C.N.N v N.N (2021/11607) [2023] ZAGPJHC 208 (23 February 2023)
INTRODUCTION
There is no adequate legal framework that allows non-member spouses to claim portions of the benefits directly from the funds when member spouses exit their funds before divorce. This enables member spouses to resign after being served with divorce summons to ensure that they keep these benefits out of the reach of their non-member spouses. This is a serious concern that the legislature has yet to address. Non-member spouses’ access to their member spouses’ benefits depends, first on divorce, and secondly, on whether member spouses are active in their funds, even though these benefits are still held by these funds. The application was dismissed.
BACKGROUND
The court dissolved the parties’ marriage on 14 October 2022 and incorporated their signed settlement agreement into its order. The respondent resigned from his employment and withdrew from his retirement fund on 7 May 2021, approximately two months after being served with the divorce summons on 18 March 2021. At the time the court granted the divorce order, the respondent was not a member of a retirement fund (“fund”), and he had no pension interest from which the applicant could be allocated a portion.
It seemed that when the divorce order was granted, the respondent’s pension benefits were still held by the fund. After the divorce order assigned her 50% of the respondent’s pension interest as per the settlement agreement, the applicant approached the fund intending to request payment of what she believed was due to her.
The fund informed the applicant that the respondent’s pension benefit had accrued to him and that he was no longer a member of the fund. The fund also informed the applicant that the divorce order did not meet the legislative requirements and could not be enforced. Interestingly, the fund’s Divorce and Maintenance officer sent a letter to the applicant on 19 October 2022. In this letter, the applicant was advised that for assistance, she needed to provide the fund with a divorce order directing the payment of a pension benefit instead of a pension interest. The fund further stated that it was holding the respondent’s accrued pension benefit, and his pension interest was nil. As a result, the current divorce order could not be enforced.
The letter from the fund prompted the applicant to apply to amend the divorce order incorporating the settlement agreement by replacing the phrase ‘pension interest’ with ‘accrued pension benefit.’
The matter was set down on an unopposed roll on 16 January 2023. There was no appearance on behalf of the respondent, and Adv Kalashe represented the Applicant. During oral argument, the judge questioned Adv Kalase about the competence of varying an order by substituting the statutorily prescribed phrase ‘pension interest’ with a phrase “accrued pension benefit” that was not legislatively recognised. Most importantly, the Judge sought clarification on whether such an amendment could be enforced under section 7(8) of the Divorce Act.
Faced with this challenge, counsel requested that the matter be stood down to allow him to prepare short heads of argument to support his case. The Judge agreed and postponed the matter to Friday, 20 January 2023. The heads of argument were uploaded on caselines on Thursday, 19 January 2023.
In the heads of argument, it was pointed out that the intended variation resulted from the fact that the applicant resigned from his employment on 7 May 2021 before the divorce order was granted. Furthermore, due to the resignation, no pension interest existed at the time of the divorce because the applicant was no longer a member of a pension fund.
During the argument, counsel contended that the phrase ‘pension interest’ made it difficult for the applicant to claim her entitled share of the respondent’s pension benefit. He further argued that to remedy this issue, there was a need to refer to the benefit as an ‘accrued pension benefit’ because the benefit accrued to the respondent when he resigned from his employment.
APPLICABLE LEGAL PRINCIPLES AND ANALYSIS
(i) Variation of divorce orders
Under Section 7(1) of the Divorce Act:
‘[a] court granting a decree of divorce may, in accordance with a written agreement between the parties, make an order concerning the division of the assets of the parties or the payment of maintenance by one party to the other.’
During divorce proceedings, parties have the right to negotiate the terms of their divorce and agree on various aspects, including the division of pension interests for one or both parties. By signing their negotiated settlement agreements in the presence of witnesses, parties explicitly state their satisfaction with the agreement’s content and agree to be bound by its terms. PL v YL 2012 (6) SA 29 (ECP). In this case it was said that settlement agreement, on the other hand, is what its name says it is: an agreement. It confers contractual rights and obligations on the parties thereto. And a contract as a source of dispute and litigation is notorious. Where a contractual dispute arises, the law of contract dictates what the remedy and ultimate resolution should be, the outcome of which is a court order capable of immediate execution.
Typically, the court that dissolves the marriage is asked to make the settlement agreement a court order. In Eke v Parsons, 2015 (11) BCLR 1319 (CC); 2016 (3) SA 37 (CC) para 29, the Constitutional Court definitively stated:
‘[o]nce a settlement agreement has been made a court order, it is an order like any other. It will be interpreted like all court orders’.
