The controversial and damaging ‘clean break principle’ which is applicable to pension funds of government employees in cases of divorce, is going to be re-considered, Adv. Anton Alberts, the FF Plus’ parliamentary spokesperson on Finance says.
This appears from a reply of the minister of Finance, Nhlanhla Nene, to a question pertaining to this issue of Adv. Alberts.
Adv. Alberts says this principle comes down to a portion of pension benefits due to a divorced spouse having to be paid within a short period of time following the divorce and not when the person who is the member of the pension fund terminates his membership when he exits the pension fund.
The member of the fund then has to start repaying this amount to the fund, similar to the repayment of a loan and this could have a very big adverse impact on the growth and capital amount of the fund, especially with early retirement.
“The minister acknowledges that the principle has negative effects and that is why it is going to be changed, but still avoids straight answers about the impact thereof on the person on whom a loan is unilaterally forced. They are clearly scared of legal action in this regard.
“There is no legal principle to force a loan onto the remaining member of the fund. This is nothing other than a loan as interest is even charged on the amount which has to be repaid.
“The minister also mentions that it actually a court which could enforce such a principle and is therefore responsible for the harmful effect, but this is not true as the rule had been created by the GEPF in cooperation with the minister by way of legislation and new fund rules. The court merely makes it an order.
“They also avoid the question as to whether they would retroactively compensate individuals for losses suffered due to the loans. The FF Plus will continuously monitor the process and will ask further questions to ensure justice for the disadvantaged individuals.
“Persons who have been adversely affected, will most probably be able to institute a claim against the funds should retroactive compensation not be paid,” Adv. Alberts said.
The comprehensive replies to the questions follow below.
Contact no.: 082 391 3117 / 083 419 5403
QUESTION FOR WRITTEN REPLY
QUESTION NUMBER: 3839 [NW4585E]
DATE OF PUBLICATION: 23 OCTOBER 2015
3839. Adv A de W Alberts (VF Plus) to ask the Minister of Finance:†
(1) (a)(i) When was the clean break principle instituted that is applicable when a member of the Government Employees Pension Fund (GEPF) gets divorced and (ii) why the stated principle is applicable when a member of the GEPF gets divorced and (b) how many members of the GEPF have been affected by the specified principle to date;
(2) (a) what is the legal basis on which the specified principle is founded, with specific reference to the relevant (i) legislation (ii) regulations and (iii) administration of justice and (b) why the specified principle is not a violation of the Pension Funds Amendment Act, Act 65 of 2001, and the National Credit Act, Act 34 of 2005;
(3) (a) what has been the frequency of divorces in the GEPF since the application of the specified principle, (b) what is the estimate regarding divorces for the next five years and (c) regarding how many of the divorces the principle (i) has been applied and (ii) is projected to apply in the future?
(a) The ‘clean break principle’ in relation to the Government Employees Pension Law, 1996 (Proclamation No. 21 of 1996) (“the GEP Law”), which regulates the GEPF, was incorporated through the GEP Law Amendment Act, No. 19 of 2011, which came into effect on 14 December 2011. Section 24A was inserted into the GEP Law, to provide for the payment of pension interest upon divorce or dissolution of customary marriage.
It is important to note, that the GEPF is not regulated in terms of the Pension Funds Act, 1956 (Act No. 24 of 1956) (“the Pension Funds Act”), but is regulated in terms of the GEP Law. Section 24A of the GEP Law was modelled on and sought to align the GEP Law with section 37D of the Pension Funds Act, 1956 (Act No. 24 of 1956) in particular, to provide for the implementation of the ‘clean break principle’, by providing for the payment of a pension interest to a former spouse of a member on divorce or the dissolution of a customary marriage. Prior to the insertion of section 24A in the GEP Law, the GEP Law and the Rules of the GEPF did not allow a former spouse of a member to claim a portion of a member’s pension interest, in terms of a divorce order or an order for the dissolution of a customary, soon after the divorce order or the order for the dissolution of a customary marriage was granted. The former spouse could only receive a portion of the member’s interest after the exit of the member from the GEPF (on resignation or retirement). With the insertion of section 24A in the GEP Law and amendments to the Rules of the GEPF, a former spouse now can receive the proportion of a member’s pension benefit that is granted in terms of a court order for divorce or the dissolution of a customary marriage, soon after the order is granted.
