For the last edition of Blue Chip, I wrote an article on the various money issues that typically arise in divorce. That article addressed the division of assets in divorce. A related topic that I address in this article is the treatment of pension interests in divorce.
Pension interests aren’t “assets” in the ordinary sense
Pension interests fall in a quirky investment category because they don’t typically qualify as “assets” in the investor’s estate. As we all know:
- They aren’t freely accessible to the investor
- They’re not capable of being transferred
- Creditors can’t attach them
- They bypass the deceased estate on death
Under the circumstances, there’s understandable confusion about how they are treated on divorce. Do divorcing couples have a claim on their soon-to-be ex-spouses’ pension, or not?
Before 1989 (when parliament eventually amended the Divorce Act[1]) the situation was nothing if not simple: pension interests didn’t come into the equation on divorce. Divorcing couples couldn’t even share their pension interests if they wanted to.
Divorce litigation on the issue ensued between lots of disgruntled, disillusioned divorcing spouses.
The situation since 1989: Section 7(7) and Section 7(8) of the Divorce Act
Eventually, in 1989, parliament intervened and amended the Divorce Act[2] to include two new sections. Section 7(7)3 and Section 7(8)4 of the Divorce Act now make it clear that pension interests do have to be considered in divorce. The section contains a deeming provision, unequivocally that the pension interests of a person getting divorced are “deemed” part of their assets to calculate who gets what on divorce. In practical terms: the couple’s pension interests must be added to their other assets to calculate the total value of what must be shared on divorce5.
It’s important to note, however, that the section creates a legal fiction strictly to do the divorce calculations. It does not give one spouse an automatic right to claim (or share in) the other’s pension interest directly.
At this point, an example might come in handy to better illustrate the practical application and effect of section 7(7) and section 7(8) of the Divorce Act:
Cedric and Cynthia are married in community of property. The assets and liabilities falling into their joint estate (co-owned and jointly managed), include (i) their house; (ii) their mortgage bond; (iii) all other debt; (iv) their respective cars; (v) their discretionary investments and (v) cash. Their pension interests do not fall into the joint estate.
Cedric and Cynthia decide to get divorced.
Before the amendment of the Divorce Act in 1989, their divorce (assuming it didn’t get nasty and involve forfeiture claims and the like), would simply have been a matter of dividing up the joint estate (with a total net asset value of R4 200 000, in this example).
Post 1989, the effect of section 7(7) of the Divorce Act is that Cedric and Cynthia must bring into account their respective pension interests, to determine the total value of what they are entitled to share in.
Applying section 7(7) of the Divorce Act to Cedric and Cynthia’s situation, we see that they are each entitled to expect to walk away from the marriage with R5 850 000 in value. At least in theory.
Cedric and Cynthia now must agree (or a court will decide for them) how to divide up their assets and investments, such that they each end up with R5 850 000 in value.
Cedric and Cynthia are free to agree on whatever they like regarding how they want to divide up their assets. One option available to them is for Cedric to transfer a portion of his pension interests to Cynthia as part of their final divorce settlement. But here’s the thing with transferring pension interests in divorce: if pension interests are going to need to be transferred, they must be dealt with in the divorce settlement agreement and divorce order.
Beware the court order
If pension interests are to be transferred upon divorce, the wording of the settlement agreement and the court order are critical.
Pension funds are authorised6 to transfer a pension interest (or a portion thereof) on divorce, provided that the court order in question meets all the legal requirements. My practical advice to divorcing clients (who want to transfer pension interests) is that they should get the pension fund in question to approve the proposed wording of their divorce settlement agreement and divorce order, in advance of their actual divorce date. It’s much easier than having to go back to court after the divorce to get the order fixed.
For those of our clients who have emigrated, the court order in question also needs to be made by a South African court. A pension fund member who has emigrated – and subsequently divorces in a foreign country – will have to apply to a South African court to have the divorce order recognised here if he or she wants it to be acted upon by a pension fund here.
The treatment of pension interests in divorce is a rather technical area of law. In this article, I have merely scratched the surface of the topic, but I hope that I have given you some idea of what is involved.
References
Divorce Act No. 70 of 1970.
The amending Act was the Divorce Amendment Act, No. 7 of 1989.
Section 7(7) of the Divorce Act 70 of 1970.
Section 7(8) of the Divorce Act 70 of 1970.
A word of caution here regarding the valuation of pension interests for this purpose: it is important to note that pension interests must be valued on the basis contemplated by the Divorce Act.
In terms of section 7(7) read with section 7(8) of the Divorce Act and section 37D of the Pension Funds Act 24 of 1956.