As the settlement agreement effectively becomes a court order, it should be drafted clearly to avoid any ambiguity regarding the court’s final decision. In AVW v SVW and Others (3118/2021) [2022] ZAWCHC 74, the court ruled:
‘[i]t is trite that settlement agreements ought only to be made orders of court if: the agreement can be enforced as a court order’.
The court further held that ‘[m]aking a settlement an order of court changes the nature of the agreement in that it provides the parties with a method to execute thereon’. See also Ex parte Le Grange and Another; Le Grange v Le Grange [2013] 4 All SA 41 (ECG); 2013 (6) SA 28 (ECG) (1 August 2013) para 32, where the court held that ‘[w]hat emerges from this is that the making of an order in terms of an agreement as envisaged in section 7(1) brings about a change in the status of the rights and obligations of the parties to the settlement agreement. The reason for this lies in the fact that the terms of the agreement are incorporated in an order of court. The granting of the consent judgment is a judicial act. It vests the settlement agreement with the authority, force and effect of a judgment’.
It is undeniable that a settlement agreement signed by divorcing parties, which stipulates that the fund of which one spouse is an active member should pay a portion of the member’s pension interest to the non-member spouse, can be enforced if the agreement was made a court order. In this case, it seemed that neither the court nor the applicant was aware when the divorce order was granted that the respondent had already exited his fund. It did not appear that the respondent took the initiative to inform both the applicant and the court. The applicant only discovered this situation when she contacted the fund to request payment. The applicant was incorrectly advised by the fund to approach the court to vary the divorce order to allow her to claim what the fund called the respondent’s accrued pension benefit. As shown below, such an amendment would be unenforceable given the current legal framework.
When there was a justifiable need, any litigant can approach the court that granted an order to vary its own order. Rule 42(1)(b) of the Uniform Rules of Court grants the court discretion, either on its own or upon application by an affected party, to rescind or vary any order or judgment that is ambiguous or contains a patent error or omission. The court can only rescind or vary to the extent of such ambiguity, error, or omission.
In Crisp v Crisp [2000] JOL 5887 (SE) 10-11, the court held that to properly adjudicate variation applications:
‘… the court [must] first identify the true nature of the “variation” sought by the applicant, which relief is somewhat obscured by the ambivalent wording of the prayer. The verb “to vary” in relation to a court order or judgment can have two different meanings. First, it can be used in the sense contemplated in the exceptions mentioned in the Estate Garlick judgment and as reflected in Rule 42(1), supra, viz the variation with retrospective effect of an incorrect, ambiguous, or incomplete order. Second, it can be used in the sense of modifying an existing order correctly made and accurately worded, but rendered no longer appropriate for some reason arising subsequent to the granting thereof.‘
The applicant sought to modify an order that had been made by the court, which was not aware of the respondent’s fund membership status at the time the order was made. The applicant only learned that the respondent exited his fund when she tried to enforce payment according to the divorce order granted by the court. The divorce order, which ordered the fund to pay a percentage of the member spouse’s pension interest to the respondent, could not be enforced under sections 7(1) and 7(8) of the Divorce Act. These provisions dealt with a pension interest which the respondent did not have at the time the divorce order was granted.
It could not be disputed that even if the order granted by the court had been correct and accurately worded, if there was a valid reason that arose after the order was granted that rendered it no longer appropriate, such an order could be varied. In this matter, the applicant was not necessarily confronted by an order that had been rendered unenforceable because of the reason that was established after the order was granted. Even though the applicant only discovered that the respondent had resigned after the order was granted, at the time the order was granted the respondent did not have a pension interest as defined in section 1 of the Divorce Act. The court had been led to grant an unenforceable order, which unfortunately could not be made enforceable even if the Judge were to order that it should be varied, as would be demonstrated below.
ii) The law regarding Pension interests in South Africa
This matter raised an important gap in the law regulating pension interests in South Africa. The term ‘pension interest’ was technically defined in such a way as to characterise the contributions plus investments held by funds on behalf of their member as their benefits differently depending on events that entitled member spouses to claim these benefits. If the member spouse was entitled to receive his or her benefit anytime before the divorce due to dismissal, retirement, retrenchment, or resignation as prescribed by the rules of his or her fund, this benefit was referred to as a pension benefit and did not constitute part of the member’s estate for as long as it was held by the fund. See Oosthuizen NO v Barnard and others [2023] JOL 57513 (GP) para 8. If the member received the benefit during the marriage, such benefit would constitute part of his or her joint estate if married in community of property or growth of his or her estate if married with the accrual system.