In order to implement section 24A of the GEP Law, the Rules of the GEPF were amended, to include definitions of “divorce”, “divorce debt” and “divorce order”, and a new Rule 14.10 was inserted in the Rules of the GEPF with effect from 1 April 2012.
(b) GEPF and GPAA are still in the process of collating the statistics on members whose benefit has been reduced as a result of a divorce order settlement.
(a) The legal basis on which the ‘clean break principle’ is implemented is by virtue of section 24A of the GEP Law and Rule 14.10 of the Rules of the GEPF, as noted in the response to question 1(a) above. In relation to the administration of justice, a court issues a court order that includes an order for the distribution of pension benefits in terms of section 7(8) of the Divorce Act, 1979 (Act No. 70 of 1979). In terms of Rule 14.10 of the GEPF, the court order must then be provided to the GEPF, who then will implement the order in relation to the division of the pension fund benefits in accordance with the terms of the order and Rule 14.10.
(b) The implementation of the “clean break principle” for the GEPF is not in conflict with the Pension Funds Act (as amended by the Pension Funds Amendment Act, 2001 and subsequent amendments) as the GEPF does not fall under this Act. . Section 24A of the GEP Law gives effect to the ‘clean break’ principle for the GEPF.
It is not clear why the Honourable Member believes that the implementation of the “clean break principle” violates the National Credit Act. It is my understanding that the National Credit Act only applies in relation to “credit agreements” as defined in the National Credit Act. The “clean break principle” applies in relation to the implementation of a court order on divorce or the dissolution of a customary marriage, which is implemented in accordance with the GEP Law and the Rules of the GEPF. The court order does not constitute a “credit agreement” so the National Credit Act does not apply. Even if the court order was made in respect of a “settlement agreement”, it is an order of court, and cannot be construed as being a “credit agreement”.
3. The GEPF does not estimate the frequency of divorce. The GEPF will continue to honour divorce orders that are presented.
QUESTION FOR WRITTEN REPLY
QUESTION NUMBER: 3847 [NW4606E]
DATE OF PUBLICATION: 23 OCTOBER 2015
3847. Adv A de W Alberts (FF Plus) to ask the Minister of Finance:†
(1) (a)(i) What is the total value of the debt that has been created by the clean break principle since its inception date,
(ii) how much of this debt (aa) has already been paid off and (bb) remains outstanding and (b) how many members of the Government Employees Pension Fund (GEPF) (i) have lost their entire pension and (ii) are running the risk of losing their pensions due to this clean break principle;
(2) whether he will take steps to correct the negative effect of this principle; if not, why not; if so,
(3) whether this would also have a retroactive effect in order to fully restore the position of those GEPF members who have already been adversely affected; if not, why not; if so, what are the relevant details?
It is assumed that this question relates to the GEPF. Please note that the GEPF has its own legislation that governs it (Government Employees Law No. 21 of 1996) and it does not fall under the Pensions Fund Act (Act No. 24 of 1956).
(a)(i)There is no debt in the conventional sense of the word. The GEPF provides affected divorced members with a funding mechanism to replenish their benefit after paying out the non-member spouse without adversely affecting other members of the Fund.
(ii)The GEPF is not aware of members who have lost their entire pension or those who are at the risk of losing their entire pension due to the application of the clean break principle under normal circumstances. It is important to note that the GEPF only applies the requirements of a divorce order. If the divorce order states that the spouse is eligible for a disproportional part of the pension benefit, 100%, the member’s pension is paid to the non-member spouse. This does not constitute a loss but the execution of a divorce order that the member spouse is party to.
Although it cannot be concluded that there are negative effects due to the current application of the clean break principle (as this also depends on whether this is the perspective of the member or the affected spouse), it is acknowledged that the application confuses members and changes the nature of the withdrawal benefit. The Board has therefore already decided to discard the current approach to the clean break principle and is busy consulting the employer and employee representative to make the necessary changes to the GEP Law and rules.
As far as the GEPF is aware, since there are two parties involved in a divorce, it is not obvious that the application of the clean break principle is adverse to both parties, other than the fact that the amount due to the non-member spouse on divorce has been correctly paid out to them in accordance with the divorce order in a cost neutral manner to the Fund and other members.