Skip to content

South Africa: Unclaimed Benefits – A Problem Across the Globe

13 July 2023
– 18 Minute Read

DOWNLOAD ARTICLE

Legal issues concerning the treatment of unclaimed benefits in retirement funds have grown prominence, especially in relation to the tracing of beneficiaries of benefits and the rights and responsibilities of various role players (trustees, administrators, regulators, members and employers) have in relation to unclaimed benefits. These concerns have become even more important as there appears to be a lack of regulation, specifically in relation to unclaimed benefits, by retirement fund regulators. This article briefly explores the unclaimed benefits problem in South Africa, providing an overview of the legal framework of South African private retirement funds in relation to unclaimed benefits, the responsibility of various role players in relation to unclaimed benefits, and what governmental intervention should take place (or at least be considered) by taking into account what other jurisdictions have done in relation to unclaimed benefits, as set out in the Paper, as well other possible solutions.

Introduction

In a recent Working Paper entitled ‘Supervision of Lost Accounts and Unclaimed Pension Benefits’ (IOPS Paper),1 the International Organisation of Pension Supervisors (IOPS) looked at all types of private pension schemes present in IOPS jurisdictions and investigated how ‘lost accounts’2 and ‘unclaimed pension benefits’3 are monitored and supervised by the regulatory authorities responsible for regulating retirement funds.

The purpose of the Paper was to investigate various aspects of the unclaimed benefit problem by addressing, amongst others, the following questions:

  • Whether unclaimed benefits are supervised by various regulatory authorities responsible for regulating retirement funds, and if so, in what why?
  • What procedures are in place to identify unclaimed benefits?
  • Whether there are any obligations on retirement funds or retirement fund administrators to report on unclaimed benefits to the regulatory authorities?
  • What is the legal character of unclaimed benefits (i.e. whether they remain vested in members)?
  • What is to eventually happen with unclaimed benefits if members or beneficiaries cannot be traced?

The answers to these questions were posed to IOPS members, 32 of which responded, including, amongst others, Albania, Australia, Canada, Hong Kong, China, Ireland, Namibia, Romania, South Africa and Tanzania, to mention a few.4

The findings presented in the Paper make it clear that although each jurisdiction operates differently in relation to unclaimed benefits — many jurisdictions face the same problems in connecting retirement funds5 with members, or beneficiaries of members, so as to pay benefits rightfully due to them.

The problem in connecting retirement funds and members, or beneficiaries of members, is largely due to inadequate record keeping and maintenance of records by retirement funds to facilitate tracing and paying members and/or poor record keeping by administrators. Employers and members also play a role. So does the fact that members do not maintain contact with their former retirement funds or employers.

This article briefly explores the unclaimed benefits problem in South Africa by providing an overview of the legal framework of South African private retirement funds in relation to unclaimed benefits, the responsibility of retirement funds and their boards, and what governmental intervention should take place (or at least be considered), by taking into account what other jurisdictions have done in relation to unclaimed benefits, as set out in the IOPS Paper, as well other possible solutions.

Overview – Legal framework

Private retirement funds are, in the main, regulated by the Pension Funds Act 24, 1956 (PFA), but are also required to comply with other applicable legislation such as the Income Tax Act, 1962 and the Financial Institutions (Protection of funds) Act, 2003 as well as common-law principles.

In addition, each retirement fund must comply with its own set of rules (its constitution) which is not only binding on the retirement fund, but also its members, the board of management of the retirement fund (Board), its shareholders and any person who claims under the rules or whose claim is derived from the person claiming.

The Financial Services Board (FSB) is an independent institution established by legislation to oversee the South African non-banking financial services industry, which includes retirement funds, in the public interest. The Registrar of Pension Funds (Registrar) is the executive officer of the FSB with the responsibility of supervising retirement funds. The Registrar issues circulars as guidelines to assist retirement funds and other role players in the retirement fund industry (such as administrators, auditors, employers and members etc.) in meeting legislative and other regulatory requirements. The Registrar also issues directives and notices related to certain requirements under the PFA.6

Retirement funds are managed by Boards, assisted by various service providers including administrators, benefit consultants and asset managers. The object of a Board is to ‘direct, control and oversee the operations of a fund in accordance with applicable laws and the rules of the fund’.