There was no adequate legal framework that allowed non-member spouses to claim portions of these benefits directly from the funds when member spouses exited their funds before divorce. This had allowed member spouses, as was the case in this matter, to resign after being served with divorce summons to ensure that they kept these benefits out of the reach of their non-member spouses. This was a serious concern that the legislature had yet to address.
Section 1 of the Divorce Act defined a pension interest regarding a pension fund in relation to a party to a divorce action who was a member of a pension fund (excluding a retirement annuity fund) as:
‘… the benefits to which that party as such a member would have been entitled in terms of the rules of that fund if his membership of the fund would have been terminated on the date of the divorce on account of his resignation from his office’.
This meant that a pension interest was that portion of the member spouse’s contributions plus investments thereon held by his or her fund which was calculated by that fund as of the date of divorce after receiving a divorce order instructing it to pay part of such contributions plus investments to the non-member spouse. The fund would determine what amount the member spouse would be entitled to receive had such a member exited the fund because of resignation as of the date of divorce. Some spouses might have, before their divorce, requested member spouses’ retirement funds to provide breakdowns of what member spouses would receive if they were to resign on the dates of divorce. Some spouses do not request such breakdowns but pleaded that the court assign a particular percentage, usually 50%, which would then be worked out by the funds named in divorce orders.
The non-member spouse could only be assigned a portion of the member spouse’s benefit that would accrue to the member spouse because of the divorce. In other words, divorce became a contingent event that led to the release of the portion of the member spouse’s pension interest to the non-member spouse.
Ordinarily, the pension interest is not an asset that was readily available to be shared when the parties divorced. It was is entirely clear why there was a need for a special legislative framework that “regarded” or “deemed” pension interests to be part of member spouses’ estates only for the purposes of divorce and not automatically part of their estates by operation of law. Lube J in De Kock v Jacobson and Another, 1999 (4) SA 346 (W) opined that:
‘The reason why a spouse married in community of property was believed to be not entitled to a share of the pension interest of the other spouse is because it was not regarded as an asset of the spouse who was a member of the fund and therefore could not form part of a joint estate’.
Because he was not concerned with the position before the pension became due, Lube J held that he:
‘…. did not have to deal with the complicated and not altogether satisfactory reasons why the pension interest of the member spouse was not regarded as an asset in his estate …’.
Most importantly, he correctly further opined that there:
‘… is no reason in principle why the accrued right to the pension should not form part of the community of property existing between the parties prior to the divorce’.
Nonetheless, the legislature created a legislative framework that made it possible for the non-member spouse to be able to claim a portion of the member spouse’s pension interest as of the date of the divorce. In terms of section 7(7)(a) of the Divorce Act:
‘[i]n the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall, subject to paragraphs (b) and (c), be deemed to be part of his assets’.
Petse JA (as he then was) in Ndaba v Ndaba, [2017] 1 All SA 33 (SCA); 2017 (1) SA 342 (SCA) para 26 held that section 7(7)(a):
‘… creates a fiction that a pension interest of a party becomes an integral part of the joint estate upon divorce which is to be shared between the parties’.
Once the legislative fiction had been created, the non-member spouse whose marital regime allowed for sharing of assets would be entitled to claim a portion of the non-member spouse’s pension interest. The entire pension interest would be part of the joint estate when the parties were married in community of property or growth of the member’s estate if parties were married with the application of the accrual system. In practice, courts usually awarded portions that parties either agreed upon or one of the parties claimed in their pleadings.
The Judge stated: ‘Once the legislative fiction has been created, the non-member spouse whose marital regime allows for sharing of assets will be entitled to claim a portion of the non-member spouse’s pension interest. The entire pension interest will be part of the joint estate when the parties are married in community of property, or growth of the member’s estate if parties are married with the application of the accrual system. In practice, courts usually award portions that parties either agreed upon or one of the parties claimed in their pleadings. Courts exercise their discretion when making these orders in terms of section 7(8)(a) of the Divorce Act which states that the divorce court may make an order that:
(i) any part of the pension interest of that member which, by virtue of subsection (7), was due or assigned to the other party to the divorce action concerned, should be paid by that fund to that other party when any pension benefits accrued in respect of that member;
(ii) the registrar of the court in question should forthwith notify the fund concerned that an endorsement be made in the records of that fund that that part of the pension interest concerned was so payable to that other party and that the administrator of the pension fund furnish proof of such endorsement to the registrar, in writing, within one month of receipt of such notification; …’.
