Introduction
In South Africa, there is no legislative clarity on the role, if any, that matrimonial principles play when retirement funds make decisions relating to the retirement benefits that accrue to their members who are married in accordance with the matrimonial property systems that allow for the sharing of patrimonial benefits. It is particularly unclear whether those married to members of retirement funds have enforceable interests in such members’ retirement benefits while the fund still holds them. Generally, members’ contributions that are invested by retirement funds and the returns on those contributions constitute the assets of these funds.Footnote 1 Members have a right to claim the promised benefits when events such as dismissal, retrenchment and resignation occur, as provided for in their retirement fund rules. A difficulty arises when such events happen at a time when members and their spouses are engaged in divorce proceedings and members become entitled to claim and receive such benefits before the divorce is granted. In MM v OM, the court was confronted with this problem and had to determine whether it could order the payment of a proportion of the retired member’s benefit to his spouse, which had accrued to the member through his retirement before the divorce.Footnote 2 Even worse, the retired member was paid his benefits after the divorce.
This article aims to critically discuss MM to highlight the court’s general confusion and misinterpretation of the applicable law regulating the sharing of pension interests in South Africa. Most significantly, this article will demonstrate that the court in MM ignored binding precedent from the Supreme Court of Appeal and also disregarded other useful judgments that correctly captured the applicable law. I will show that in the court’s conclusion that it had the authority to order the former retirement fund member to pay his former spouse a portion of the received retirement benefit, it failed to adequately engage the applicable legal framework in South Africa. This note starts by providing a brief overview of that framework; it then proceeds to critically analyse the approach adopted in MM to demonstrate why it is bad law and should be rejected.
The regulatory framework
Overview
The law that regulates the sharing of retirement benefits when parties are divorcing in South Africa is provided for in sections 1, 7(7) and 7(8) of the Divorce Act, as well as the new definition of the phrase “pension interest” introduced by the Pension Funds Amendment Act (PFAA).Footnote 3 The phrase “pension interest” appears to be defined differently in the PFAA than how it is defined in the Divorce Act. Nonetheless, in the event of a conflict between the provisions of the PFAA and the Divorce Act, the provisions of the PFAA will prevail.Footnote 4 This amendment was not yet in force when MM was decided; had this legislation already been signed before this case, it would not have had a material impact on the question that the court was called to determine.
Sharing of assets
The starting point is the contract of marriage and the parties’ chosen matrimonial property system. The Constitutional Court in EB v ER NO demonstrated that economically stronger spouses, who in practice are usually men, can dictate the choice of matrimonial property system to which the parties contract, and that “women typically enter into marriage poorer and more dependent than men, and therefore have less bargaining power”.Footnote 5 This unequal bargaining power often leads to prejudicial outcomes during divorce for financially weaker spouses, most of whom are women. Be that as it may, the matrimonial property system that parties choose will determine whether assets would be shared during divorce. Statutory remedies, such as redistribution of assets and forfeiture of patrimonial benefits, may be used to address or perpetuate the inequality experienced during the marriage upon divorce.Footnote 6
In South Africa, a marriage can be concluded in community of property, out of community of property, and out of community of property with the application of the accrual system.Footnote 7 The parties can decide not to share in each other’s patrimonial benefits by concluding an antenuptial contract that states that their marriage will be completely out of community of property. The practical consequence of this system is that parties to such a marriage do not co-own the assets they bring into the marriage.Footnote 8 However, if they wish to benefit from each other’s assets, they may enter a marriage that is subject to an accrual system; this is also a marriage out of community of property. While the party with a lesser estate essentially has the right to share in the growth of the party with a bigger estate, neither spouse has an enforceable claim towards the assets of the other during the subsistence of the marriage.Footnote 9 The accrual claim arises only on the dissolution of the marriage.Footnote 10
