“Divorce” of cohabitees: Can pension benefits be shared?

There is no law that deems a member’s pension assets to be transferred into a partnership and be available as a partnership asset to be divided on the dissolution of a universal partnership.

By Deborah Escott-Watson (BA LLB (UKZN) Adv Post Grad Dip in Financial Planning Law (UFS)), a legal adviser at Old Mutual in Durban.

It is becoming increasingly common for people to eschew the traditional concept of marriage and instead opt to cohabit without getting married. As the Domestic Partnership Bill (36 of 2008) is still in draft form, cohabitees in relationships outside the current legislative framework relating to marriage or civil unions are presently afforded minimal legal protection. Depending on the particular circumstances that give rise to the termination of the cohabitation relationship, the relevant governing legislation would need to be examined to see what rights are afforded to the cohabitees. Cohabitees are therefore advised to draft a cohabitation agreement to regulate the terms of the cohabitation. This agreement will determine the division of their property on termination of the relationship, as well as the division of the assets jointly acquired by the parties during the cohabitation.

If a relationship between cohabitees breaks down and terminates, and in the absence of agreement between the parties as to the financial and proprietary consequences on termination, each party would walk away with the assets he had at the time he entered the relationship and with what he acquired in his own name since, regardless of whether or not the assistance of the other party enabled him to acquire an asset or increase the value of it. This is not always equitable. The courts have therefore often come to the aid of a disgruntled partner who has been left with nothing and have recognised that a universal partnership can come into being between cohabitees. This provides a mechanism whereby assets can be shared.

A universal partnership will exist if the following essentials are present (Pezzutto v Dreyer and Others 1992 (3) SA 379 (A)):

• Each of the partners brings something into the partnership.
• The business is carried on for the joint benefit of the parties.
• The object of the partnership should be to make a profit. (In Ally v Dinath 1984 (2) SA 451 (T) it was held, in the context of a cohabitation relationship between two people, that a pure pecuniary motive is not required; the achievement of another material gain, such as a joint exercise for the purpose of saving costs, will suffice.)
• The contract should be a legitimate one.
• Further, universal partnerships can be claimed in respect of the estate as a whole or in respect of a specific enterprise.

It is a question of fact whether a universal partnership can be said to exist in a given set of circumstances. The recent judgment of Ponelat v Schrepfer 2012 (1) SA 206 (SCA) confirmed the principles as set out in the Pezzutto case relating to universal partnerships in the context of two people cohabiting. In the Ponelat case the cohabitees lived together for years. Meer AJA (Heher, Maya, Malan and Majiedt JJA concurring) held that a universal partnership did exist between them as each party brought something into the partnership, the partnership was carried on for their joint benefit and the object was to make a profit. The activities engaged in by the parties were for their joint benefit and they increased their assets thereby.

The case of McDonald v Young (SCA) (unreported case no 292/10, 24-3-2011) (Theron JA) can be contrasted with the Ponelat decision as it was held that the evidence did not support the existence of a joint venture formed in the context of a cohabitation relationship. During the relationship a property was acquired and registered in the respondent’s name. The respondent was to contribute financially to the project and the appellant was to use his time and expertise to oversee the development of the property. On the facts, it could not be proven that there was an agreement between the two to establish a joint venture partnership and, accordingly, notwithstanding the appellant’s allegations that his time and effort had contributed to the property, his claim for a share therein failed.

The contrast between these two cases illustrates the importance of the factual matrix in proving the existence of a universal partnership. The difficulties in proving the existence of this should not, however, be underestimated.

The formation of a universal partnership creates a community of property and profit and loss in respect of partnership assets (Sepheri v Scanlan 2008 (1) SA 322 (C)). On dissolution of this partnership, the partners can share in the partnership assets that are jointly owned, but not necessarily in equal shares. Partnership assets are those assets that were brought into the partnership at inception and also those that were acquired during the existence of the partnership. In the absence of a partnership agreement, evidence must be led as to what the parties’ intention was regarding the assets each was contributing to the partnership. Further, it must also be decided what the share of each partner is. It does not necessarily follow that if there are two partners, each is entitled to 50% of the partnership’s profit and assets. Again this is usually done by agreement, but in the absence of such the court will decide on the percentage split and not all property that is brought into the partnership is automatically divided in the partnership share (see the Ponelat case, where the split was 65%:35%).