Section 7(8) of the Divorce Act plays an important practical role. First, it provides the divorce court with discretion to make an order that a portion of the member spouse’s pension interest is due to the non-member spouse. Secondly, it empowers the court to make an order against the identified retirement fund which might or might not have been joined in the divorce proceedings as a party to pay the prescribed portion of the member spouse’s pension interest to the non-member spouse when the benefits accrues to the member spouse. Thirdly, it authorizes the court to direct the registrar of the court to notify the identified fund of the order for such a fund to endorse its records in respect of its member that a portion of that member’s benefits be paid to the non-member spouse. Fourthly, it creates an obligation on the administrator of the identified fund, once an endorsement in the records of the fund had been made, to provide proof of such endorsement to the court in writing.
In Ndaba v Ndaba, [2017] 1 All SA 33 (SCA); 2017 (1) SA 342 (SCA) para 27 it was been held that:
‘Section 7(8) … creates a mechanism in terms of which the Pension Fund of the member spouse is statutorily bound to effect payment of the portion of the pension interest (as at the date of divorce) directly to the non-member spouse. … The non-member spouse is thereby relieved of the duty to look to the member spouse for the payment of his or her share of the pension interest with all its attendant risks’.
Unfortunately, in practice the procedure laid out in section 7(8) of the Divorce Act is partially followed. Usually, it is non-member spouses or their legal representatives that notifies the funds of divorce orders and their obligation to pay non-member spouses, and not courts’ Registrars. Retirement funds usually also do not report back on the endorsements of their clients’ records. Practically, it does not appear as if it is desirable for retirement funds to be legislatively required to report back to the courts. This might increase the registrars’ workloads. However, this remained a legislative imperative.
The Judge stated that: “It appears that compliance with this requirement may have been necessary before the amendments that brought the clean-break principle came into effect. These amendments made divorce not only one of the contingent events that leads to the release of benefits but also immediate release thereof on the date of divorce in the form of pension interests.” See generally Wiese v Government Employees Pension Fund and Others 2012 (6) BCLR 599 (CC); Ngewu and Another v Post Office Retirement Fund and Others 2013 (4) BCLR 421 (CC). See also The Pension Funds Amendment Act 11 of 200 and Government Employees Pension Law Amendment Act 19 of 2011. See also M N v F N 2020 (2) SA 410 (SCA) para 2, where it was stated that ‘[t]he object of this amendment to the PFA was to ensure that the non-member spouse, receives payment of the amount assigned from the member’s pension interest, in terms of a decree of divorce and within the statutorily defined periods, as set out in s 37D(4)(b) of the PFA’.
In terms of the clean break principle, divorcing non-member spouses do not have to wait until their member spouses exit their retirement funds due to retirement, resignation, retrenchment, dismissal or even death, which can be years after the divorce, before they are paid what is due to them. The clean break principle is facilitated in terms of section 37D(4) of the Pension Funds Act, 24 of 1956 which dictates that:
- the portion of the member’s pension interest that should be paid to the non-member spouse must be deducted by a retirement fund named in or identified from the divorce order;
- within 45 days of the submission of the court order by the non-member spouse to the retirement fund named or identified in the divorce order, such retirement fund must request the non-member spouse to elect whether to receive the allocated portion directly or for that portion to be transferred to a retirement funds to which he or she is a member;
- the deduction must be made on the date on which the non-member spouse makes an election on how he or she should be paid and after he or she has provided the fund with details of how payment must be effected;
- the named or identified retirement fund must pay or transfer the amount prescribed in the divorce order within 60 days of being informed of how the amount must be dealt with in relation to the non-member spouse;
- if the non-member spouse fails to make an election or identify the retirement fund to which the prescribed amount should be transferred, the named or identified retirement fund must pay the amount directly to the non-member spouse within 30 days of the expiry of the period he or she was supposed to make an election; and
- if the retirement fund cannot reasonably ascertain how the payment to the non-member spouse must be effected, such retirement fund must retain the amount and any fund until such time as details of how that payment must be effected is made available to the retirement fund by the member spouse, the non-member spouse or any other person.
In this matter, the applicant wished to effect the clean break between herself and the respondent by being paid a portion of the respondent’s pension interest. The applicant would only have been entitled to claim from the respondent’s pension interest if that benefit had not accrued before the divorce. Maya JA (as she then was) in Eskom Pension and Provident Fund v Krugel and Another, [2011] 4 All SA 1 (SCA); 2012 (6) SA 143 (SCA) (31 May 2011) held that:
‘Once the pension benefit has accrued, i.e., beyond the date of divorce at which time the pension interest converts into a pension benefit, the provisions of ss 7(7) and 7(8) are no longer applicable’.
