Helping trustees navigate Section 37C
Section 37C of the Pension Fund Act describes how death benefits should be distributed by the pension fund’s trustees after a member passes on. The Act places a clear and onerous duty on the board of trustees to determine the fair and equitable distribution of fund members’ death benefits, and effectively puts ultimate decision-making in trustees’ hands.
A duty to consider all – not just nominated beneficiaries
When you pass away, your accumulated pension savings will get treated similarly to how an approved death benefit will be treated. The key points you need to familiarise yourself with are the differences between unapproved and approved death benefits in terms of how premium and benefit taxation works, as well as the pay out procedures after death.
After a member of the fund passes away, their accumulated pension savings gets treated similarly to how an approved death benefit is treated, in that the trustees are responsible for making sure the assets are distributed in a fair manner, irrespective of who the member nominated as their beneficiaries, to make sure those who are financially dependent on the member are also considered.
For example: if the deceased fund member had children with more than one partner, all of whom have a financial dependency on the member, and only their current partner is nominated as the main beneficiary, the trustees may elect to also pay a portion of the benefit to them.
This means that, regardless of whether a member of a fund dies before they have left the fund, the benefits are not paid out solely based on that member’s nomination or will. The trustees are legally obliged to determine how the death benefits should be allocated among the member’s beneficiaries and dependents using the member’s beneficiary nomination form or will as a starting point for their investigation.
Many of the Pension Fund Adjudicator’s complaints relate to perceived unfairness in distribution allocations
Each case is truly unique and depends on the individual circumstances of the affected family, such as the circumstances surrounding the deceased member and their dependents as well as various pieces of legislation that govern the retirement industry in South Africa. Trustees are expected to act in good faith and apply their minds to the problem, exercising good discretion after considering all the known facts.
There is no manual outlining what steps could be regarded as reasonable. That reasonability would depend on the unique circumstances of the member’s household at the time of the investigation. Failing to conduct extensive investigation where required may, in some cases, be seen as a break of fiduciary duty and be deemed unreasonable, especially in cases where the rights of a minor have not been safeguarded.
The process of gathering this information plays a key role in reaching a decision quickly. Arriving at such a decision requires a thorough deliberation process. Actual apportionment is based on how the trustees interpret the information. The onus is on the trustees to act in good faith, think logically about the problem and exercise discretion after taking all known facts into consideration. Not doing so will mean trustees have failed their fiduciary duties.
Legislative and administrative requirements
Trying to keep track of outstanding death claims, while trying to resolve them as quickly as possible becomes more challenging with a process that is not fully electronic. If it goes to the Pension Funds Adjudicator, and there is even the slightest inaccuracy, the administrator is held responsible.
With so many variables at play, trustees rely on past value judgments and industry best practices when making decisions.
The FSCA has made several resources available to guide trustees:
- The PF130 circular provides guidance in the field of good governance with regards to trustees’ fiduciary duties and responsibilities, and what is expected of them.
- The FSCA stipulates that all trustees should attain the qualification from the Trustee Toolkit website within six months of being appointed to the board.
- Boards are expected to provide training from reputable providers where needed.
- Furthermore, a declaration of interest policy would ensure trustees do not promote allocations to specific beneficiaries based on vested interests.
The absence of absolute rules and guidelines can create doubt in the minds of trustees as to whether they have complied with their fiduciary duty. Section 37C adds even more complexity as trustees are expected to balance the intended outcomes of the law with the compassion required to address the best interests of unique family units.
Section 37C requires that trustees investigate the member’s beneficiaries, dependants and nominees and identify the best division of death benefit distributions, resulting in a subjective process and trustees who are constantly questioning whether they have applied their minds sufficiently.
If you or your client is a trustee of a fund, the following tips could ensure you are better prepared to handle post mortem benefit allocations:
- Make sure fund members understand the types of financial products they have. Many complaints received by the Pension Funds Adjudicator are due to unmet expectations. Members and their families who do not know that approved death benefits can take longer to pay out and are subject to the trustees’ allocations to nominated and non-nominated beneficiaries can cause distress. Remind members to keep their nomination forms updated annually.
- The admin-intensive Section 37C decision-making process is largely paper-based and requires a lot of manual input from various parties. Good coordination and data management skills and resources will help trustees with their investigations’ speed and thoroughness.
- Legal impact: guidelines drawn up by the Pension Funds Adjudicator and documents from the FSCA that outline principles of good governance are expected to be considered by trustees when making decisions about death benefit distribution.
If you would like to get in touch with a Group Risk Specialist at Fedgroup, you can do so here.