In pursuing its object, a Board must, amongst other things, take all reasonable steps to ensure that the interests of members in terms of the rules and the PFA are protected at all times; and act with due care, diligence and good faith.7 A Board owes a fiduciary duty to members and beneficiaries in respect of accrued benefits or any amount accrued to provide a benefit, as well as a fiduciary duty to the fund, to ensure that the retirement fund remains financially sound and is responsibly managed and governed.8 Other duties of a Board include ensuring that proper registers, books and records of the operations of the retirement fund are kept and that proper control systems are employed by or on behalf of the Board.9

The object of a retirement fund, on the other hand, is to ensure that it remains financially sound so as to meet its obligations which are to pay benefits to members and beneficiaries in terms of the rules of the retirement fund. The term ‘benefit’ is defined in the PFA to mean ‘any amount payable to a member or beneficiary in terms of the rules of that fund’.10

In turn, the term ‘member’ is defined to include any member or former member of a retirement fund, but excludes any person who has received all the benefits which may be due to that person from the retirement fund and whose membership has thereafter been terminated in accordance with the rules of the particular fund.

Accordingly, a member of a retirement fund will remain a member until such time as he or she receives the benefit due to him or her. The fact that a member no longer contributes to the retirement fund makes no difference — it is only after receiving payment of the benefit that a member’s membership will cease and the retirement fund will have no further liability in relation to that member.

The term ‘unclaimed benefit’ is defined in the PFA to mean any benefit not paid by a retirement fund to a member, former member or beneficiary within 24 months of the date on which the benefit became legally due and payable in terms of the rules of the retirement fund.11

Unclaimed benefits may be transferred to ‘unclaimed benefit funds’ if the retirement fund is not able to trace a member to make payment to him or her. Unclaimed benefit funds are special purpose preservation funds (which must be registered by the Registrar) established to receive unclaimed benefits.

Regulation 30(2)(r) to the PFA requires that the rules of a retirement fund provide for the manner in which unclaimed benefits must be dealt with upon (i) the death of a member; (ii) the liquidation of the retirement fund; and (iii) the withdrawal of a member from the retirement fund. Regulation 30(2)(r) does not, however, prescribe what retirement funds must (or may) do in relation to unclaimed benefits.12

Retirement funds therefore have discretion in deciding what to do with unclaimed benefits, provided of course that what the retirement fund aims to do is permitted in terms of the rules of the retirement fund. Any act by a retirement fund which is inconsistent with its rules is ultra vires.

Many retirement funds have transferred unclaimed benefits to unclaimed benefit funds in the mistaken belief that they had an obligation to do so because the PFA specifically provides for ‘unclaimed benefit funds’. However, in some instances, the rules of the retirement funds did not authorise such transfers.

Some retirement funds have simply transferred unclaimed benefits to unclaimed benefit funds without attempts to trace members or beneficiaries and believed that a transfer to an unclaimed benefit fund would relinquish the retirement funds of all its obligations towards the members or beneficiaries. If the rules of a retirement funds do not allow for the transfer, then the retirement fund may not transfer the unclaimed benefits to an unclaimed benefit fund.

Furthermore, a transferor fund will only be discharged of its obligation to a member or beneficiary if the rules of the transferor fund specifically allow a transfer to an unclaimed benefit fund before the benefit accrued to the member.

Unfortunately, it appears that, in many instances once a benefit becomes unclaimed, the management of ‘other’ retirement fund business takes preference over tracing and paying members. Despite the PFA specifically providing that a Board owes a fiduciary duty to a member and beneficiary whose benefit had accrued to him or her, many Boards are not proactive in ensuring that all reasonable steps are taken to ensure that the interest of members and beneficiaries are protected at all times.

This is unfortunate because an unclaimed benefit is like any other benefit and a Board remains obliged to comply with its duties. Similarly, the liabilities of a retirement fund, in relation to unclaimed benefits held by it, are liabilities like any other.

It is arguable that financial institutions that administer ‘commercial’ unclaimed benefits (and also established them) are in a better position to trace and pay members and beneficiaries, than those retirement funds from which the unclaimed benefits were paid. It is said that the only people that benefit from unclaimed benefit funds are services providers to unclaimed benefit funds, and that there is little or no incentive to trace members.

This said, however, there are unclaimed benefit funds that have achieved great success in tracing and paying members. It has been reported that thousands of mine workers have been paid more than ZAR 60 million in unclaimed benefits, during the period 2014 to 2016, by the Mines 2003 Unclaimed Benefits Preservation Pension and Provident Fund. The funds have been able to locate 62% of the total number of their beneficiaries. Tracing agents employed by these funds make in-person visits to the homes of beneficiaries to assist them with completing application forms and obtaining necessary information to submit a claim.