Should no agreement be reached between the parties on dissolution as to the division of assets of the partnership, a liquidator must be appointed to liquidate the partnership assets (see the Ponelat decision).

A cohabitee’s membership of a retirement fund creates unique difficulties within the framework of the dissolution of universal partnerships. Can this fund become a partnership asset available for division on dissolution of the universal partnership, as it does on the dissolution of a marriage?

A member of a retirement fund has no right to his minimum individual reserve until the operation of an exit event. An exit event is defined in all pension fund rules to be retirement (including for disability), death, resignation, retrenchment or dismissal.

Section 1 read with s 14B of the Pension Funds Act 24 of 1956 (PFA) defines the ‘minimum individual reserve’ as essentially the sum of the contributions paid by the member and employer less expenses, together with any other amounts that are lawfully permitted to be debited or credited to the member’s account and increased or decreased by fund return.

On the happening of an exit event the minimum individual reserve is converted into a pension benefit. This benefit accrues to the member and the fund will pay the benefit to the member as determined by the fund rules. The benefit may be a lump sum, a monthly pension or a combination of both. The member’s minimum individual reserve is used to fund the benefit payable in terms of the rules and is not in itself the benefit payable (Records v Barlows Pension Fund [2000] 8 BPLR 920 (PFA)).

A pension ‘benefit’ is defined in s 1 of the PFA as ‘any amount payable to a member or beneficiary in terms of the rules of that fund’.

Married couples and pension assets on divorce.

A member’s minimum individual reserve was therefore not an asset that could be taken into account when determining the proprietary and financial consequences on divorce, unless it had accrued to the member prior to divorce, become a pension benefit and had been paid out to the member in terms of the fund rules as a lump sum benefit.

In certain circumstances it was acknowledged that this could be prejudicial. For example, where one party stayed at home and looked after the children and ran the home, while the other went out to work and, by so doing, was able to accumulate a large pension fund. On an exit event this fund benefit would either fall into the joint estate (if taken as a cash lump sum and subsequently invested) or be used to provide an income to benefit both parties. If the marriage was terminated before an exit event, then this asset was ‘lost’ to the non-member spouse.

In 1989, s 7(8) of the Divorce Act 70 of 1979 was amended by the enactment of the Divorce Amendment Act 7 of 1989 to deem pension interests (as defined in that Act) to be part of one’s assets on divorce. Pension interests could thus be shared between the parties, depending on their marital regime. This new provision meant that if the parties were married in community of property then the pension interest fell within the joint estate. If the parties were married out of community of property subject to the accrual system, the value of the pension interest fell within the assets available to determine the accrual in the parties’ respective estates. The non-member spouse could therefore be awarded a share of the pension fund.

Notwithstanding the Divorce Act deeming pension interests to be an asset on divorce, s 37A of the PFA clearly states that, save to the extent permitted in the Act, pension benefits are not ‘capable of being reduced, transferred or otherwise ceded, or of being pledged or hypothecated, or be liable to be attached or subjected to any form of execution under a judgment or order of a court of law, or to the extent of not more than three thousand rand per annum, be capable of being taken into account in a determination of a judgment debtor’s financial position in terms of section 65 of the Magistrates’ Courts Act, 1944 (Act no. 32 of 1944).’

Following legislative amendments to the PFA contained in the Pension Funds Amendment Act 11 of 2007 and the Financial Services Laws General Amendment Act 22 of 2008, payment to a non-member spouse by the fund is possible on the finalisation of the divorce and not on the subsequent happening of an exit event, as was originally the case when the legislation was enacted. This is due to the operation of s 37D of the PFA, as amended. This section sets out the exceptions, as it were, to the operation of s 37A of the PFA, and empowers the fund to deal with the deduction against a member’s individual reserve or benefit in terms of the divorce order and settlement agreement. Section 37D(1)(d)(i) states that a registered fund may ‘deduct from a member’s benefit or minimum individual reserve, as the case may be … any amount assigned from such benefit or individual reserve to a non-member spouse in terms of a decree granted under section 7(8)(a) of the Divorce Act, 1979 (Act No. 70 of 1979).’

Does this apply vis–à-vis universal partnerships?

