The Constitutional Court on Friday confirmed the declaration by the Western Cape High Court of the constitutional invalidity of the “clean-break” principle of the Government Employees Pension Law.
This case highlighted the plight previously experienced by people married in community of property and whose spouses were, upon divorce, members of the Government Employees Pension Fund (Government Pension Fund) established under the Government Employees Pension Law (GEPL).
Under the matrimonial laws, non-member spouses could, in certain circumstances, be entitled to payment of part of the pension interest due or assigned to the member of the Government Pension Fund when any pension benefit accrued to that member. Prior to the Government Employees Pension Law Amendment Act (GEPL Amendment Act), the non-member’s benefit would be frozen on divorce until any pension benefit accrued to that member, unlike that of a counterpart under the Pension Funds Act (PFA). The effect of this was that non-members could not benefit from any interest or capital growth on the portion of the pension interest allocated to the member spouse – thus resulting in the portion devaluing over time.
Invoking the equality provision in the Constitution, the GEPL was originally challenged by the applicant on the ground that it did not afford to a former spouse of a member of the Government Pension Fund the same rights and advantages that are afforded to former spouses of members of funds subject to the PFA. The applicant also sought a constitutional remedy of reading in certain provisions of the PFA into the GEPL together with an order for costs.
Parliament passed the GEPL Amendment Act to cure the defects in the GEPL. As such the Constitutional Court did not pronounce on the constitutional issues in this matter. As a result of this legislative intervention, a question arose whether any live constitutional issue requiring determination by this Court was extant.
There are two parallel regimes of pension funds at play: first, those private funds governed by the PFA and second, government funds which are not governed by the PFA but, rather, by a statute unique to that fund. This latter class of government funds includes, but is in no way limited to, the Government Pension Fund.
During 1989, section 7(7)(a) was added by the Divorce Amendment Ac to deal with certain problems. Under the Divorce Act non-member spouses were, in certain circumstances, entitled to payment of part of the pension interest due, or assigned to, the member of the Government Pension Fund when any pension benefit accrued to that member. A pension interest which had not yet accrued was not considered an asset in the spouse’s estate. To cure this defect, the amendment provided that a pension interest is deemed to be an asset in the estate for the purpose of determining patrimonial benefits.
The Divorce Amendment Act was, however, not without difficulties. One was the question of when the payment of a pension interest should occur. Generally, this depended on the rules of a specific fund but usually took place on retirement, dismissal or some other defined “exit event”.
The problem was that a non-member spouse would be severely prejudiced if the value of his or her benefit was frozen at the date of divorce and the beneficiary would have had to wait for a later exit event.
To cure this defect, various amendments were made to the PFA, in particular, the Pension Funds Amendment Act, which incorporated the “clean-break” principle into section 37D of the PFA. The effect of this amendment is that the non-member spouse no longer has to wait for an exit event to occur. This means that a pension benefit awarded to a non-member spouse in terms of the Divorce Act is deemed to have accrued on the date of the divorce. This demonstrates the interplay between the Divorce Act and the PFA.
The oversight, however, was plainly that these amendments only apply to the PFA and, by extension, to funds that are governed by the PFA. As mentioned above, this is only one leg of the parallel regime. The Government Pension Fund could not benefit from the clean-break principle, as it was governed by its own statute, the GEPL.
In its amended form, section 3 of the GEPL Amendment Act introduces a clean-break principle by incorporating section 24A after section 24 of the GEPL. Section 24A is, in effect, similar to section 37D of the PFA.
Section 24A authorises the Government Pension Fund to make payment of a pension interest upon divorce or dissolution of a customary marriage.
Non-members of the GEPF were denied their share of the pension benefit immediately upon divorce or on dissolution of a customary marriage. They had to wait until their member and former spouse became entitled to his or her pension benefit. This was the subject of a challenge in the Western Cape High Court.
The Applicant Mrs Wiese submitted that it was unfair for the GEPF not to allow her access to the pension benefits that were awarded to her in terms of a divorce order. The High Court found in her favour and declared it unconstitutional as the GEPF failed to give former spouses of members the same rights as those afforded to spouses of members of pension funds falling within the ambit of the Pension Funds Act.
It granted Parliament a year to amend the Government Employees Pension Law so that the GEPF could amend its rules.
The High Court’s declaration was referred to the Constitutional Court for confirmation. The suspension of invalidity was appealed by Wiese.
While the proceedings in the Constitutional Court were pending, Parliament amended the law. Wiese and the GEPF agreed that the amendment disposed of the main issues before the Constitutional Court and the matter had become moot.
The court found that although the absence of a live controversy did not constitute an absolute bar to justifiability, the matter had become moot in the light of the amendment. It could still consider the question of costs.
THE CLEAN-BREAK PRINCIPLE IN A DIVORCE DOES NOT APPLY TO DEFERRED PENSIONS
The legal definition of the words “pension interest” is vital in deciding when a non-member spouse becomes entitled to a share of a fund member’s retirement savings.
