Divorce Settlement Agreements: Protecting Pension Funds

While divorce settlement agreements are sticky at best, and horrifically complicated at worst, understanding your rights to certain assets during the divorce procedure is critical. One of the most important assets to consider are pension funds – the loss of which can leave either party extremely vulnerable.

The pension interest of a party is deemed to be part of his or her assets, in the determination of patrimonial benefits to which the parties to a divorce action may be entitled – as is stated in section 7(7) of the Divorce Act.

Whilst this may seem a simple proposition, it has led to – and can create – a myriad of difficulties in the drafting of divorce settlement agreements and the formulating of court orders as part of the divorce procedure.

When it comes to pension funds and divorce settlement agreements, there are a number of issues which need to be taken into account. In their simplest terms, here are a few:

• Pension funds for the purposes of the Divorce Act include pension funds, provident funds, retirement annuities and preservation funds.
• Pension interest in a pension fund (not including a retirement annuity) means the benefits to which that party as a member would have been entitled in terms of the rules of that fund if his or her membership of the fund had been terminated on the date of the divorce on account of his or her resignation from office;
• Pension interest in a retirement annuity means the total amount of the party’s contributions to the fund up to the date of the divorce together with simple interest at the prescribed interest rate up to that date;
• The pension interest in a provident fund is the benefit to which that member would have been entitled to in terms of the rules of the fund if his or her membership of the fund terminated on the date of the divorce;
• Pension ‘interest’ and ‘benefits’ are not the same during the divorce procedure. If a party has already been paid out his or her pension benefit during the course of the marriage the value of this payment will simply fall into his or her estate and be treated as an asset. The non-member spouse will have no claim to the “pension interest” as contemplated in the Divorce Act one the benefit has accrued. It is important to be mindful of the rules of the fund and the dates of payment to the member so as not to be left with a court order which becomes unenforeceable;
• Whilst this may go without saying – for the Divorce Act to apply to your marriage, you need to have a valid marriage in terms of the Marriage Act or the Civil Union Act.
• The rules of certain funds allow for a certain portion of the pension benefit to be paid out as cash and oblige the member to utilise the balance to purchase a living annuity. These compulsory living annuities are not a retirement fund and as such do not fall within the definition of “pension interest” in the Divorce Act and as such cannot be assigned in terms of the Act on divorce;
• Section 7(7) of the Divorce Act does not apply to parties married out of community of property (without the accrual and after 1984), it only applies to parties married in community of property or in terms of an Antenuptial contract with the accrual system included.

In terms of section 37D of the Pension Funds Act (which took effect on 1 November 2008), any amount of pension interest awarded to a non-member spouse in terms of a court order or divorce settlement agreement may now be paid out to that non-member prior to the benefit accruing to the member spouse (this legislation is applicable to divorce orders granted from 13 September 2007 and in terms of orders granted prior to this date, the pension interest is deemed to have accrued to the non-member spouse on 13 September 2007).

The procedure is clearly stated, however, it is also important when drafting a divorce settlement agreement or court order to be mindful of the various formalities which need to be followed to ensure that the order granted is enforceable and valid. In short:

• The fund must be clearly identifiable;
• The interest can only be awarded to the non-member spouse in terms of a valid court order which is submitted to the fund by the non-member;
• The court order must refer to the pension ‘interest’ as a percentage or figure.
• The fund, within 45 days will inquire from the non-member whether or not they wish the amount to be paid out in cash or transferred to a pension fund on their behalf;
• The non-member must make this election within 120 days of the inquiry from the fund; • Once the election is made, the fund has 60 days to fulfil the election requirement;
• Any restrictions pertaining to withdrawals from preservation funds only apply to the members of the fund and not to the non-member spouse’
• It is important to bear in mind the tax implications which arise when an amount is withdrawn from a pension fund. The manner in which this pension interest will be taxed will also be affected by the election made by the non-member to either be paid out in cash or re-invest in a pension fund.

The field is a dynamic and constantly changing one, and as such it is advisable to obtain input from the administrator of the fund in question (or a party within the organisation possessing the requisite know how) prior to finalising any divorce settlement agreement and/or court order.

By Gillian Lowndes, attorney specialising in family law