Divorce orders and pension interest – what you need to know

This legal note sets out the principles that apply when a divorce order is granted in relation to a member of a retirement fund, specifically for members of the Ninety One Retirement Annuity Fund, the Ninety One Pension Preservation Fund and the Ninety One Provident Preservation Fund (‘Ninety One Funds’).

1 Background

When a marriage is dissolved, depending on what marital regime applied, there may be a division of assets between the parties. This includes the division of pension interest in relation to a spouse’s retirement fund benefits.

There are three matrimonial property regimes that could apply, namely:

In community of property: All assets and liabilities accumulated by either spouse before or during the marriage become jointly owned. This means that any debts or financial obligations incurred by one partner will also become the responsibility of the other.

Out of community of property with accrual: Both spouses have separate estates when they get married and don’t share profits or losses for the duration of the marriage. Accrual relates to the extent of increase of wealth between spouses throughout the marriage. Should one spouse have a smaller accrual than the other, then that spouse will have a claim against the other for half of the difference in growth.

Out of community of property without accrual: This regime is often referred to as ‘cold exclusion’. In this system, when couples marry, each spouse keeps a separate estate and whatever assets and liabilities they individually had before the marriage form part of their separate estates. Furthermore, assets and liabilities acquired by each during the marriage also fall within their separate estates. Hence, pension interest (as defined below) cannot be claimed if the parties were married out of community of property without accrual.

The default regime in South Africa is in community of property unless the parties execute an anti-nuptial contract (‘ANC’) before the marriage or execute a postnuptial agreement after the marriage.

2 Pension interest

For divorce orders granted before 1 September 2024, pension interest is defined in section 1 of the Divorce Act as follows:

• In the case of a member of a pension fund or provident fund (including preservation funds), it refers to the benefits the member would have been entitled to under the rules of the fund, had their membership been terminated on the date of the divorce due to resignation from their office.
• In the case of a member of a retirement annuity fund, it refers to the total amount of the member’s contributions to the fund up to the date of divorce, plus the accumulated simple interest on those contributions, calculated at the rate prescribed as of that date by the Minister of Justice under section 1(2) of the Prescribed Rate of Interest Act, 1975, provided it does not exceed fund return.
  
  The interest rate referred to above is calculated as the repurchase rate as determined from time to time by the South African Reserve Bank, plus 3.5% per annum. For example, if the repurchase rate is 7%, then the interest rate used to calculate pension interest will be 7% plus 3.5% which is equal to 10.5%.

A new definition of pension interest was introduced in section 1 of the Pension Funds Act, effective 1 September 2024. For divorce orders granted on or after this date, pension interest is calculated as the member’s benefit in the fund, as determined by the rules of that fund, on the date that the court order is issued. This new definition aligns the calculation of pension interest for retirement annuities with that for pension, provident and preservation funds, applying the same basis for all fund types.

Although the definition of pension interest in the Divorce Act has not been removed, the definition of pension interest in the Pension Funds Act overrides that definition (due to a trumping provision in the legislation) and applies to all orders granted on or after 1 September 2024.

Pension interest can only be claimed where the parties were married either:

• in community of property, or
• out of community of property with accrual.

It cannot be claimed if the parties were married out of community of property without accrual.

3 Requirements for a valid order

Although the definition of pension interest changed after 1 September 2024, the requirements for an order to be enforceable against a retirement fund remain unchanged and must still be met for a fund to give effect to the order. To ensure compliance with an order for the division of pension interest, the following requirements must be satisfied:

The fund must be identified or identifiable. If the order includes the member’s policy number, then the fund is identifiable. Where the fund is identified but no policy number is stated, and the member holds more than one policy in the fund, the pension interest will be deducted proportionately from all the policies in the fund. If the member belongs to more than one fund but only one fund is identified, the order is not binding on the other funds.

Pension interest must be awarded. The order must state either a percentage or a rand amount of pension interest. The requirement is not met if the order refers to fund value, pension fund benefits or policy proceeds. It must specifically refer to pension interest for this requirement to be met.

The fund must be ordered to pay. The fund can only pay the pension interest if it is expressly ordered to do so. Where the member is ordered to make payment to the non-member, this requirement will not be met. A mere reference to endorsing the fund’s records is not sufficient.

It is strongly recommended that the parties submit a copy of the draft order to the specific fund before it is made an order of court to confirm the validity of the wording. If the order is found to be non-binding, the parties will need to obtain a variation or amended order. In such cases, the pension interest will still be determined based on the date of divorce, and not the date on which the order was amended.

4 Note regarding divorce proceedings in KwaZulu Natal

The courts in KwaZulu Natal may request a letter of no objection from the fund confirming the suitability of the wording and an undertaking that the fund will pay on receipt of a valid order. Any such request in relation to the Ninety One retirement funds must be referred to the Ninety One retail legal team.

5 Suggested simplified wording

The parties can use the following suggested simplified wording in the order:

1. The Plaintiff is a member of the Ninety One Retirement Annuity Fund (‘the Fund’).
2. The Defendant is, in accordance with section 7(7) and 7(8) of the Divorce Act, awarded 50%¹ of the Plaintiff’s pension interest in the Fund, as defined in section 1 of the Pension Funds Act.²
3. The Fund is ordered to pay or transfer the assigned portion of the pension interest to the Defendant or an approved fund on their behalf in terms of section 37D of the Pension Funds Act.

6 Payment options

The pension interest will be deducted proportionately across all the components in the member spouse’s contract. The non-member spouse may choose to receive the benefit as:

1. a lump sum, which is taxed in the non-member spouse’s name according to the withdrawal tax tables, or
2. transfer the benefit to another approved fund, which will be a tax-neutral transfer.

The non-member spouse cannot exercise a combination of the options.

If a rand amount is granted in the order, and the non-member elects a lump sum, they will be paid an after-tax amount (the amount stated in the order is the gross amount before tax).

7 Withdrawal pending divorce

If the member submits an instruction for a savings withdrawal (i.e. a withdrawal from the Savings component) and the fund has been notified (with proof) of the pending divorce proceedings, the fund cannot process the instruction, without the consent of the non-member spouse, until the divorce order is granted. Likewise, if the fund receives proof of an application for the division of assets of a religious marriage, the fund cannot process the withdrawal until the matter is finalised.

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¹ The parties can agree to any percentage of pension interest.
² Amendment orders for divorce orders granted before 1 September 2024 must refer to section 1 of the Divorce Act.