Government Employees Pension Fund adopts clean-break principle

GEPFSix years after the clean-break principle was introduced into legislation in 2009, the Government Employees Pension Fund (GEPF) has introduced the principle allowing the non-member spouses of pension-fund members to access their share of pension interest at the time of divorce.

This means that the portion of the pension interest assigned to the non-member spouse ‒ as determined in the divorce order ‒ is now payable on the date the divorce is granted. The non-member spouse has a choice to either take the benefit in cash (in which case they will be taxed on the amount they receive) or transfer the benefit to another approved fund.

Until now, because the GEPF does not fall under the Pension Funds Act, non-member spouses could only claim their portion of the pension interest when the member spouse exited from the fund (usually on retirement), often leading to significant delays in payment. Another drawback was that the non-member did not benefit from any interest accrual in the time between the date of the divorce and the date of the fund member’s exit from the fund. For example, if Mr Zondi’s ex-wife was awarded a benefit of R300 000 when they divorced at age 35, she would have to wait until he retired at age 65 to receive her benefit. She would then only receive a benefit of R300 000, which means her money would not have accrued any interest in the interim 30 years.

The implementation of the clean break principle was further made necessary by a High Court ruling that the Government Employees Pension Law was inconsistent with the South African Constitution because it failed to afford former spouses of GEPF members the same rights and advantages enjoyed by former spouses of members of funds regulated by the Pension Funds Act.  The GEPF was then given a year’s grace to change the GEP Law and Rules to implement the clean break principle.

You may owe a debt to GEPF

There is a complexity in calculating how much is owed to the non-member spouse and this calculation could give rise to a debt owed by the member to the fund.

The amount paid to the non-member spouse is based on the stipulated share of the member’s withdrawal benefit at the date of divorce. The problem comes in calculating exactly what that benefit is.

Prior to 2012, a GEPF member’s withdrawal benefit was either a cash resignation benefit or what is considered “actuarial interest”. From 2012, actuarial interest is payable regardless of the member’s choice.

Actuarial interest is the estimated value of what the member’s fund would be worth when they exit the fund. Since the fund trustees have no way of knowing when and how each member will exit the fund or what their salary will be at the date of exit, the actuarial interest calculation makes various assumptions about future economic conditions as well as the fund’s membership profile.

When the benefit is paid to the non-member spouse on divorce, however, the member’s future benefit would be reduced. This is done by creating a “debt” which would be deducted against their benefit when they finally exited the fund.

In practice this means that if as a member of the GEPF you get divorced, any retirement benefit that you expect to receive in the future (either when you resign or retire) would still need to be reduced by the “debt” incurred by the fund when they paid out your ex-spouse. This debt also incurs interest.

This is to achieve cost neutrality between the member and the fund. If no interest is charged, the member profits at the expense of the fund (and other members in the fund). If the interest charged on the debt is higher than the fund returns, the difference between the interest and the fund returns will profit the fund at the expense of the member. To achieve cost neutrality the interest needs to be equal to the fund returns. The Board of Trustees decided to apply the repo rate as the interest on this notional “debt” which is expected to be lower than fund returns.

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