Without the specific deeming provision in the Divorce Act (if the asset had not yet accrued) and the operation of s 37D of the PFA (allowing the fund to reduce the minimum individual reserve or pension benefit), the member spouse’s interest in a retirement fund would not be able to be included in the assets to be divided on divorce nor paid out to the non-member spouse on the date of divorce. Further, this concession in respect of pension interests only applies to a marriage in community of property or a marriage out of community of property subject to the accrual system.

A universal partnership is not a marriage and accordingly cannot be dissolved by divorce. Therefore the Divorce Act does not apply to its dissolution. The deeming provision in this Act necessary to bring pension interests into the ambit of property available for division on termination of the relationship is thus of no application.

The operation of s 37A of the PFA is clear in rendering pension benefits not reducible, transferable and executable. In order to circumvent this provision, s 37D would have to apply. Section 37D specifically applies to the deduction of any amount assigned in terms of a decree of divorce in respect of s 7(8)(a) of the Divorce Act. The dissolution of a universal partnership is not affected by a decree of divorce and therefore s 37D does not apply.

The operation of s 37A would therefore prevent a member of a retirement fund from making his minimum individual reserve or pension benefit available as a partnership asset in any event, because a pension benefit is not capable of being reduced, transferred or executed against.

Therefore, there is no law that deems a member’s pension assets to be transferred into a partnership and be available as a partnership asset to be divided on the dissolution of a universal partnership. A cohabitation agreement would be of no force and effect either as it would not be enforceable against the pension fund.

Are cohabitees in universal partnerships being unfairly discriminated against?

Section 9(3) of the Constitution states that the state may not unfairly discriminate directly or indirectly against anyone on one or more grounds. These listed grounds include marital status. In consequence, many pieces of legislation, including the PFA, have redefined the definition of ‘spouse’ to include heterosexual partners in long-term relationships that are intended to be permanent. Due to this widened definition, cohabitees are able to receive the pension benefit of their partners on their death, without the need to establish a universal partnership, as they qualify as a dependant by definition.

However, this widened definition of spouse does not factor in the operation of s 37D, which only refers to relationships terminated by divorce, that is, relationships registered in terms of the Marriage Act 25 of 1961, the Recognition of Customary Marriages Act 120 of 1998 and the Civil Union Act 17 of 2006. This section therefore excludes cohabitees and people in relationships that have not been registered in terms of any of these Acts.

In the case of Volks v Robinson and Others 2005 (5) BCLR 446 (CC), the court was concerned with the Maintenance of Surviving Spouses Act 27 of 1990 and whether or not the surviving partner of the deceased was unfairly discriminated against in the context of that Act by virtue of her marital status. The majority of the court held that it would be unfair to impose a maintenance burden on the death of a person when he was not obliged to maintain that person during his lifetime and, accordingly, the discrimination between married and unmarried persons in the context of this Act was fair.

Does the Domestic Partnership Bill provide recourse?

In terms of the Bill, there is no community of property between domestic partners but they can register a domestic partnership agreement wherein they detail contributions made to the joint property and the financial resources of the parties. ‘Financial resources’ is further defined in s 1 of the draft Bill as including ‘a prospective claim, or entitlement in respect of a scheme, fund or arrangement under which pension, retirement or similar benefits are provided’.

The difficulty is that, as discussed above, but for the specific deeming provision in s 7(8) of the Divorce Act, membership of a retirement fund would not be an asset that is able to be divided on divorce. There is, however, no specific deeming provision in the Bill similar to that in the Divorce Act.

As a comparison, it is specifically stated in s 13 of the Civil Union Act that all other legislation referring to marriage is of equal application to civil union partners. This would include the Divorce Act and the deeming provision with regards to pension assets would therefore be extended to civil union partners. Further, s 37D of the PFA would be of application as the civil union would be terminated by divorce and the fund would be empowered to make the deduction in favour of the non-member civil union partner.

None of this applies to domestic partnerships as defined in the Bill and accordingly this draft legislation does not provide recourse.

In conclusion, cohabitees, even those who are able to prove the existence of a universal partnership and a joint estate between them, cannot share in the pension assets of their partners on termination of the relationship as is the case with people who have registered their unions in terms of the Marriage Act or the Civil Union Act. It will have to be decided by the courts whether or not this amounts to discrimination on the basis of marital status, but it is submitted that it does, especially as cohabitees are able to be awarded these assets on the death of their partners.

 

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