If you currently have a policy with a Pension / Preservation / Provident Fund or Retirement Annuity, you may be aware that (generally speaking) the benefit derived from your policy is protected in the event of insolvency.
Section 37B of the Pension Funds Act (“the Act”) states that –
“If the estate of any person entitled to a benefit payable in terms of the rules of a registered fund (including an annuity purchased by the said fund from an insurer for that person) is sequestrated or surrendered, such benefit or any part thereof which became payable after the commencement of the Financial Institutions Amendment Act, 1976 (Act No. 101 of 1976), shall. . . .not be deemed to form part of the assets in the insolvent estate of that person and may not in any way be attached or appropriated by the trustee in his insolvent estate or by his creditors, notwithstanding anything to the contrary in any law relating to insolvency.” (my emphasis)
In an interesting judgment handed down by the Supreme Court of Appeal on 9 July 2020, the Court expounded on this protection.
Ordinarily, in insolvency or liquidation proceedings, the rights of creditors are protected and protectable over most instances. As is with all contexts, there are exceptions.
However, in M and Another v Murray and Others (251/2019) [2020] ZASCA 86 (9 July 2020), Makgoka JA confirmed that this protection is only granted on benefits in existence at the time of sequestration, and do not apply to funds once they have been paid out by the Scheme. The background facts leading up to this judgment were also quite unique and are a clear example of the lengths at which classy prowess will be explored by desperate insolvent persons.
The Act refers to a benefit that is a protectable interest on behalf of the insolvent member and is defined as money which is payable to the member. The specific inference drawn was that the money had not yet been paid to the insolvent member. Once it leaves the hands of the Scheme, it loses that protection as the money then becomes mixed into any other money held by the insolvent member.
The Court stated as follows:
“‘Benefit’ is defined in s 1 of the Act as ‘any amount payable to a member or beneficiary in terms of the rules of that fund’. The reference to ‘payable’, instead of ‘paid’ clearly envisages a sum to which a member of a pension fund or a beneficiary is entitled to receive, but has not yet received. So construed, the amount remains a ‘benefit’ to the extent it has not yet been paid to the member or beneficiary. Once the benefit is paid to him or her, the beneficiary ceases to be a ‘member’ of the pension fund according to the rules of the fund, and the money ceases to be a ‘benefit’. It loses its character once in the hands of the beneficiary and ceases to be a benefit. The beneficiary may do as they please with it. Such a beneficiary can thus hardly complain if creditors lay their hands on the money to satisfy outstanding debts. Thus, all that s 37B entails is that, while in the hands of a pension fund, the insolvent’s pension interest cannot be attached by his or her trustee on the basis that it forms part of the insolvent’s assets“
This would also be applicable, as was the case for this matter, if the insolvent anticipates an insolvency application and cashes in his or her policy to seek aid in terms of Section 23(7) of the Insolvency Act. He or she cannot later claim that his or her pension interest was protectable and thus exempt from assets which form part of his or her estate.
If you are in the position of an insolvent and need to live off the proceeds of your pension, in terms of Section 23(7) of the Insolvency Act, there are procedures which must be followed in order to enjoy this protection.