Generally, where the parties are married without concluding any antenuptial contract, they will automatically be married in community of property by operation of law.Footnote 11 This is the default matrimonial property system in South Africa, and establishes a joint estate that will hold all the patrimonial assets that each party brings into the marriage and those that they individually or collectively acquire during it. According to Hahlo, “[c]ommunity of property is a universal economic partnership of the spouses. All their assets and liabilities are merged in a joint estate, in which both spouses, irrespective of the value of the financial contributions, hold equal shares.”Footnote 12 In NM v MM, it was held that “[c]o-ownership of the property, movable as well as immovable[,] is a consequence of the marriage in community of property”.Footnote 13 As such, the parties’ chosen matrimonial property system provides guidance on their respective entitlements towards each other’s assets or those that constitute part of the joint estate. Parties that marry in terms of community of property and out of community of property subject to the accrual system can share patrimonial benefits on the dissolution of their marriage. In BLST v MJM, it was correctly held that a “patrimonial benefit is a benefit that accrues to a party’s interest in the assets of the estate of the marriage by virtue of the marriage”.Footnote 14
Pension interest
Since retirement benefits are regarded as the assets of the retirement funds while they are still held by the fund, and members have not yet derived a right to claim them, they do not constitute patrimonial assets that can ordinarily be shared on the dissolution of the marriage.Footnote 15 Heaton correctly argued that a retirement fund member’s benefit that has not yet accrued is not an asset in the member’s estate, because the right to claim the benefit only vests in the member when the benefit accrues to them, usually through their retirement, dismissal, retrenchment or resignation.Footnote 16 Retirement fund rules provide the circumstances under which retirement benefits will accrue to members; accrual of these benefits basically means that members derive a right to claim their benefits as prescribed in these rules. In other words, events such as dismissal, retrenchment, retirement and resignation entitle members to claim their retirement benefits. While retirement benefits are ordinarily not classified as patrimonial benefits, the legislature has created a framework that allows these benefits to be considered when identified patrimonial benefits of marriage are determined during a divorce. Section 1 of the Divorce Act includes the phrase “pension interest”, the definition of which provides some basis for the calculation of the retirement fund members’ benefits and the portions which can be paid to the spouses of these members. This phrase is defined as follows, in reference to a party to the divorce proceedings; he or she
“(a) is a member of a pension fund (excluding a retirement annuity fund), [which] means 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;
(b) is a member of a retirement annuity fund which was bona fide established for the purpose of providing life annuities for the members of the fund, and which is a pension fund, [which] means the total amount of that party’s contributions to the fund up to the date of the divorce, together with a total amount of annual simple interest on those contributions up to that date, calculated at the same rate as the rate prescribed as at that date by the Minister of Justice in terms of section 1 (2) of the Prescribed Rate of Interest Act, 1975 (Act No. 55 of 1975), for the purposes of that Act.”
It is generally accepted that this definition entails that a pension interest is the value of the notional benefit the retirement fund member would have been entitled to receive if he or she had exited his or her fund at the date of divorce.Footnote 17 Through this definition, the legislature attempted to provide “a method of ascertaining the value of the ‘interest’ of the member of the pension or retirement annuity fund concerned as accumulated up to the date of the divorce”.Footnote 18 For the value of the interest to be considered for the purpose of divorce, the legislature created a framework that deems this benefit to be an asset in the member’s estate.Footnote 19
In JMM v PMM and Another, it was held that “[s]ection 7(7)(a) creates, as a peremptory deeming provision, a fiction that such a pension interest of a party becomes part of the joint estate which upon divorce is to be shared between the parties”.Footnote 20 It is important to note that this is a special mechanism designed solely to make it possible for the spouse of the retirement fund member to claim at the date of divorce a portion of the member’s retirement benefit that is held by the fund. Divorce becomes a legislative route for the non-member spouse to receive payment from the member’s retirement fund. In other words, divorce is a contingent event that empowers retirement funds, where the parties are married in terms of any of the matrimonial property systems that allow for the sharing of assets, to allocate and pay a prescribed portion of the calculated benefit to the non-member spouse.
