S 37A: Member’s Right to Contributions and the Protection of Benefits

Clement Marumoagae, Associate Professor, School of Law, University of the Witwatersrand, South Africa, published an interesting article in Law Democacy and Development volume 25 of 2021. In its abstract the author points out the fragmentation of the industry with regard to the protection of benefits, as the result of the different pension laws. This fragmentation leads to the development of confusing jurisprudence regarding the protection of benefits and suggests that it should be addressed.

The abstract concludes that legislative protection of retirement benefits is available before these benefits accrue to members, there is, however, controversy whether this protection remains intact when these benefits have accrued to members, but not paid yet.

NAMFISA is lately declining rules where any costs are accounted for in the build up of a member’s fund credit, i.e., before the benefit has accrued to the member. It argues its decision on section 37 A(1) of Namibia’s PFA (a copy of the South African equivalent quoted by the author below). It appears that NAMFISA might be relying on this article for its decision to decline rules that provide for the accounting of costs in the build up of a member’s fund credit. By implication NAMFISA should also argue that no costs may be accounted for in calculating the portion of monthly contributions to be allocated to a member’s fund credit, based on the member’s ‘right in respect of contributions…’ contained in the section. If NAMFISA indeed relies on the cited article, it overlooks or ignores the author’s unambiguous conclusion that the protection only relates to a member’s creditors and not to the fund’s creditors! In the build-up before a benefit accrues, the member only has an interest in the fund based on the fund’s rules but the assets belong to the fund!

If one follows NAMFISA’s assumed rationale, there is actually no manner in which a retirement fund could fund its management costs, as even a reduction of the investment returns would meet the prohibitions NAMFISA seems to read into section 37A(1). In practice retirement funds have, over many years, funded its management costs from contributions, member’s fund credits and investment returns.

Section 37A(1) states “No benefit provided for in the rules of a registered fund (including an annuity purchased or to be purchased by the said fund from an insurer for a member), or right to such benefit, or right in respect of contributions made by or on behalf of a member, shall, notwithstanding anything to the contrary contained in the rules of such a fund, be capable of being reduced, transferred or otherwise ceded, or of being pledged or hypothecated, or be liable to be attached or subjected to any form of execution under a judgment or order of a court of law, or to the extent of not more than three thousand rand per annum, be capable of being taken into account in a determination of a judgment debtor’s financial position in terms of section 65 of the Magistrates’ Courts Act, 1944 (Act No. 32 of 1944) …”.

I have narrowed down the content of the article to only focus on the member’s rights to contributions and the protection of benefits under the PFA, without delving into comparisons with other laws.

Introduction

The South African Pension Funds Act 24 of 1956 (PFA) [and the Namibian PFA, in the same manner] includes provisions designed to protect the retirement benefits of members from the reach of their creditors. These legislative measures are crucial in ensuring that members can sustain themselves during retirement, establishing a general rule that protects pensioners from being deprived of their income source during retirement.

Protection of Retirement Benefits

Contribution to Retirement Funds:

The most common method for saving towards retirement in South Africa involves contributions to retirement funds. These funds include pension funds, provident funds, and retirement annuity funds.

Employers may provide retirement funding as part of employment packages, while some employees invest independently to secure financial stability in retirement.

Challenges to Financial Security:

Various challenges, such as unemployment, lack of access to retirement funds, and high charges by retirement funds, can impact the financial security of individuals during retirement.

The South African government aims to increase the financial security of all citizens, encouraging adequate provision for retirement through policy initiatives.

Legislative Framework:

The PFA provides significant protection for retirement benefits, aiming to reduce the financial vulnerability of the elderly population.

This protection ensures that retirement benefits are used for their intended purpose, primarily to prevent poverty during retirement.

Legislative Provisions in the PFA

Section 37A(1) of the PFA:

Prohibits the reduction, transfer, cession, pledge, hypothecation, attachment, or execution of retirement benefits under a court order.

This section explicitly includes benefits provided for in the rules of a registered fund, annuities purchased by the fund, and contributions made by or on behalf of a member.

The protection is intended to ensure that retirement benefits remain intact for the financial security of the member during retirement.

