Fund members: Nominating beneficiaries to your retirement fund – what you need to know

By Kobus Hanekom, head of strategy, governance and compliance at Simeka Consultants & Actuaries

As a member of a retirement fund, you have no doubt nominated one or more beneficiaries – and your fund probably asks you to review your decision every year and also whenever there is a change in your family situation. But did you know that you don’t have the final say in the matter?

The allocation of your fund’s death benefits is entirely at the discretion of the fund trustees, and they may be compelled by law to consider beneficiaries not nominated by you. The golden rule to remember when nominating beneficiaries is this: the trustees will not be able to honour and respect your nomination if persons dependent on you will be left destitute as a result.

Therefore, if you nominate as your beneficiary a person who is not dependent on you and you are survived by a spouse or a life partner who is dependent on you, the chances are that the trustees will have to override your nomination, especially if the benefit is not sufficient to cover the maintenance needs of the dependant. This is unless you can provide a reasonable explanation as to why the dependant will not be unfairly disadvantaged by not being allocated a portion of the benefit.

For example, we know of a case where a fund member had nominated her son to receive 100% of the death benefit. After her death, however, an investigation by the trustees revealed that she was survived by a life partner who was financially dependent on her. The trustees had no choice but to allocate a portion of the benefit to the partner.

The son argued that the full death benefit should have been paid to him in accordance with his mother’s nomination. He said his mother’s life partner of 30 years (who happened to be his father) had abused his mother physically, emotionally and verbally. This man had allegedly relied on and exhausted his mother financially with demands for liquor and food.

Once the trustees have identified a person as a dependant, however, they are duty bound to consider the person for a possible benefit allocation. The nomination form is merely one of the factors the trustees will look at, and whether or not a dependant is in your view worthy of receiving a benefit or not, is not necessarily relevant.

Individuals who live with their life partners, but are not legally married, need to pay special attention when nominating beneficiaries. Unfortunately, the law can be unforgiving in such cases – so-called ‘common law spouses’ will only be considered for a possible benefit if they were nominated as beneficiaries or if they were financially dependent on the deceased.

However, where both the member and partner were/are working, it may not be all that clear that a partner was financially dependent on the deceased. People who live together often contribute equally towards bond payments and other household expenses and mutually support each other. If one partner dies, and the surviving partner has not been nominated as a beneficiary, it will be up to the trustees to decide whether or not the survivor qualifies as a factual dependant as per the definition in the Pension Funds Act.

In a ground-breaking case which came before the Pension Funds Adjudicator a few years ago, a deceased member’s mother lodged a complaint after the trustees allocated two thirds of the death benefit to the deceased’s life partner of 17 years – who had not been nominated as a beneficiary. The mother argued that the life partner earned a good salary and that she was not dependent on her son. The Adjudicator, however, determined that it would be contrary to the intentions of the law to exclude a party from qualifying as a factual dependant if there was evidence that the parties ‘were inter-dependent and as a consequence of the other party’s death, the surviving partner is left in a financial predicament, with a financial void, or is financially worse off’.

It is important to remember that Adjudicator determinations do not constitute legal precedents and that this determination may possibly not withstand the scrutiny of the High Court. Trustees therefore run a risk if they follow what some consider to be an accommodating interpretation of the Act.

Fund members who aren’t married but who are in a long-term relationship will spare their loved ones potential disappointment and hardship if they not only nominate them as beneficiaries, but also provide, on the nomination form, an additional explanation to the trustees as to how they have taken care of other individuals who are dependent on them.

For married couples, not nominating a beneficiary is not as critical, as spouses automatically qualify as dependants.

So what can retirement fund members do to ensure their wishes are seriously taken into account when their death benefits are allocated? The best members can do – especially if the matter is a complex one – is to provide enough information and guide the trustees to understand their planning and strategy.

Members should therefore not stop at merely nominating a beneficiary and indicating what percentage of the benefit he/she should receive. They should write a motivation (on the nomination form or an attachment thereto) that will assist the trustees to see the full picture and guide them to an outcome aligned with their own objectives.

In our first example, if the member had made it clear that the relationship with her son’s father had been an abusive one, and that she was in the process of ending the relationship and wished only her son to benefit, the trustees’ determination may well have been different. But there aren’t any guarantees – ultimately the trustees are entitled to deviate from the provisions of the nomination form and distribute the benefit in a manner they deem fair to all concerned.