In Ndaba v Ndaba, the Supreme Court of Appeal authoritatively held that section 7(7) of the Divorce Act “vests in the joint estate the pension interest of the member spouse for the purposes of determining the patrimonial benefits, to which the parties are entitled as at the date of their divorce”.Footnote 21 This essentially means that the divorce itself triggers the deeming provision, and once deemed to be an asset in the member’s estate, a pension interest will become a patrimonial benefit that is eligible to be allocated to the non-member spouse. While this might be sharing in the broader scheme of things, however, the process is more about allowing the non-member spouse to have an enforceable claim to the member’s retirement benefit. Unlike assets such as houses and cars that can be sold and the money apportioned between the parties, there will not be any sharing of the pension interest in the strict sense at the time of divorce. The non-member spouse will be paid the prescribed portion, and the member spouse will not be paid anything. The remaining benefit will remain invested in the fund until the member exits the fund through resignation, dismissal, retrenchment, retirement or death. As soon as the pension interest is deemed to be a patrimonial asset, the non-member spouse will be entitled to claim it, and section 7(8) of the Divorce Act will come into operation. This section empowers courts to order retirement funds, which are not ordinarily part of the divorce litigation, to pay amounts or percentages stated in the divorce decree or the settlement incorporated into the divorce order to the non-member spouse. The Supreme Court of Appeal made it clear in Old Mutual Life Assurance Co (SA) Ltd and Another v Swemmer that:
“[o]nce a part of the pension interest of the member spouse becomes ‘due’ or ‘is assigned’ to the non-member spouse in the course of the divorce proceedings, the court may order that such part of the pension interest must be paid by the pension fund concerned to the non-member spouse ‘when any pension benefits accrue in respect of’ the member spouse. The court may also order that an endorsement be made in the records of the fund concerned to the effect that the part of the pension interest thus allocated to the non-member spouse is ‘so payable’ to such spouse.”Footnote 22
The court can make an order that the identified retirement fund pay to the non-member spouse only if the member is still contributing to the fund and the divorce is the trigger event that leads to the disinvestment of the member’s benefit. This was made clear by Maya JA in Eskom Pension and Provident Fund v Krugel and Another, where she explained that when a member spouse has exited his fund and his benefit becomes payable to him before divorce, “he could not again be deemed to become entitled to a resignation benefit. He simply no longer had a pension interest for purposes of ss 7(7) and 7(8) of the Divorce Act and s 37D(4)(a) of the Pension Funds Act, which is specifically designed for purposes of section 7(8)(a).”Footnote 23 The Supreme Court of Appeal basically clarified that for the non-member spouse to derive a right to share the member spouse’s retirement benefit held by the fund, the event that makes the retirement fund claimable should be a divorce. If any other event that leads to the accrual of these benefits takes place before divorce, there will not be any pension interest of which a proportion can be allocated to the non-member spouse. While this legal position is unsatisfactory and leads to prejudice against non-member spouses, it is the current law in South Africa that should be applied unless challenged on constitutional grounds or changed through legislative processes.Footnote 24 As will be demonstrated below, the court in MM failed to appreciate and apply this legal framework.
Separation of issues
MM was brought to court in terms of Rule 33 of the Uniform Rules of Court, which makes provision, once a case has been lodged, for the parties to a dispute to ask the court to determine a question of law that has arisen. The parties are required to provide the court with a written statement of fact wherein they set forth the facts agreed upon, the question of law in dispute and their contentions thereon.Footnote 25 The primary purpose of separating issues and isolating and adjudicating on an identified question of law “is to facilitate the convenient and expeditious disposal of litigation”.Footnote 26 Miller J, in Minister of Agriculture v Tongaat Group Ltd, held that this rule enables the court to expeditiously dispose of a particular issue (or issues) raised in the case, “before considering other issues which, depending on the result of the issues singled out, might fall away or become confined to substantially narrower limits”.Footnote 27 It empowers the court to address the “alleged lacuna in the plaintiff’s case or an answer to the case can be tested; or simply so that a factual issue can be determined which can give direction to the rest of the case and in particular to obviate a parcel of evidence”.Footnote 28
The Supreme Court of Appeal in Molotlegi and Another v Mokwalase cautioned that a court “hearing an application for a separation of issues in terms of rule 33(4) has a duty to satisfy itself that the issues to be tried are clearly circumscribed to avoid any confusion”.Footnote 29 This entails that the issues where separation is sought must not only be clearly defined but must also be complex. The application of the law to such issues should also require clarification. In other words, unless the law that regulates those issues is challenged, where the law is settled, there is no need for such issues to be separated and adjudicated separately; otherwise, the court runs the risk of providing an alternative interpretation that is at odds with settled legal principles. In the same case, it was held that “[w]here there is a likelihood that such separation might cause the other party some prejudice, the court may, in the exercise of its discretion, refuse to order separation”.Footnote 30
The separation must only be allowed when necessary and where it would not lead to significant delays in finalizing the entire matter.Footnote 31 Where the court is required to separate issues to clarify matters for itself, it must consider whether it is indeed convenient to separate the identified issues.Footnote 32 When faced with an application to separate issues, the courts should adequately consider the request and determine whether the efficient management of litigation would not be best served by airing all the issues together.Footnote 33 Courts should be mindful “not [to] lose sight of the possibility of inconvenience and prejudice to a party should the litigation be dealt with on a piecemeal basis”.Footnote 34 In MM, since the wife pursued litigation sometime after the parties’ divorce, it was not clear what the actual cause of action before the court was. However, the court agreed to separate issues, as illustrated below.
