REASONS WHY A PENSION FUND MAY REJECT A DIVORCE SETTLEMENT AGREEMENT
Never rush into a division of retirement savings in a divorce settlement.
Divorce settlement agreements or court orders that award a share of a fund member’s retirement savings to a non-member spouse are rejected by retirement fund administrators for various reasons, including the court order not stating the name of the fund.
Where a spouse belongs to a number of retirement funds (for example, a pension fund and a provident fund), it may not be clear against which fund the divorce order can be enforced, especially if the order states only the words “the fund” instead of the words “the funds”.
- Date of divorce
The situation where the date of the divorce is after the member spouse left the fund complicates the issue. The definition of a “pension interest” in the Divorce Act has a connotation that, in order to calculate the pension interest, the member has to be in active employment and active fund membership at the date of divorce so that it may be deemed that he or she has resigned on the date of divorce and his or her former spouse is now entitled to a portion of his or her fund benefit as at that date.
But, if your employment (which is a condition for fund membership) already terminated at the date of divorce, then you cannot be deemed to have resigned at the date of divorce and your former spouse cannot be paid a portion of what would have been your fund benefit at the date of divorce.
A non-member spouse is at liberty to make a decision in terms of the divorce settlement agreement. It happens frequently in some divorce orders that the non-member spouse, as part of the divorce settlement, is compelled to preserve the benefit and is being forced to transfer the benefit to a preservation fund.
In terms of the Pension Funds Act, a retirement fund is compelled to give the non-member spouse the right to decide how the pension interest award should be paid out to the member. On presentation of a valid divorce order, the fund has normally 45 days to request the non-member spouse to decide how the pension interest due to him/her must be paid. The non-member spouse has 120 days in which to make a decision.
If the decision is made in terms of the divorce settlement agreement and the fund is not made a party to that agreement, the fund cannot enforce the provision.
- Interest on the benefit
In terms of legislation, no interest is payable in the first 120 days from the date of the divorce to the date on which the non-member spouse decides what to do with his/her share of the benefit. Interest is added only for periods exceeding 120 days. This should be reviewed to allow interest to be payable from the date of the divorce, because, when markets are volatile, it can make a difference to the non-member spouse or the member spouse.
Before obtaining a divorce, both the member spouse and the non-member spouse should ask the retirement fund or its administrator about the current fund value and the present value of the pension interest – these two values may differ – to ensure an equitable division of the assets.
Frequently the member spouse is reluctant to co-operate in this process, but the non-member spouse is entitled to ask the fund for the relevant information. If the fund is not prepared to divulge the information, the non-member spouse may be entitled to it in terms of the Promotion of Access to Information Act.
The current fund value is the amount typically reflected on a benefit statement and indicates the value of the member’s investment – the rand value of all the assets in the member’s underlying portfolios on a given date in a defined contribution fund or an RA fund, or the actuarial reserve value (the amount notionally held by the fund to provide for the future retirement benefit) in a defined benefit fund.
In most defined contribution funds, the resignation benefit will equal the current fund value, but this may not be the case in defined benefit funds. In retirement annuity (RA) funds, because the pension interest consists of contributions plus simple interest, the effect of compounded returns usually means that the current fund value will be significantly higher than the pension interest.
If sufficient uncertainty exists as to which fund is in fact intended, the divorce order will not be enforceable. Orders are frequently obtained in which the insurance company that sponsors or administers the pension fund is mistakenly cited instead of the fund. It is not sufficient to refer to the sponsor or administrator (for example, the Old Mutual pension fund), as these financial institutions typically operate several funds.
The law provides for two separate systems for a non-member spouse to access a member spouse’s pension on divorce.
- Ordinary matrimonial law – The principles of ordinary law concerning the division of assets on divorce cover pension benefits that have already accrued to a fund member at the time of divorce. An example of an accrued benefit is where a member has retired from a fund and has been paid a lump sum benefit and/or a monthly pension at the time the divorce order is granted.
- Section 7(7) of the Divorce Act – In terms of an amendment to the Divorce Act, a non-member spouse is entitled to share in the assets of a pension fund member where the benefit has not accrued to the member at the date of the divorce.