Divorce and pension sharing

Asset splitting on divorce includes pensions – or does it?

There is probably no aspect of divorce more complex and contentious than the division of pension entitlement. Despite the introduction of “clean-break” legislation in 2007 by amendments to the Pension Funds Act 24 of 1956 (PFA), fair and equitable sharing of pension fund assets is still a minefield.

Marital regime and pension sharing

The very first question to ask is – what marital regime applies? Entitlement to asset sharing of any description is determined by whether or not the marriage is in or out of community of property, and, if out of community of property, influenced by whether it is with or without accrual. The terms of the marital regime are set out in an antenuptial contract (ANC), or “pre-nup”. If there is no pre-nup, the default regime is in community of property (although this can be altered subsequently by means of a post-nuptial agreement).

If the marriage is out of community of property, then neither party has a right to the assets of the other, including pensions. They each leave the marriage with the property they brought to it and with any assets they secured independently during the period of marriage. If the marriage is in community of property, or out of community of property with accrual, it gets more complicated.

Because the division of pensions is so complex, for illustrative purposes we will assume that one spouse is a member of an occupational scheme (“the member”) and the other spouse has no pension provision apart from the anticipated share in the proceeds of the scheme at retirement (“the non-member”). Historically, this was the situation for many couples where the husband was the breadwinner and the wife looked after the home, or perhaps worked part-time in a low-value job. Now of course many couples are professionals with two incomes and two pension pots and may also be same-sex; but the traditional scenario of member/dependent non-member is still common enough to be useful for the sake of illustration.

Pension interest

“Pension interest” is not to be confused with interest earned on investments. Pension interest refers to the fund benefit at time of divorce and the entitlement of the non-member to a portion of that fund. Amendments to the Divorce Act 70 of 1979 – the Divorce Amendment Act 7 of 1989 – provided that: ‘In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall…be deemed to be part of his assets.’ What this means is that the court granting the divorce decree can now order that ‘any part of the pension interest of that member which, by virtue of subsection (7), is due or assigned to the other party to the divorce action concerned, shall be paid by that fund to that other party when any pension benefits accrue in respect of that member’.

In simple terms, this means the award to the non-member spouse of any part of the member spouse’s “interest” is calculated as at the date of the divorce, but takes effect (is paid) at a date in the future when the pension benefit accrues to the member spouse. In this way the fund continues to grow for the benefit of both parties on retirement.

However, the PFA also gives the non-member spouse the right to take the pension interest allocation as a lump sum in cash or reinvested into another retirement fund at the date of divorce.

Clean break

This provision is known as the clean-break principle. The clean-break principle was introduced by the 2007 amendments to the Pension Funds Act 24 of 1956 (PFA) and extended to private sector retirement funds by amendment on 1 November 2008. “Clean break” describes the right or entitlement of the non-member spouse who is married in community of property to receive immediate payment or transfer of the portion of the other spouse’s pension interest allocated to them upon divorce. Certain public pension funds are not regulated by the PFA and therefore the clean-break principle does not automatically apply to members of these schemes who divorce.

Bar that exit!

There can be no pension interest in an annuity or if the member spouse has left the fund. Exiting a fund is a common tactic employed to avoid sharing a pension. Technically the proceeds would be part of the joint estate. However, it can be difficult to recover the spouse’s share of benefit if the member has gone and spent the money. This is a short-sighted action that will diminish the member’s own retirement facility but is often done to ensure the estranged spouse receives no benefit. For this reason a good divorce lawyer will often ask the fund administrator to put a hold on any claims pay-out until the divorce is finalised.

Out of community of property with accrual

If the marriage is out of community of property but with accrual, and if the pension benefits were not expressly excluded in the antenuptial contract before the marriage, the same principle applies. Either spouse may have an accrual claim against the other, which could mean that the pension fund of the other spouse may need to be accessed to pay the accrual on divorce. The court is empowered to order that the non-member spouse be paid out a portion of the other’s pension fund if there are no other funds to satisfy the accrual claim.

Mind your language

The wording of the Divorce Order is absolutely crucial in matters concerning pension sharing. If the language is imprecise and the pension fund not correctly cited by name, the fund administrator may reject the claim. The administrator can make the payment only if the Divorce Order is binding on the fund, which means it must meet certain conditions. For example, if the insurance company managing the fund is named, but not the fund itself, the administrator may reject the claim on the basis that the company runs multiple funds and it is not clear which fund is meant. Any errors in the Divorce Order will require an amended order from the court; it can’t be adjusted informally.

The Divorce Order

In order to be binding, the Divorce Order must contain certain critical elements. There must be specific reference to “pension interest”. It is not sufficient to refer to “pension fund”, “pension benefits”, or any other generic description. The fund must be named or it must be clear from the wording which fund is meant. The Divorce Order must also contain the percentage or rand value of the pension interest to be assigned to the non-member spouse.

Seek the guidance of an expert divorce attorney

We have tried in this short article to give an overview of the treatment of pension entitlement on divorce. There are many variables and each situation is unique. Achieving fair and equitable sharing of pensions, remaining within the various laws involved but securing full entitlement, requires professional advice. This is not a matter that can simply be agreed between parties, however amicable the divorce, though the spouses may come to an agreement on the portion of pension interest to be awarded.

Contact Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za to discuss your case in confidence. SD Law and Associates are experienced family law attorneys who will look after your interests and ensure a fair settlement that respects all parties.

For more information see this related article.

Divorce Attorney Cape Town

http://divorceattorneycapetown.co.za/

View more posts from this author