An overview of MM
In MM, the court agreed to separate four issues. The first was whether a member who exited a fund before divorce and received his benefit after the divorce could be ordered to pay his ex-wife the portion of the received benefits in terms of the provisions of the Divorce Act.Footnote 35 This issue was settled by the Supreme Court of Appeal in Krugel and clarified in CNN v NN, cases which the court ignored.Footnote 36 There was no need to separate this issue because the law is settled in this regard. The second issue that was separated was determining the remedy available to the non-member spouse during the divorce proceedings.Footnote 37 The two remaining issues that were separated relate to the settlement agreement, and it is unnecessary to discuss them in this article.Footnote 38
Notwithstanding the fact that this case was brought to court in terms of Uniform Rule 33, which allows the parties to set out the facts to enable the court to not only understand the issue sought to be separated but also reflect on the applicable law, the court failed to record the facts of the case adequately. The court correctly indicated that the parties were married to each other in community of property. The wife instituted divorce proceedings; however, the judgment does not clarify when the divorce proceedings commenced. The court also disregarded critical information when setting out the facts: it failed to record as an undisputed fact that the husband, on 31 March 2017, exited his fund during the divorce proceedings, before the court granted the divorce order. This is a material factor that demonstrates whether a pension interest exists, and the court’s failure to deal with it adequately led to its misdirection. The husband exited his pension fund due to retirement before the divorce was granted, which means that he ceased to be a retirement fund member before the court granted the divorce order.Footnote 39 In other words, at the time the court granted the divorce order, there was no pension interest that the court could order to be allocated to the non-member spouse. The parties managed to settle their divorce dispute and concluded a settlement agreement. However, it is not clear from the judgment whether this settlement agreement was concluded and signed before or after the husband exited his retirement fund.
Nonetheless, in the settlement agreement, the parties recorded that the husband was a member of a retirement fund, and in terms of section 7(8) of the Divorce Act, the wife was entitled to 50 per cent interest as of the date of divorce.Footnote 40 It was recorded that the wife was also a member of a different retirement fund, of which the husband was also entitled to 50 per cent interest. Interestingly, the word “interest”, as opposed to the phrase “pension interest”, was used in the settlement agreement; the word “interest” is not defined in the Divorce Act, and there is no provision in this Act that entitles the court to order that a member spouse’s “interest” in the retirement fund should be paid to the non-member spouse. Should the court grant such an order, the retirement fund will be confused as to what must be deducted and paid to the non-member spouse: whether it should be a pension interest, the member’s interest or retirement interest.Footnote 41 If the court granted an order where the fund was ordered to pay an “interest”, this would have made the order unenforceable, and the non-member spouse would have been burdened with making a variation application.
