Section 37C and the Trustee's Role in Death Benefit Distribution

The passing of a retirement fund member presents trustees with one of their most sensitive and critical responsibilities: the distribution of death benefits under Section 37C of the Pension Funds Act. This unique provision ensures the financial well-being of a deceased member's dependants, often overriding the member's will. This module will equip you with a deep understanding of Section 37C, empowering you to navigate complex family dynamics with empathy, diligence, and unwavering adherence to the law.

1. Understanding Section 37C

Section 37C of the Pension Funds Act, 1956, is a powerful and often misunderstood provision. It specifically dictates how a lump sum death benefit from a retirement fund must be distributed.

Its Purpose and Overriding Nature:

• The fundamental purpose of Section 37C is social protection: to ensure that individuals who were financially dependent on the deceased member are not left destitute upon their death.
• Crucially, Section 37C overrides any will or nomination form completed by the deceased member. While the deceased's wishes are considered, they are not binding on the trustees. The trustees' primary duty is to identify and provide for financial dependants.

Why is it Necessary? Without Section 37C, death benefits would typically form part of the deceased's estate, subject to estate duty and potentially lengthy winding-up processes. This could leave financially vulnerable dependants without immediate support. Section 37C ensures quicker, more direct, and needs-based distribution.

2. Defining "Dependant" under Section 37C

Before any distribution can occur, trustees must accurately identify who qualifies as a "dependant" according to the Act.

• Legal Dependants (Section 37C(a)):
  • Spouse: Including a party to a marriage (civil, customary, religious), or a union recognised as a marriage in terms of the tenets of any religion. Also includes partners in a life partnership (heterosexual or same-sex).
  • Children: Biological, legally adopted, and posthumous children (conceived before and born after the member's death), including those from previous relationships.
• Factual Dependants (Section 37C(b) and (c)):
  • Any person whom the member was legally liable to maintain (e.g., minor children from a previous relationship even if not residing with the member).
  • Any person whom the member was not legally liable to maintain, but was in fact dependent on the member for maintenance at the time of their death. This requires proving actual financial reliance. This category often includes parents, siblings, or other relatives who relied on the deceased's income.
• Nominees (Section 37C(d)):
  • Persons specifically nominated by the member in writing to receive a portion of the death benefit. These individuals do not need to be dependants. However, nominees only receive a benefit after all dependants' needs have been considered and provided for. If there are dependants, trustees often allocate a smaller portion or nothing to nominees, depending on the circumstances.

3. The Trustee's Three-Fold Duty

Trustees have a non-delegable, three-fold fiduciary duty when administering death benefits under Section 37C:

• Duty 1: Identify and Trace Dependants and Nominees:
  • Thorough Investigation: Trustees must conduct a diligent and comprehensive investigation, typically within 12 months of becoming aware of the member's death. This is not just a passive wait; it involves active steps:
    • Obtaining the deceased's personal details, marital status, and family history.
    • Contacting family members, employers, and administrators for information.
    • Placing notices (if necessary) to invite potential claimants.
    • Utilising tracing agents if beneficiaries are difficult to locate.
  • Critical Note: The 12-month period is for investigation, not for payment. If the investigation is complex, it may extend beyond 12 months, provided the trustees can demonstrate continuous, diligent efforts.
• Duty 2: Make Equitable Allocations:
  • After identifying all dependants and nominees, trustees must exercise their fair and reasonable discretion to determine how the death benefit will be distributed among them. This is the most challenging aspect and often leads to disputes.
  • Factors to Consider (as per PFA determinations):
    • Age of Dependants: Younger dependants (especially minors) generally have a longer period of dependency and greater need.
    • Relationship with Deceased: Spouses and children usually have a higher claim due to legal dependency.
    • Extent of Dependency: How much financial support each dependant received from the deceased.
    • Financial Needs: Current and future financial needs of each dependant (e.g., housing, education, medical expenses, potential future earning capacity).
    • Deceased's Wishes: The member's nomination form or will, while not binding, serves as guidance and should be considered.
    • Cultural and Social Context: Understanding family structures and cultural norms can be important, especially in diverse South Africa.
  • Avoiding Fettering Discretion: Trustees must not rigidly apply a formula or policy without considering individual circumstances. Each case must be assessed on its merits.
• Duty 3: Determine Appropriate Mode of Payment:
  • Deciding how the benefit will be paid to ensure the funds are managed responsibly and for the benefit of the recipient.
  • Direct Payment: To adult beneficiaries capable of managing their own finances.
  • Beneficiary Funds: For minor dependants, the benefit is often transferred to a registered beneficiary fund, which manages and disburses the funds for the minor's benefit until they reach adulthood. This is generally the preferred option for minors.
  • Trusts: In complex cases, a trust may be established for specific beneficiaries.
  • Installments: In limited circumstances, benefits may be paid in more than one installment, especially for major beneficiaries, if it is in their best interest and they consent.

4. Challenging Scenarios and Best Practices

Section 37C frequently gives rise to complex situations and disputes. Trustees must be prepared to handle these with professionalism and sensitivity.

• Multiple Spouses/Partners: Common in culturally diverse South Africa (e.g., customary marriages, religious unions). Trustees must identify all legal spouses and partners.
• Adult Children Claiming Dependency: Requires rigorous proof of actual financial dependence.
• Disputes Among Dependants: Trustees must act as impartial arbitrators, thoroughly documenting their decision-making process. The PFA is the recourse for unresolved disputes.
• The Role of the Pension Funds Adjudicator (PFA): The PFA provides crucial guidance through its determinations. Trustees should regularly review PFA rulings related to Section 37C to understand how similar cases have been handled and to learn from past decisions. Common grounds for PFA complaints include unreasonable delays, failure to properly investigate, and inequitable allocations.

5. Communication with Families

Navigating death benefit claims requires immense sensitivity and clear communication.

• Empathetic Approach: Remember families are grieving. Communication should be compassionate, yet clear about the legal process.
• Transparency: Explain the Section 37C process, the 12-month investigation period, and the factors trustees consider.
• Regular Updates: Keep claimants informed of the progress of the investigation.
• Managing Expectations: Be realistic about timelines and the ultimate discretion of the trustees.

Trustee Responsibilities: A Summary

Your role as a trustee in Section 37C administration is paramount. It demands:

• Diligence: Conducting a thorough and timely investigation to identify all legitimate dependants.
• Impartiality: Exercising equitable discretion in allocating benefits, based on facts and the needs of dependants, not personal bias or the deceased's binding wishes.
• Compliance: Strict adherence to the letter and spirit of Section 37C and relevant PFA determinations.
• Sensitivity: Communicating with grieving families with compassion and clarity.
• Documentation: Maintaining meticulous records of the investigation and decision-making process to withstand scrutiny.

Next steps

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