Marriage in community of property

marriage-community-of-property

Is pension interest automatically an asset in the joint estate?

Compiled by: Lize de la Harpe, Legal Advisor: Glacier by Sanlam
This publication is intended for use by intermediaries.

Introduction

One of the ordinary consequences of a marriage in community of property is that a joint estate is created in which both spouses have an equal share. What is however not always properly understood is exactly what constitutes an asset in the joint estate. This is of particular importance when the joint estate is dissolved upon divorce.

In this edition we will look at the applicable law and recent case law on this topic.

Sharing in the joint estate at divorce

A marriage in community of property is the automatic matrimonial property regime for most marriages in South Africa. From the start of the marriage all assets and liabilities are incorporated into a single, joint estate and all assets accumulated during the marriage also become part of the joint estate. Both spouses are joint owners and are thus entitled to an equal share of the joint estate, subject to certain exceptions.

When a court grants an order of divorce the community of property between spouses comes to an end and the joint estate is divided. The Divorce Act 70 of 1979 (hereinafter referred to as the “Divorce Act”) governs divorce proceedings in South Africa. Section 7(1) of the Divorce Act specifically empowers the court to make an order in accordance with a written agreement between the parties (so called “settlement agreement”). Alternatively, in the absence of an agreement between the parties, the court is empowered to order division of the joint estate equally. In doing so, the court will have to determine what assets the joint estate consists of.

Assets typically include moveable property (cars, furniture), immoveable property (houses, land) and then less obvious assets such as shares, loan accounts and pension interest.

Pension interest

It is extremely important that one understands what is meant by “pension interest” when preparing a settlement
agreement and/or a divorce order.

Section 1 of the Divorce Act defines pension interest as follows:

“pension interest”, in relation to a party to a divorce action who―

(a)        is a member of a pension fund (excluding a retirement annuity fund), 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, 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;”

Simply put, pension interest refers to the notional benefit to which such member would have been entitled in terms of the rules of the fund if his membership of the fund terminated on the date of the divorce on account of his resignation from his office.

Section 7(7)(a) of the Divorce Act makes provision for the “pension interest” (as defined in section 1) of a party to a divorce action to be deemed to be an asset in his estate for the purposes of determining patrimonial benefits at divorce. Section 7(8)(a) in turn specifically enables the court granting a decree of divorce to order the fund in question to make payment of a portion of the member’s “pension interest” to the non-member spouse and make an endorsement in the member’s records.

Does pension interest automatically form part of the joint estate?

As discussed above, the joint estate of parties married in community of property consists of all assets brought into the marriage and accumulated during the subsistence of the marriage, subject to certain exclusions.

The common law position is that the member spouse’s pension interest does not form part of the joint estate at all. Therefore, prior to the introduction of section 7(7) of the Divorce Act, the non-member spouse did not have a recognised interest in the pension of the member spouse where such benefit had not accrued yet. This meant that, when determining the patrimonial benefits in the joint estate upon divorce, the pension interest of either spouse could not be taken into account whatsoever. The reason therefor is that pension interest refers to an interest which a member of a fund has in benefits which may accrue in the future, but which does not yet constitute an asset vesting in his estate. In other words, it refers to the amount held by the fund as provision for its future liability towards the member.

The Divorce Amendment Act 7 of 1989 inserted sections 7(7) and 7(8) into the Divorce Act thereby introducing the concept of the sharing of pension interest upon divorce. As stated above, section 7(7)(a) makes provision for the pension interest (as defined in section 1) of a party to a divorce action to be deemed to be an asset in his estate for the purposes of determining patrimonial benefits at divorce.
This section reads as follows:

“7)(a) In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall, subject to paragraphs (b) and (c), be deemed to be part of his
assets”.

(my emphasis)

It is clear from the wording of section 7(7) that it is a deeming provision – it provides a mechanism whereby parties can gain access to the pension interest of either of them for the purpose of achieving an equitable distribution of their assets during divorce proceedings.

However, section 7(7) does not detract from the common law position – pension interest is not automatically part of the joint estate. A spouse seeking a share in the pension interest of the other spouse must apply and obtain an appropriate court order during the divorce proceedings. Section 7(7)(a) must therefore be invoked during the divorce proceedings so as to deem such pension interest to be an asset in the joint estate when determining the patrimonial consequences of the divorce. It is only by means of this deeming provision that a non-member spouse would be able to secure a part of the member spouse’s pension interest.