The parties’ divorce action was heard on an unopposed roll on 21 July 2017, where the court granted a divorce order incorporating the settlement agreement.Footnote 42 It is not clear from the judgment whether the court that granted the divorce order was made aware that the husband was no longer a member of a retirement fund, even though at the time his benefit had not yet been paid to him. It can, however, generally be assumed that the court was not informed of this critical fact, otherwise it would not have granted the order on the terms the parties agreed, because the husband did not have a pension interest as defined in the Divorce Act at the time of divorce. This is an issue that Mabuse J in MM failed to grapple with adequately. He also failed to seek guidance from the Supreme Court of Appeal’s Krugel decision, where the current legal position was set out.
As explained above, where a benefit accrues to a member before divorce, at the time the court determines whether a divorce should be granted, there will be no pension interest that can be shared in terms of the provisions of the Divorce Act. Divorce must be the exit event that leads to the member’s retirement benefits being deemed to be part of his assets to make them vulnerable to being shared by the non-member spouse. The fact that divorce was not an exit event meant that the definition of pension interest provided for in section 1 of the Divorce Act was not met. This essentially meant that sections 7(7) and 7(8) of the Divorce Act were simply not applicable in this case. In this respect, Mabuse J failed to understand and apply the current legal framework; he went further and incorrectly held that the member’s benefit was preserved in the fund because it was not paid to him when he retired.Footnote 43 The member retired on 31 March 2017, during the divorce proceedings, and only got paid his benefit in October 2017, after the divorce order was made. This can hardly be referred to as a preservation of benefits. Benefits are preserved for retirement, and in this case, the husband had retired and there was no need to preserve his benefit. At best, if there was such an option, the husband could defer payment of his benefit to a later date. This was purely an administrative issue that led to retirement benefits being paid several months after retirement, which is usually the case with such payments. Mabuse J incorrectly opined that the husband’s benefit preserved and “remained … for all intents and purposes, the parties’ pension benefits, in different proportions, in their joint estate”.Footnote 44 It is not clear from Mabuse J’s reasoning how the deeming provisions of the Divorce Act became applicable when the pension interest did not exist at the date of divorce.
With respect, Mabuse J’s approach and reasoning are incorrect and illustrate a clear judicial misunderstanding and misinterpretation of the current legal framework. This is a clear illustration that Mabuse J failed to understand the significance of different exit events from retirement funds and the accrual of benefits before the date of divorce, and most significantly, whether divorce can be regarded as an exit event for the benefit of the non-member spouse when the member has already exited his fund due to retirement before the date of divorce. Mabuse J further incorrectly held that “[b]oth were entitled, in terms of s 7(7)(a), to the pension benefits … from the date on which the divorce action commenced until the date of the divorce to such pension benefits when their joint estate was dissolved by an order of Court”.Footnote 45 This is incorrect because the member spouse is not entitled to receive any portion of his retirement benefit on the date the court grants a divorce order. Only the non-member spouse is entitled to receive a portion of the member’s pension interest as prescribed in the divorce order. Once the non-member spouse has been paid that prescribed portion, the member spouse will continue contributing to his retirement fund until he exits the fund through dismissal, retrenchment, resignation or retirement. Where parties are married in community of property, the member’s retirement benefit is deemed to be part of his estate, and by extension the joint estate, solely to allow the non-member spouse to claim a portion of it.