The above said, however, despite attempts by retirement funds and unclaimed benefit funds to trace and pay members and beneficiaries, and despite efforts by the FSB in hosting media roundtables in an attempt to seek the assistance of media in making members and beneficiaries aware of their rights in relation to unclaimed benefits that may be due to them, as well as the FSB requesting that all retirement funds and administrators submit information on unclaimed benefits which was (or is still in the process of being) captured on the FSB’s database to enable the public to ascertain if they are entitled to any unclaimed benefits, according to the FSB’s 2016 Annual Report, the aggregate value of unclaimed benefits reported by retirement funds regulated and supervised under the PFA remains significantly high and was reported as ZAR 34 billion for 2014.13

The magnitude of unclaimed benefits remains an issue and different measures need to be put in place by Government in order to address it. It is recommended that certain measures and industry practices adopted by other jurisdictions, as briefly referred to below, in relation to reporting on unclaimed benefits and tracing of members and beneficiaries, be considered by Government (National Treasury, and the FSB) for purposes of developing national policy and new regulatory instruments on the treatment and regulation of unclaimed benefits.

Measures to be considered (or reconsidered)

National Registry

In the United Kingdom, retirement funds are required to provide updated information to the national ‘Pension Schemes Registry’ on an annual basis at the same time they pay their annual levy. The Pension Schemes Registry service is a single source which assists employees to trace unpaid or unclaimed benefits. Similarly, Australia maintains a ‘Lost Members Register’ where retirement funds are required to provide, on a twice-yearly basis, details of members with whom they have lost contact, as well as reports on inactive, found and transferred members, to the Australian Taxation Office.14

Whilst the FSB has set up a database to enable the public to ascertain if they are entitled to any unclaimed benefits, retirement funds, unclaimed benefit funds and administrators are not compelled to provide the information. It is recommended that Government consider whether to make it compulsory for retirement funds and unclaimed benefit funds to submit all information in relation to unclaimed benefits, active and inactive, as well as traced and paid members, to the FSB (or another established body) on at least an annual basis.

The database/registry could be funded by annual levies paid by retirement funds to the FSB. Of course, necessary steps need to be taken to ensure that the information provided remains adequately protected to prevent unauthorised access and possible fraud.

Central depository for unclaimed benefits

In some jurisdictions (Albania, Hong Kong China, Ireland and Spain, for example), unclaimed benefits stay in retirement funds indefinitely.15 In other jurisdictions (Colombia, Mexico and Switzerland), unclaimed benefits are utilised for public interest.16 In Mexico, for example, if a benefit is not claimed within 10 years from the date the benefit accrued, the benefit will be paid to the Social Security Agency.

In Switzerland, benefits not claimed within 10 years after reaching normal retirement, must be paid to a ‘Guaranteed Fund’ (which is, in principle, similar to the South African Guardian’s Fund17) until the member reaches the age of 100 years. If not claimed before then, the benefit will be used to fund the Guaranteed Fund.

In Australia, Namibia, Serbia and Tanzania, unclaimed benefits revert to the state.18 In Namibia, for example, benefits which remain unclaimed for five years must be paid to the Guardian’s Fund, administered by the Master of the High Court, in terms of the Administration of Estates Act. Unclaimed benefits will remain in the Guardian’s Fund for 30 years and will thereafter revert to the state as forming part of its revenue.19

The United Kingdom has no statutory limit within which a member or beneficiary entitled to a benefit must submit a claim; however, many trust deeds require claims to be made within six years. If a benefit is not claimed within six years from the date it became due and payable, the unclaimed benefit will revert back to the retirement fund and will be used to fund administration costs.

In Roumania, provided that the retirement fund can prove that it has taken all necessary steps to trace a member, the unclaimed benefit will revert back to the fund to increase pension benefits.20 Although the Registrar has stated in PF Circular 12621 that unclaimed monies may not revert back to retirement funds, the current legal position as to whether a retirement fund must hold unclaimed benefits indefinitely has not yet been tested by South African courts and is not clear.

National Treasury recommended in the Retirement Reform Discussion Paper published by National Treasury during December 2004, that retirement funds pay the value of the member’s benefit which remained unclaimed for a period of 24 months to a ‘central unclaimed benefit fund’ (national unclaimed benefit fund).

