Trade union Solidarity is preparing papers to launch a High Court challenge against how the Government Employees Pension Fund (GEPF) applies the “clean-break” principle.
However, the fund says its board has decided to revise how it implements the principle and is consulting with the employer and employees about how to change the fund’s rules.
The clean-break principle permits members of retirement funds to split their retirement savings between themselves and a former spouse in terms of a divorce order. The non-member former spouse can withdraw his or her share of the fund awarded to him or her before the member retires.
Before the introduction of the clean- break principle, a former spouse had to wait until her ex-husband (or his ex-wife) retired or resigned from his (or her) retirement fund to get the court-awarded portion of the retirement assets.
The principle was introduced for private sector funds in 2007. It was introduced for the GEPF in 2012 after a court challenge the year before succeeded in forcing the government to amend the law that regulates the fund.
The GEPF is a defined-benefit fund, which means it provides a pension to members on retirement based on their final salary and years of service.
The fund’s trustees decided that they would apply the clean-break principle by raising a “notional” debt against a member’s account for the amount due to a former spouse. The debt in the member’s account attracts interest each year, which, according to a statement from the GEPF, is applied at the repo rate. The fund says this rate should be lower than the fund’s returns.
The GEPF says the alternative to creating a “debt” to be deducted from the member’s benefit when he or she leaves the fund was to reduce the member’s benefit by reducing the member’s years of pensionable service.
According to the GEPF, there were a number of “complications” that made it “inappropriate” for the fund to reduce the member’s benefit (or service).
The fund’s trustees therefore chose to treat the divorce settlement as a “notional debt” owed to the fund that would be deducted from the member’s benefit when he or she resigned or retired.
The GEPF says the advantage of this method is that the member’s years of service are not adjusted as a result of the divorce settlement, and therefore the member’s other benefits are not affected.
But in response to questions about the implications of the notional debt, the fund said its board has “taken a decision to do away with the implementation of the clean-break principle involving the creation of a notional debt’’. It said this followed an amendment that improved members’ withdrawal benefits.
According to the GEPF’s response, the board has revised the clean-break principle in favour of adjusting the years of service. It says the fund will calculate the years of service – or “negative service” that are actuarially equivalent to the divorce settlement paid – and maintain two service dates on its system.
One will be the original service date (which assumes the member did not get divorced), and the other will be the ser-vice date equivalent to the divorce settlement, to be offset against the original service date when the member leaves the fund, the GEPF says.
‘Dire effect’
Johan Kruger, the deputy general secretary of Solidarity, says Solidarity is of the view that the “notional debt” method of implementing the clean break has a dire effect on the pension and financial position of fund members.
He says GEPF members have in the past been sent letters stating that the debt will attract interest at the repo rate plus three percentage points and that the interest is compounding. If the debt and interest are not paid monthly, the amount will, at an interest rate of only 7.2 percent, double every 10 years, Kruger says.
The GEPF did not clarify which interest rate was applicable, referring only to the repo rate as an interest rate.
Kruger says that, as a result of interest being charged on the notional debt, some members who split their savings with a former spouse have accumulated debt that exceeds their savings in the fund. Solidarity is concerned that this could result in members having no pension when they retire, or, even worse, owing the GEPF on the debt for the payment made to a former spouse.
Kruger says Solidarity believes that the clean-break principle as it is currently applied by the GEPF is not in line with either the Government Employees Pension Law or the National Credit Act.
“In our court application we will therefore ask that the fund’s rules and the application of the clean-break principle be revised. If we are successful, we will ask for a court order in terms of which the GEPF compensates those persons who were adversely affected by the fund’s charging of interest,” Kruger says.
The GEPF did not respond to questions about whether the debt could exceed a member’s savings.
Private sector funds
In the private sector, defined-benefit funds apply the clean-break principle by reducing a member’s years of service in proportion to the withdrawal made to pay a former spouse.
Shamiel Basadien, a consulting actuary at Old Mutual Corporate Consultants, says funds take into account a withdrawal made to pay a former spouse by adjusting the member’s date of entry to the fund to reflect the reduced years of service. He says some members make additional, voluntary contributions that can be offset against any benefit paid to an ex-spouse in terms of a divorce order.
If a member decides to settle the portion of the retirement benefit due to a former spouse out of their discretionary savings, the years of service are not adjusted, Basadien says.
Basadien says that, when a pensioner gets divorced, splitting the pension proportionately may result in an unfair allocation to each spouse, because their respective life expectancies may differ.
A possible fairer split would be to consider the capital value of the pension at the date of divorce and to determine the annuity income for each spouse based on their respective demographics, he says.