Most significantly, the court incorrectly stated that the fact that the husband’s “membership of the [fund] terminated on 31 March 2017 is immaterial because at that stage they were already parties to a divorce action as contemplated by the provisions of s 7 (7)(a) of the Divorce Act. The pension benefits were already part of the parties’ joint estate.”Footnote 46 Heaton correctly argues that “[i]t is only the amount of pension interest as at the date of divorce that is deemed to be part of the member’s assets”.Footnote 47 This essentially means that none of the Divorce Act provisions were applicable when the divorce was instituted and when the member retired. It is disheartening that judges can make incorrect statements of the law where there is adequate judicial and academic literature that adequately explains the applicable legal principles. Judges complain about the challenges of accessing good research databases, but the relevant literature that explains the law relating to pension interests is readily available on the internet and can be accessed free of charge, even with a simple Google search. There is absolutely no excuse for judges to get basic legal principles wrong, particularly those who choose to ignore or fail to locate binding precedent that is easily accessible. This is not justice, and it is unfair to the parties before the court. The deeming provisions come into operation only on the date the divorce order is granted, not before. The fact that the divorce has been instituted and the spouses “are already part of the divorce action” does not trigger the application of sections 7(7) and 7(8) of the Divorce Act. At best, it could be argued that the benefit accrued to the joint estate should be shared as an ordinary financial asset of the joint estate in terms of the provisions of the Matrimonial Property Act.Footnote 48
Once accrued before the divorce, the retirement benefit cannot be shared as a pension interest because divorce will not be an exit event from the fund. In other words, sections 7(7) and 7(8) of the Divorce Act cannot be used to share the ordinary financial assets of the joint estate, irrespective of whether they are derived from retirement benefits. In CNN v NN, a reported case that Mabuse J appears to have not been aware of despite it being readily and freely available, it was clarified that the non-member spouse “cannot claim pension benefits that accrued before the divorce was ordered because section 7(8) of the Divorce Act only deals with a benefit that accrues to the member spouse due to divorce”.Footnote 49 Mabuse J endeavoured to answer whether a former member of the fund who exited the fund before divorce and got paid his benefit after it could be ordered to pay such benefits to his former spouse, in terms of section 7(8) of the Divorce Act. He was of the incorrect view that such an order could be granted.
It appears that Mabuse J was not aware that section 7(8) of the Divorce Act is a statutory mechanism that allows courts to order retirement funds, and not members of retirement funds, to pay portions of members’ retirement benefits to the non-member spouses that accrue to members due to divorce. In this respect, Mabuse J fundamentally misdirected himself, and his approach is not in line with the current legal framework; the judgment amounts to bad law and should be rejected. The court misdirected itself further by relying on Ndaba v Ndaba, where the Supreme Court of Appeal was not confronted with the retirement benefits that had accrued before the divorce order was granted.Footnote 50 The relevant Supreme Court of Appeal authority that Mabuse J ought to have relied on is Krugel. I suggest that the court mischaracterized the dispute; it was required to demonstrate why sections 7(7) and 7(8) of the Divorce Act were not applicable in this case, and it failed to do so.
Conclusion
This note has discussed the current legal position in South Africa regulating the sharing of retirement benefits upon divorce. It has illustrated that where these benefits accrued before the divorce order is granted, the court that grants a divorce decree does not have the power to order the division of these benefits in terms of section 7(8) of the Divorce Act. It has been demonstrated further that sections 7(7) and 7(8) of the Divorce Act are not applicable when retirement fund members exit their funds before divorce. It was argued that at the very least, retirement benefits can be taken to have accrued to the joint estate where parties are married in community of property or to part of the growth of the member’s estate if the accrual system is applicable to the parties’ marriage. In these circumstances, they can be shared as ordinary patrimonial benefits of the marriage.
This note has also critically discussed the approach adopted by Mabuse J in MM, and has demonstrated that the court failed to consider and apply the current legal framework. It has also shown that the court failed to follow precedent and completely misdirected itself. While Mabuse J got the applicable law entirely wrong in this case, his approach is in line with how the law should be developed. The facts of this case demonstrate a fundamental challenge for non-members whose member spouses exit their funds before divorce, as non-member spouses are prevented from claiming portions that they would otherwise be entitled to claim had divorce been the exit event. It is hoped that the legislature will intervene and safeguard the interests of non-member spouses who are cheated of their entitled retirement benefits on divorce. Until then, judges are not at liberty to rewrite the law unless there is an explicit challenge to it.
Finally, as unsatisfactory as the law is, it is nonetheless settled that non-member spouses are only entitled to receive portions of their member spouses’ pension interests when such benefits accrue to members due to divorce, and not any other exit event. If any other exit event, such as resignation, dismissal or retrenchment, occurs before the divorce, there will be no pension interest that can be shared when the parties later divorce. Further, there are generally no delays in the payment of pension interests when retirement funds have been furnished with divorce orders that instruct them to pay non-member spouses portions of their members’ pension interest, unless the administrative processes have not been properly complied with.
Competing interests
None
Open access