According to the 2004 Discussion Paper, the central unclaimed benefit fund would be obliged to trace members and pay those who it had traced. If the central unclaimed benefit fund was unsuccessful in tracing members and beneficiaries (or if they passed away), then the central unclaimed benefit fund would be entitled to release the benefit to the State in order to fund social old age pensions. If any members or relatives of deceased members come forward thereafter, then the central unclaimed benefit fund would pay the benefit to them. To date, however, a central unclaimed benefit fund has not yet been established.

To keep unclaimed benefits for an indefinite period in retirement funds or unclaimed benefit funds does not seem viable and does not benefit anyone, especially in instances where retirement funds and unclaimed benefit funds have done everything possible to trace members or beneficiaries, with no result.

It is recommended that legislation be enacted for the establishment of a national unclaimed benefit fund to hold all unclaimed benefits. If members cannot be traced after all reasonable steps have been taken to do so, then, as National Treasury initially recommended, the unclaimed benefits should be released to the State to fund social old age pensions. In doing so, Government might have more revenue available to use towards investing in infrastructure and social needs.

Lastly, regulatory and legislative frameworks in dealing with unclaimed benefits must be strengthened. There is currently no regulatory and/or legislative framework specifically setting out the measures that must be implemented by retirement funds and unclaimed benefit funds in tracing members.

This article was first published in International Pension Lawyer, Special Edition, Volume 88 – January 2018

  1. See IOPS Working Papers on Effective Pensions Supervision, No. 26 dated December 2016, online: <www.iopsweb.org>.
  2. According to the Paper, “lost accounts” are “where the beneficial owner of the account cannot be located”. See page 4 of the Paper.
  3. According to the Paper, “unclaimed pension benefits” are “where the beneficiary has a right to payment but has not yet made a claim”. See page 4 of the Paper.
  4. See footnote 4 to the Paper for a full list of IOPS members who responded to the questions.
  5. The phrase “retirement funds” is used in this article and is to be interpreted to include all types of funds whose object is to provide a retirement benefit to members as and when they retire, this includes “pension schemes”, “pension plans”, “pension funds”, “provident funds”, “retirement annuity funds” and so on.
  6. The circulars, notices and directives are available on the FSB’s website at: <www.fsb.co.za>.
  7. Section 7C(2)(a) and (b) of the PFA.
  8. Section 7C(2)(f) the PFA.
  9. See s 7D of the PFA.
  10. See s 1 of the PFA.
  11. See s 1 of the PFA.
  12. There are only two sections in the PFA which specifically deal with transfers to unclaimed benefit funds, these are:
  13. Section 28 deals with the voluntary liquidation of a retirement fund by a liquidator. Section 28(12A) allows a liquidator to, if he or she is satisfied that benefits will remain unclaimed benefits, transfer the benefits to an unclaimed benefit fund; and
  14. Section 37C of the PFA which deals with the distribution of death benefits, allows a retirement fund to, if it does not become aware of or cannot trace any dependant of a member within twelve months of the death of the member and if the member has not designated a nominee or if the member has designated a nominee to receive a portion of the benefit in writing to the fund, the benefit or the remaining portion of the benefit after payment to the designated nominee, must be paid into the estate of the member or, if no inventory in respect of the member has been received by the Master of the Supreme Court in terms of section 9 of the Administration of Estates Act, 1965, into the Guardian’s Fund or unclaimed benefit fund.
  15. The IOPS Paper refers to R42 million.
  16. See IOPS Paper, para 20 at page 11. Also see <https://www.ato.gov.au/Super/APRA-regulated-funds/Reporting-and-administrative-obligations/Lost-members>.
  17. See IOPS Paper para 22 at page 12.
  18. See ibid para 24 page 13.
  19. Although, the Guardian’s Fund will retain monies for 30 years.
  20. See IOPS Paper para 25 at page 13.
  21. See ibid para 25 at page 13. The Guardian’s Fund in Namibia is similar to that of South Africa, however, the South African Guardian’s Fund is a fund created to hold and administer “funds which are paid to the Master on behalf of various persons known or unknown, for example, minors, persons incapable of managing their own affairs, unborn heirs, missing or absent persons or persons having an interest in the moneys of a usufructuary, fiduciary or fideicommissary nature”. See <http://www.justice.gov.za/master/guardian.html>. The PFA only allows death benefits to be paid to the Guardian’s Fund in limited instances.
  22. See IOPS Paper para 26 page 14.  
  23. Issued by the Registrar in November 2007. A copy can be obtained on the FSB’s website. Note that Circulars issued by the Registrar have no legal force or effect and serve as guidance notes / guidelines.