A recent judgment by Supreme Court of Appeal highlighted the fact that the date on which a member resigns from a pension fund and the date of the divorce directly affect when the non-member spouse may expect to receive his/her pension interest.
In this matter the ex-wife of a former member of a Pension Fund, was not entitled immediately to receive a share of her former husband’s retirement savings in the fund. This was despite a divorce settlement that awarded her a share of the savings and a determination by the Pension Funds Adjudicator that the fund must pay up.
Long before the divorce, the husband resigned from his employment and had elected to defer his pension benefit in the fund. He had thus become a deferred pensioner in terms of a rule of the fund.
The divorce settlement, which had been made an order of court, recorded that the husband had a pension interest in the pension fund and provided that his wife was entitled to 25% of that pension interest, payable to her as soon as the husband became entitled to the pension interest.
The settlement agreement further provided that the spouse’s attorneys would secure the registration of an endorsement against the records of the fund – as provided for in the Pension Funds Act. But the fund refused to register the endorsement against its records on the basis that, at the time of the divorce, the husband was a deferred member and no longer had a pension interest in the fund as contemplated in the Pension Funds Act.
The court held that the legislation contemplates an award to the non-member spouse of part of the pension interest, calculated at the date of the divorce but with effect from a future date when the benefit accrues to the member spouse. It held that, where the benefit has already accrued, the provisions of the Act do not apply and that the husband could not again be deemed to become entitled to a resignation benefit.
The court ruled that the wife could claim her share when the husband turned 55 and the benefit became due to him.
What parties in a divorce cannot do by agreement is to invoke the statutory mechanisms under the Pension Funds Act in a situation to which that Act simply does not apply. This means, for example, that a non-member spouse cannot impose obligations on a pension fund (rather than on the member spouse) in terms of the Pension Funds Act in a situation in which the Act does not apply.
In a divorce, where one spouse was awarded a portion of the pension benefits of the other spouse, who is a member of a Pension Fund in the private sector the waiting period for payment of such benefits would normally be 3 to 6 months. However, when the spouse is a member of a Government Pension Fund the spouse that was awarded such benefits had to wait until resignation, termination of employment or death of the other spouse before the benefits could be paid. This has now changed by a landmark decision handed down by Judge Bozalek in the Cape Town High Court in the matter of Wiese v Government Employees Pension Fund. The Government was granted a period of 12 months to change the legislation.
In this case it was declared that the Government Employees Pension Law, Proclamation 21 of 1996, was inconsistent with section 9(1) of the Constitution of the Republic of South Africa, Act 108 of 1996, insofar as it fails to afford to former spouses of members of the Government Employees Pension Fund the same rights and advantages as are afforded to former spouses of members of funds subject to the Pension Funds Act, 24 of 1956, more particularly those contained in section 37D(1)(d), (3) (4) and (5), and is invalid to the extent of that inconsistency.
The applicant was a former spouse of a member of the Government Employees Pension Fund (‘the Fund’), the first respondent, who, in March 2008, in terms of a settlement agreement which formed part of a divorce decree, was awarded a 25% share of her spouse’s pension interest in the Fund. The applicant was unable to realise this interest, however, since the legislation governing the Fund, unlike that governing private pension funds, only allows for the realisation of such an interest as and when an ‘exit event’ takes place in relation to the former spouse, such as resignation, termination of employment or death, and no such event has occurred.
As a result of financial hardship the applicant has at all time unsuccessfully sought to realize her share of her former spouse’s pension interest in the Fund. Having exhausted all other avenues she seeked an order that the governing legislation, the Government Employees Pension Law, Proclamation 21 of 1996, (‘the Law’) is inconsistent with s 9(1) of the Constitution of the Republic of South Africa and is invalid to that extent. She seeked, furthermore, an order whereby, broadly speaking, certain provisions in the Pension Funds Act 24 of 1956, (‘the PFA’) which allow for the immediate realization of pension benefits awarded on divorce to the non-member spouses of members of private pension funds, be read into the ‘Law’.
The applicant’s case was that differential treatment of a non-member spouse of a Fund member to that of a non-member spouse of a member of a pension fund governed by the PFA violates the affected party’s right, in terms of s 9(1) of the Constitution, to the equal protection and benefit of the law. More particularly, she contended that the applicant’s right of access to social security as entrenched in s 27 (1)(c) of the Constitution, and that of others in her position, was violated.
Given that the ‘clean break’ principle is applied to the divorced spouses of private pension fund members, there appears to be no rational reason why this should be withheld from their counterparts on divorce from a member of the Fund (or any other public pension fund, for that matter).
B.Proc; AD Dip L Law
Family Law Attorney
Abrahams and Gross Inc.
A:1st Floor, 56 Shortmarket Street, Cape Town, 8000
O: +27 (0) 21 422 1323
F: 086 572 8373