Put simply: pension interest is not automatically shared by virtue of the existence of a joint estate. Pension interest will only be shared once deemed an asset for the purpose of division of the joint estate upon divorce.

What if the divorce order is silent on the aspect of pension interest?

As explained, section 7(7)(a) of the Divorce Act has to be invoked at the time of divorce so as to empower the court to deem the pension interest to be part of the member’s assets and consequently award a portion thereof to the non- member spouse.

Accordingly, one cannot claim a share of the pension interest of the member spouse in a divorce action simply by virtue of the fact that the parties are married in community of property.

This leads us to the following question: what happens if your divorce order does not specifically deal with pension interest? Does it mean you lose your right to claim against your spouse’s pension interest if you do not specifically claim it during divorce proceedings?

The courts have unfortunately been inconsistent in its interpretation of section 7(7).

In the matter of  Sempapalele v Sempapalele 2002 (2) SA 306 (O)  the parties were married in community of property and got divorced in 1998. The settlement agreement was silent on the aspect of pension interest – it merely provided for a blanket division of the joint estate. The respondent argued that the prayer in respect of the pension interest was abandoned during settlement negotiations (the parties having agreed to exclude this from division of their joint estate). The applicant in turn argued that the pension interests were part of their joint estate and automatically fell to be shared in line with the order for division – i.e. she did not need a specific court order for the purpose of sharing in the pension interest.

The court therefore had to decide whether or not the pension interest fell into the joint estate, thereby automatically falling within the terms of the blanket order for division, or whether pension interest had to be specifically claimed for in terms of section 7 of the Divorce Act.

The court confirmed that the law as it stood prior to the introduction of section 7 of the Divorce Act is that the pension interest was not an asset of the spouse who was a member of a pension fund and hence it could not be part of the joint estate of such member and his spouse. Section 7 was introduced precisely to improve on the existing law. The section does not, however, abolish the existing law, but rather provides a mechanism for parties engaged in divorce proceedings to have access to the pension interest of either of them for the purpose of achieving an equitable distribution of their assets. It provides that the pension interest shall be deemed to be an asset for the purpose of division on divorce, which means it is not ordinarily part of the joint estate.

The court accordingly came to the conclusion that a spouse seeking a share in the pension interest of the other spouse must apply for and obtain an appropriate court order during divorce proceedings. The applicant failed (for whatever reason) to obtain an order awarding her a share of the pension interest at the hearing of the divorce matter – she therefore could not get such an order post-divorce.

In the matter of  Old Mutual Life Assurance Company (SA) Limited and Another v Swemmer [2004] 4 BPLR 5581 (SCA) the Supreme Court of Appeal held that the necessary implication of section 7(7)(a), read with the definition of “pension interest”, was that any right or interest which a member spouse had in respect of pension benefits which had
not yet accrued, was not to be regarded as an asset  in determining patrimonial consequences on divorce.

There are, however, determinations where the courts followed a different interpretation.

In the matter of  Maharaj v Maharaj 2002 (2) SA 648 (D) the parties were married in community of property and got divorced in 1996. The divorce order was silent on the division of the joint estate, meaning that the joint estate had to be divided equally. The question before the court was whether the First Respondent’s pension interest formed part of the joint estate, to be divided equally with the Applicant. The First Respondent argued that at the time of the divorce,
the Applicant failed to obtain an order in terms of Section 7(8)(a) of the Divorce Act. The court, however, did not agree
and held that when the joint estate is to be divided, it is proper to take into account, as an asset in the joint estate, the value of the pension interest held by one of them as at the date of divorce.

In the recent matter of  Kotze v Kotze and another [2013] JOL 30037 (WCC) the parties were married to each other in community of property and got divorced in 2005 by consent between parties on division of assets. The divorce order failed to deal with pension interest. The non-member spouse subsequently applied to the court in order to amend the divorce order so as to indicate her entitlement to 50% of the member spouse’s pension interest.

As in the Sempapalele matter (discussed above), the court had to decide whether or not the pension interest could automatically be included in the joint estate so that it could fall within the terms of the blanket order for the division of the joint estate or whether the applicant had to specifically claim for half of the pension interest in terms of section 7 of the Divorce Act.