Interpretation of Legislative Protection

Judicial Interpretation:

Courts have generally interpreted section 37A(1) to mean that retirement benefits are protected from the member’s creditors while still in the custody of retirement funds, but have not accrued to the member yet.

However, once benefits accrue to the member and are paid out, they can be subject to claims by creditors. This interpretation creates a potential risk for members who might become insolvent.

Case Law:

In Mostert NO v Old Mutual Life Assurance Co (SA) Ltd, the court ruled that annuities are protected under section 37A until they are paid out to the member, after which they can be claimed by creditors.

Similar interpretations were made in Moller v Innova Insurance Ltd and Vawda v Administration of Transvaal, where the courts held that accrued benefits fall within the member’s insolvent estate once paid out.

Conclusion

The legislative protection of retirement benefits under the PFA is vital for the financial security of retirees.

While section 37A provides robust protection, there is a need for legislative harmonisation to ensure consistency across different statutes and enhanced protection, such as preventing retirement benefits from being part of an insolvent estate once paid out.

The unanswered question raised in the article is only if a creditor may attach a benefit once it has become due and payable (it has accrued) while the fund still holds it. In the Sentinel case referred to on page 429 and onwards, the High Court concluded that “…once the fund is legally obliged to … pay it to the member, the benefit automatically becomes an asset in the member’s estate … notwithstanding that it … has not yet been paid to the member. Relying on the definition of ‘benefit’ in section 1 in line with section 5(1)(b), the SCA contradicted the High Court by concluding “… that a benefit payable to a member is, therefore, deemed to belong to the fund and not the member” (meaning a member’s creditor cannot attach it while the fund holds it). In the Sentinel case, a member’s curator, Bonis, wanted to attach the member’s benefit and acknowledged that he did not demand that the fund pay the benefit to him.

While the author relies on extensive references, the article nowhere insinuates that pension fund management costs may not be funded from monthly contributions, member’s fund credit, or investment returns. It only refers to a National Treasury comment concerning the impact of recurring charges on the ultimate retirement benefits that individual members of retirement funds will receive.Here’s a relevant excerpt from the article regarding this point:

“Fifthly, recurring charges levied by retirement funds on assets under management, which are generally borne by individual members, play a significant role in the ultimate retirement benefits individual members of retirement funds will receive when they exit their funds. According to the National Treasury’ in South Africa’s retirement system, recurring charges, which serve to reduce the investment return of the fund, are borne entirely by members in the form of lower benefits when they retire.’”

The article, therefore, acknowledges that management costs are indeed funded from the retirement fund’s investment returns and other assets, which ultimately reduces the benefits received by the members. It does not argue against this practice but instead points out its implications for members’ final retirement benefits.

Judgments cited in the article repeatedly confirm that the fund rules are the source of benefits. Implicitly, the reduction of benefits would only become relevant to the benefit once it is determined in the manner the rules prescribe.

Editor’s note

Retirement fund consultants frequently find themselves in a difficult position due to sudden rulings by NAMFISA that long-standing industry practices violate the PFA. These decisions are made without prior notice or consultation with stakeholders. As discussed in this article, NAMFISA’s new interpretation of section 37A(1) is likely incorrect. Unfortunately, NAMFISA is not inclined to seek workable solutions when it diverges from well-established practices that have stood the test of time in Namibia and South Africa. While NAMFISA often suggests that disputes be reviewed, it is well aware that few Namibian funds can afford the costs associated with such reviews unless NAMFISA itself is committed to resolving the matter swiftly and economically.

NAMFISA has the opportunity to play a crucial role in safeguarding the interests of retirement funds and their members. By engaging with industry stakeholders and thoroughly considering the long-term implications of its rulings, NAMFISA can ensure that regulatory changes do not disrupt the stability and reliability of retirement planning. A collaborative approach would not only uphold the integrity of the regulatory framework but also enhance the confidence of fund members in the system’s ability to protect their retirement benefits.

NAMFISA’s willingness to find solutions that respect established practices while ensuring compliance with the PFA can foster a more cooperative and constructive relationship with the industry. This cooperation, in turn, would lead to better outcomes for all stakeholders involved. We urge NAMFISA to consider its interpretations’ significant impact and work proactively with the industry to develop transparent, fair, and beneficial guidelines for funds and their members.