maintenance, rather than only arrear maintenance as before.
These changes have left both retirement fund members and non-member spouses facing a legal grey area.
In a presentation for the 2024 EBnet Evolutionaries Conference, Lize de la Harpe, senior legal adviser at Sanlam Corporate, explored the impact of the two-pot system on divorce and maintenance orders.
The legal landscape
De la Harpe clarified the legal framework around retirement fund deductions in cases of divorce and maintenance. She began by explaining a general principle: “Funds are not allowed to make a deduction from a member’s benefit unless such a deduction is allowed in terms of the Pension Funds Act itself, the Tax Administration Act, the Income Tax Act, or the Maintenance Act.”
Section 37D of the PFA outlines specific exceptions, such as deductions related to divorce and maintenance orders. According to De la Harpe, section 37D allows a retirement fund to deduct an amount assigned to a non-member spouse, provided a court has granted an order under section 7(8) of the Divorce Act.
To understand this, De la Harpe highlighted how “section 1 of the Divorce Act specifically defines ‘pension interest’… as the benefits to which that member would have been entitled in terms of the rules of the fund had his own membership terminated on the date of divorce by reason of that person’s resignation”.
In simpler terms, this means the non-member spouse is entitled to the share the member would have received if they had left the fund on the date of divorce.
Section 7(7) of the Divorce Act is crucial, De la Harpe continued. It ensures that pension interest, as defined in the Divorce Act, is considered part of the marital assets at divorce, allowing the court to make an order regarding the division. Section 7(8) further enables the court to assign a portion of the member’s pension interest to the non-member spouse.
“It’s very clear,” De la Harpe noted, “that the non-member spouse is only entitled to the member spouse’s notional benefit if it actually qualifies as pension interest,” emphasising that a valid divorce order must specifically reference pension interest to be enforceable against a fund.
A “notional benefit” in divorce proceedings refers to a hypothetical or assumed value of a pension interest or retirement benefit, which a court considers for the purposes of dividing matrimonial assets, even if the member does not yet have access to the funds.
The calculation of ‘pension interest’
Lize de la Harpe emphasised that section 37D of the PFA and the Divorce Act must be read together, particularly when handling deductions from pension benefits in divorce cases.
She explained that “section 37D grants that specific exception to the fact that pension benefits can’t really reduce by saying a fund is allowed to deduct from the member’s individual reserve amount assigned to the non-member spouse, in terms of section 7(8) of the Divorce Act”.
This is where pension interest calculations become crucial, because they directly reflect the impact of the two-pot changes. De la Harpe pointed out that, under the current law, the court will calculate “pension interest” based on the Divorce Act.
“This is where the deeming provision section 7(7) and the empowering provision, section 7(8) lies, and this definition remains unchanged.”
The recent Pension Funds Amendment Act introduces amendments to align the Pension Funds Act with the two-pot system, including a new definition of “pension interest” that differs from the Divorce Act’s.
According to de la Harpe, “If you have a look at Section 7(7), that deeming provision, which is the mechanism by which a court can actually deem this ‘fictional asset’ (in the sense that the member doesn’t have access to it yet, while still a member of the fund); by deeming this to be in the pot for purposes of calculating the matrimonial assets that are to be divided.”
The new definition in the Pension Funds Amendment Act goes further than the Divorce Act. It has been worded in such a way as to include the concept of where a member has already left some service or retired from the fund.
This, De la Harpe argues, is legally flawed: “If a member has already left the service, already retired, that person no longer has a pension interest in the fund, and this has been confirmed in case law.”
Industry bodies such as the Association for Savings and Investment South Africa and the Institute of Retirement Funds Africa flagged these issues with National Treasury when the amendment was in draft form.
To address this conflict, the final Amendment Act includes a clause stating that the PFA will take precedence if the definitions clash. However, De la Harpe believes it would have been better to amend the Divorce Act to match the two-pot system’s new structure.
She said that this discrepancy puts funds in a difficult position, as they must choose between the new PFA’s definition or the Divorce Act’s, which may lead to inconsistent practices.
As De la Harpe noted, “you could have a difference in the industry where one particular fund calculates it based on the new definition of pension interest, whereas another does not… This is never ideal.”
The resulting legal uncertainty is problematic for fund members and their non-member spouses, who may face inconsistent treatment during divorce settlements.