The court held that, where parties who were married to each other in community of property, in subsequent divorce proceedings do not deal with a pension interest, each of them nonetheless remains entitled to a share in the pension or provident fund to which the other spouse belonged, and that such share is to be determined as at the date of divorce by virtue of the provisions of section 7(7)(a) of the Divorce Act 70.

It is thus clear from the judgement that the court construed section 7(7) to mean there is an automatic entitlement to a half share in such asset.

The Kotze judgement has come under heavy criticism. Although a pension interest is deemed to be part of the assets that constitute the patrimonial benefits of a marriage, section 7(7)(a) does not provide any basis for the finding that the non-member spouse automatically becomes entitled to 50% of the member spouse’s pension interest. At date of divorce the pension interest has not accrued yet, which in turn implies it cannot be regarded as an asset in the estate.

Conclusion

As confirmed in various judgements (including the Supreme Court of Appeal), a party to divorce proceedings must apply for pension interest to be deemed an asset in the estate.
A party to a divorce action therefore does not automatically acquire any right to the pension interest of the member spouse simply by virtue of the fact that the parties are married in community of property – otherwise there would be no need for the deeming provision of section 7(7)(a) of the Divorce Act (as inserted) which specifically creates the mechanism whereby a non-member spouse can ask the court to deem such pension interest an asset in the estate when determining the patrimonial benefits of a divorce.
In order for the court to award a portion of pension interest to the non-member spouse, the court must first declare the pension interest to be part of the estate after deeming it as an asset in terms of section 7(7)(a). Furthermore, the wording of this section makes it clear that a claim for pension interest must be invoked (i.e. specifically pleaded) at the time of divorce:

“7)(a) In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall, subject to paragraphs (b) and (c), be deemed to be part of his assets”
(my emphasis)

Section 7 has, unfortunately, been inconsistently interpreted by our courts, as can be seen from the cases quoted
above.

My advice to parties embarking on divorce is to be safe rather than sorry – rather follow a conservative approach and specifically plead division of the pension interest in terms of sections 7(7) and 7(8).

Also remember pension funds are very strictly regulated. The fund in question will only be in a position to deduct a
portion of a member’s pension interest in terms of an order granted in terms of section 7(8) of the Divorce Act.
Section 37A of the Pension Funds Act protects a member’s benefit and states that a fund may only make a deduction from such benefit if such a deduction is allowed in terms of the Pension Funds Act, the Income Tax Act and the Maintenance Act. Section 37D(1)(d)(i) of the Pension Funds Act makes provision for divorce as an exception, and states that a registered fund may deduct any amount assigned to a non-member spouse in terms of a divorce order granted in terms of section 7(8)(a) of the Divorce Act (or any order made by a court in respect of the division of assets of a marriage under Islamic law). Section 7(8)(a) of the Divorce Act, in turn, specifically enables the court granting a decree of divorce to order the fund in question to make payment of a portion of the member’s “pension interest” to the non-member spouse and make an endorsement in the member’s records.

Section 7(8) of the Divorce Act, read together with section 37D(4)(a) of the Pension Funds Act, sets out certain conditions with which a divorce order must comply in order for the fund concerned to be able to give effect to a non- member spouse’s claim. These conditions can be summarised as follows:

  1. the order must specifically provide for the non-member spouse’s entitlement to a “pension interest” as
    defined in the Divorce Act;
  2. the relevant fund which has to deduct the “pension interest” must be named or identifiable;
  3. the order must set out a percentage (%) of the member’s “pension interest” or a specific amount; and
  4. the fund must be expressly ordered to endorse its records and make payment of the “pension interest”.

If the divorce order does not strictly meet the above requirements, it will not be in compliance with the Divorce Act read together with the Pension Funds Act, and will therefore not be enforceable against the fund. The fund in question has no discretion in this regard, since it is strictly bound by the provisions of the Pension Funds Act.

The fact that the divorce order is found unenforceable against the fund in question does not mean that the non- member spouse has lost his/her claim for the awarded pension interest – he/she still has a claim, just not against the fund directly. The non-member spouse will have to either approach the court to have the order amended so as to bring it line with the requirements discussed above (thereby enabling the fund to give effect thereto) or try to enforce the order against the member spouse directly (assuming he/she has the money to make good on the claim).