This was the challenge that confronted the applicant. She was claiming a portion of the benefits that accrued to the respondent before their divorce was granted. In other words, the applicant was relying on section 7(8) of the Divorce Act to claim a pension benefit that had already accrued to the respondent through resignation as opposed to a pension interest which ought to have accrued to the respondent due to the divorce. Section 7(8) of the Divorce Act regulated the latter.
The applicant did not challenge the constitutionality or otherwise of sections 7(7) and 7(8) read with section 37D(4) of the Pension Funds Act, and there was no need to consider this issue in this judgment. It was, however, important to highlight some of the challenges with the legal framework pertaining to the division of “retirement benefits” generally when parties married in accordance with any of the marital regimes that allowed for the sharing of patrimonial benefits were engaged in divorce proceedings.
This case raised an important social issue regarding fund members who exited their funds when they were embroiled in divorce proceedings.
Particularly when these members cashed in their benefits or instructed their funds to purchase annuities for them using their accrued retirement benefits. This practice made it difficult for non-member spouses to claim their entitled share of such benefits on divorce. This conduct appeared to be prevalent in practice, and those who were prejudiced did not have the financial resources to bring these cases to the courts for adjudication.
In Fourie v Vrystaat Munisipale Pensionfond and Others, (2973/2021) [2022] ZAFSHC 98 (20 May 2022) the member spouse had been a Chief Executive Officer of the fund to which he was a member. He exited his retirement fund four months before the court granted a divorce order due to retirement. The fund was placed under curatorship due to financial irregularities in its administration which were attributed to the member spouse. The curator of the fund instituted civil claims against the member spouse to recover the misappropriated funds. On the strength of these civil claims and in terms of section 37D(1)(b)(ii) of the Pension Funds Act, the curator withheld the member spouse’s pension benefit pending the determination of the civil claims in respect of the damage caused to the Fund by reason of the member spouse’s misappropriation of funds. In their settlement agreement which was made an order of court, it was stated that the non-member spouse would receive R 12 000 000.00 from the member spouse’s pension interest. The non-member spouse approached the court claiming this amount, arguing that payment was due to her by virtue of a decree of divorce incorporating a settlement agreement.
The fund and the curator argued that the divorce order upon which the non-member spouse relied as the basis of her claim was a nullity. In that at the time of the divorce, the member spouse did not have a pension interest which could be apportioned to the non-member spouse. Further, that the member spouse retired and exited the fund before the divorce, and his pension benefits which had accrued to him were subsequently withheld by the Fund in terms of section 37D (1) (b) (ii) of the PFA.
The court agreed with the fund and the curator and dismissed the non-member spouse’s claim. It held that she was not entitled to the payment that she sought.
In this matter, the law was against the applicant. She could not claim pension benefits that accrued before the divorce was ordered because section 7(8) of the Divorce Act only dealt with a benefit that accrued to the member spouse due to divorce. As such, the variation sought by the applicant would have flown in the face of section 7(8) of the Divorce Act, and it would not have been enforceable. To the extent that the fund advised the applicant to approach the court to vary the divorce order with a view to direct the fund to pay her a portion of the respondent’s ‘accrued pension benefits’, the advice was misconceived, misplaced, and legally flawed. The applicant ought to have challenged the current legal framework. Unfortunately, as the law stands, the court could only order the fund to pay a pension interest as defined in section 1 of the Divorce Act in terms of section 7(8) of the Divorce Act, and not an ‘accrued pension benefit’. The current legal position allows unscrupulous member spouses to deliberately prejudice their non-member spouses’ claims to their “retirement benefits” by resigning from their work after being served with divorce summons.
CONCLUSION
Non-member spouses can only claim parts of their member spouses’ contributions plus investments which will conveniently be referred to as pension interests for the purposes of divorce. This will be the case if member spouses were active members of such retirement funds as at the date of divorce. This means that non-member spouses’ access to their member spouses benefits is dependent, first on divorce, and secondly, on whether member spouses are active in their funds, even though these benefits are still held by these funds. This is the conundrum that the applicant is facing because at the time the divorce was granted, the respondent was not a member of a fund and there was no pension interest from which a portion could be allocated to her. Unfortunately, the applicant did not challenge the law in this matter, which the Judge were bound to follow.
Order
The following order was made:
The application was dismissed.
No order as to costs.
Authored by Bertus Preller, a Family Law and Divorce Law attorney at Maurice Phillips Wisenberg in Cape Town, Bertus was recognized by Business Day in 2023 as one of the leading lawyers in his field.
Read the judgement here.