Divorce post-retirement
So how does these two differing definitions impact divorce cases after retirement?
At retirement, members are subject to compulsory annuitisation requirements. They cannot withdraw the entire benefit in cash (a lump sum), though there are some exceptions for provident fund members that may apply. Instead, they must use at least two-thirds of their retirement component, along with the non-vested portion of their vested component, to purchase a compulsory annuity.
De la Harpe reiterates that, according to section 1 of the Divorce Act, “pension interest” refers to the benefit a member would receive if they had ended their employment and membership in the fund due to resignation on the date of divorce.
“What this basically means is that at the date of divorce, you still have to hold a pension interest in the fund. If a benefit had already become payable to the member before the date of divorce, a benefit cannot again be deemed to have become favourable to the member.”
The Supreme Court of Appeal (SCA) confirmed this principle in the matter of Montenari v Montenari. In this case, the former member had already retired and purchased living annuities.
“The annuity policy itself doesn’t fall within the definition of pension interest defined in the Divorce Act, and the SCA confirmed it here.”
Accordingly, De la Harpe explained, an annuitant cannot give a part of their compulsory annuity that they purchased at retirement to a non-member spouse as part of their divorce.
“You cannot pay anything out from this annuity, the capital underlying the annuity.”
However, the new definition of “pension interest” in the Pension Funds Amendment Act has stirred up concerns, because it now includes the retirement benefits of a member who has already retired.
De la Harpe explained that although this principle was altruistic, it does not address a loophole in divorce law. “The idea was that this has been long established as quite a loophole in our current regulatory system whereby somebody can evade a pension interest claim by retiring before the date of divorce … thereby sidestepping their spouse’s claim against the former pension interest.”
She said the issue lies in the legal nature of an annuity. As established in Montanari, an annuity does not fall within the definition of pension interest after retirement.
De la Harpe clarifies: “The minute you purchase the annuity, the capital underlying that annuity becomes the asset, and it’s on the balance sheet of the insurer. The annuitant only becomes entitled to an income from that annuity in terms of the contract.”
Ultimately, even with this expanded definition in the Amendment Act, the legal position remains unchanged – there is still no claim against an annuity purchased after retirement, as no lump sum can be paid out to the spouse.
Maintenance orders
One of the exceptions to the general prohibition against the attachment of pension fund benefits is when a court has issued a maintenance order. Maintenance is governed by the Maintenance Act and its associated court rules. Chapter 5 of this Act specifically addresses the enforcement of maintenance orders, allowing for civil execution.
Section 26 of the Act states that if a maintenance order remains unpaid, the claimant can approach the Maintenance Court for a warrant of execution against property, attachment of debt, or attachment of emoluments (money or other forms of payment received for work). Section 26(4) further provides for the enforcement of a maintenance order against benefits to which a retirement fund member is entitled.
However, De la Harpe noted that Chapter 5 of the Act applies only to arrear maintenance.
“It does not deal with amounts that are still due in future. So, as such, where a cash lump sum payment is concerned, a fund is only allowed to make a deduction in the form of a cash lump sum in respect of arrear maintenance, not future maintenance.”
This position has been confirmed in various cases, including Mngadi v Beacon Sweets and Chocolates Provident Fund and Magewu v Zozo and Others. In these cases, the court did not order a lump-sum payout by the fund for future maintenance but directed that the pension benefits be withheld to secure future maintenance obligations.
“In both cases, the one member resigned specifically to evade maintenance, and in the second, he was retrenched, so a withdrawal benefit was payable,” De la Harpe added.
The situation becomes more complex with amendments to the PFA, specifically the addition of section 37D(3)(aC), which allows a fund to deduct a lump sum from a member’s benefit to cover future maintenance. This contrasts with the Maintenance Act, which does not provide for future maintenance.
De la Harpe explained it is crucial to read the Maintenance Act and the relevant provisions of the PFA together, because they cannot be viewed in isolation. She warned that this new clause introduced in the Pension Funds Amendment Act may lead to legal uncertainty that may prejudice both members and claimants.
“It remains to be seen how this amendment is going to be interpreted by the courts, in the sense of, will the courts change their stance, or will they see this enabling provision in terms of the PFA as sufficient to overcome this problem?”
