The Divorce Amendment Act allows some relief to spouses who might otherwise receive nothing from a marriage. Prior to August 1989, parties to a divorce could not take pension benefits into account when dividing the joint estate. And, in many matters, the only, or major benefit in a joint estate was the pension.
What often happened, was that husbands, (and normally it was the husband who was the breadwinner, and sole provider) would convert assets into cash, and put them into retirement annuity funds, and pension funds. This would effectively frustrate the claims of spouses to any portion of the joint estate because these pension benefits are generally unimpeachable. As a result of abuses like this, and also because it was quite clearly prejudicial to these non-member spouses, some measure of relief was due to them and the Divorce Amendment Act was introduced.
This article will deal with some of the aspects of the Divorce Amendment Act and will touch on a few of the anomalies in the law. For further information on some of the income tax aspects, see the earlier article published on Billboard.
Section 37 of the Pension Funds Act
Section 37 A of the Pension Funds Act, deals with the alienation of pension benefits by a pension member. It provides that pension benefits are not reducible, transferable or executable. The section provides that pension benefits may not be alienated, or pledged, or ceded. There are, of course exceptions and the Maintenance Act, for example, allows for the attachment of pension benefits in respect of maintenance. Sections 37B and C provide for what happens to pension benefits in the event of insolvency and on death. Section 37 D provides that a fund may make deductions from benefits where the member has a housing loan, or where the member has been dishonest, or where the fund pays a member’s medical aid subscription, insurance premium or for any other purpose deemed by the Registrar to be valid.
Division of Pension Benefits on Divorce
Apart from the exceptions specifically dealt with in the Pension Funds Act, the Divorce Amendment Act provides that a court making an order of divorce, may order the fund to make payment of benefits to the non-member spouse when those benefits become payable. The benefit, which is payable is that benefit the member spouse would be entitled to if that member spouse were to withdraw from the fund at the date of the divorce. One of the difficulties with this is that the benefit due may only be paid when the member spouse (or estate) becomes entitled to the benefit. If the member spouse withdraws or retires, the non-member spouse would become entitled to the benefit at that time.
If the member spouse died, the death would trigger the payment of the benefit and the non-member spouse would be entitled to receive his or her benefit then.
If the non-member spouse predeceased the member spouse the claim to the pension benefit would become a claim in favour of the estate. It would have to be held over until the benefit in terms of the divorce became accessible. This could mean that the estate of the non-member spouse could remain open for some time pending the receipt of the benefit.
Note, too, that the court does not have the authority to order the fund to make payment of any interest but the parties could deal with this outside of the divorce agreement.
This problem, i.e. that the non-member spouse can only have the benefit at some indeterminate future date is in fact where the law is lacking. At the time of the divorce, there is generally a need for finances for extraordinary expenses. The spouses often require money to establish a new home, meet new expenses and so on. These and other aspects of the Act are still under consideration.
Note, too, that this attachment of pension benefits under the Divorce Amendment Act, applies to pension funds that are not necessarily registered with the Registrar of Pension Funds. These other funds, for example are those established by collective agreements in terms of the Labour Relations Act.
It is also important to note that the benefit must be “flagged” in the records of the fund as quickly as possible after the order is received. There could be problems where the order is not registered, and is not capable of being carried out such as for example where the share of the non-member spouse was greater than the actual value as a result of a drop in the share price.
If the benefit were greater than the one-third allowance to be commuted on the member’s retirement, what would happen then?
i) At the time of a divorce, the court makes an order for the spouse to get 50% of the Pension benefit.
ii) The 50% equates to R160 000 (at the time of the divorce).
iii) The member retires two months later, and his total pension amount is R 325 000; the one-third allowable commutation, in terms of the second schedule to the Income Tax Act, is R 108 000.
Basically, there are a few possible courses of action:
1 The member spouse cannot give more than he or she is able to give. Thus, if the Income Tax Act provides a maximum retirement amount of one third, the other spouse would be entitled to take a third only, and then, so much of the balance due as equates to her share would have to be paid by the member spouse on the terms agreed upon by the parties. An unsatisfactory arrangement.
2Alternatively, it could be argued that the Divorce Amendment Act is a later one than the Income Tax Act, therefore in terms of the Laws of Interpretation of Statutes, the later act, giving the other spouse rights to an amount greater than one third would prevail and the amount could be taken by the non-member spouse. This unfortunately is not a course that would be favoured. It would have the effect of turning pension funds into provident funds. There could be a manipulation of the law whereby spouses would get divorced, under a collusive divorce action, solely with the intention of getting the full pension in a cash commutation.
If regard is had to the Pension Funds Act, section 37 D, the Act refers to the settlement of a fund member’s housing loan liability. It states that any loan by a fund to a member in terms of section 19(5) can be deducted from the benefit payable to a member “…to an amount not exceeding the amount which in terms of the Income Tax Act, 1962, may be taken by a member or beneficiary as a lump sum benefit as defined in the Second Schedule to that Act; or…”
Although the section quoted refers to a loan in terms of section 19(5) it could be argued that the plain rules of interpretation must apply to those amounts due and payable to a divorced spouse. If the amount of the order exceeds the one-third-commutation amount, then, the divorced spouse may take only the amount up to that one third (less the tax) and the balance must be paid by the member spouse, as he is able to.
If this were not so, parties could conceivably enter into collusive divorce actions, and thus free up greater amounts than they would otherwise be entitled to. Surely a situation not envisaged by the drafters of the legislation.
The matter is not yet settled.
The Divorce Amendment Act, while noble in its intentions, falls a bit short of perfection with a number of anomalies. The Act has in fact been referred to the Law Commission and will be dealt with in due course.