Pension funds must check whether a dependant is still dependant before paying out

Deirdre Phillips, partner at Bowmans

When a member dies, Section 37C of the Pension Funds Act, 1956 (PFA) places an onerous duty on the board of a retirement fund to identify the potential class of ‘dependants’ and distribute the death benefits equitably among both them and nominated beneficiaries (if any).

This process should be a lot less open to differences in interpretation – and hence to disputes – following the Supreme Court of Appeal’s (SCA) ruling on 31 May 2019 in Fundsatwork Umbrella Pension Fund v Guarnieri and Other.

In resolving the disputed death benefits in the Guarnieri case, the SCA had to consider two key issues: the meaning of ‘dependant’ as defined in the PFA and the question of when a fund must identify dependants for the purpose of distributing death benefits.

When is as important as who

In this case, the member was survived by his wife, two children and his mother. Prior to the distribution of the member’s death benefit, his mother also passed away. The fund’s board, which was not aware of her death, allocated 42% of the death benefit to her. The mother had completed an election form prior to her death, requesting an advance payment of the death benefit and that the balance be used to purchase an annuity in her favour. The beneficiary of that annuity was her daughter, who was living in Australia and was not a dependant of the deceased member.

The deceased member’s widow lodged a complaint with the Pension Funds Adjudicator, which set aside the board’s initial allocation and remitted the matter back to the board.

The board then made the same allocation as before – without satisfying itself that the deceased member’s mother was still a dependant. This time the High Court set the decision aside in favour of the widow and children. The fund then approached the SCA, which dismissed the appeal.

Date of member’s death is not the deciding factor

The fund argued that the determining criterion for qualifying as a dependant should be the date of the member’s death. Any subsequent changes in circumstance should be ignored, it said.

The SCA disagreed. It observed that the aim of Section 37C of the PFA is to provide some protection for dependants, existing or potential (as in the case of a still-unborn child). Protecting the interests of the deceased member’s dependants means they would be less likely to be a drain on the state’s resources.

The SCA said the only way to ensure that the people identified as dependants are those whose interests Section 37C seeks to protect, is the proper timing of this determination: a dependant should be a dependant when the death benefit allocation is made and should still be a dependant when the benefit is paid.

Accordingly, to qualify as a dependant and receive a portion of the death benefit, the person concerned has to be a beneficiary at the time the allocation is made; and the person must still be a beneficiary at the time the distribution is made (i.e. when payment is made).

Onus is on funds to check accuracy of information

In weighing up a beneficiary’s eligibility as a dependant, the SCA said the board is obliged to carefully consider whether the information it has to hand when it makes its allocation is still accurate when it makes distributions.

After all, funds have up to 12 months after the member’s death to trace dependants, and the factual circumstances could change from the date of death to allocation and distribution.

For example, a deceased member’s spouse may have been financially dependent on the date of his death; however, six months into the investigation as to who qualifies as a dependant, the spouse may have won the lottery and no longer be financially dependent on the date the board distributes the death benefit.

In the Guarnieri case, the deceased member’s mother died four days before the board made its decision to distribute 42% of the death benefit to her. And it made the exact same decision when the adjudicator ordered it to reconsider.

In essence, the board made an allocation in favour of someone who was not a dependant at the time and therefore did not qualify to participate in the distribution of the death benefit.

It is important to note that financial or factual dependency is a key consideration in the allocation and distribution of death benefits. To simply allocate and distribute death benefits to those who fall within the ambit of ‘dependant’ (i.e. spouse or a child, etc.) is not sufficient and does not align with the object of Section 37C of the PFA.

Implications for retirement funds

For some funds, the SCA judgment may not have an impact on how they allocate and distribute death benefits as their practice (and interpretation of Section 37C) may already have been aligned with the Guarnieri judgment. Those funds that are not aligned should take careful note of the judgment, which is unlikely to be appealed and so is here to stay.