Many funds offer a disability income benefit to members, insured with an insurance company. When a fund member becomes disabled, the member would be entitled to an income benefit, paid by the insurance company that would effectively replace a certain percentage of the salary the member used to earn from employment prior to disablement; usually between 60% and 100% of his previous salary. The disabled member would remain a member of the fund. The insurance company usually also takes over the employer contribution towards the fund, in respect of the disabled member. The member will remain obliged to contribute to the fund as if he was still employed, but the contribution would normally be deducted from the income benefit payable by the insurance company and be paid over to the fund. As a member of the fund, the disabled person would also remain entitled to the death benefit the fund offers that is also usually insured with an insurance company.
The employer of this member would usually terminate the employment of the employee upon his disablement. As pointed out, the employer’s contributions would be taken over by the insurance company so the employer also no longer has any obligation towards the former employee in this regard. Where the rules of the fund (and the Income Tax Act) requires that membership of the fund must be a condition of employment, the termination of employment as the result of disablement, would then imply that the disabled member cannot remain a member of the fund unless the rules specifically provide that a disabled member will remain a member of the fund notwithstanding the fact that he is no longer an employee of the employer, and most rules do provide for this. The relationship of the disabled member with the employer would thus be severed and the disabled member would now be a member of the fund is his own capacity as provided for in the rules. Usually rules would link the conditions of the disabled member’s continued membership to the terms and conditions set out in the insurance policy under which the disability income benefit is being paid to the disabled member.
Fund rules would normally describe under what circumstances a member becomes entitled to a benefit, typically, termination of employment, death or retirement; all of these reasons being linked to the employee’s employment. For employed members, these would cover all possible reasons for termination of membership, other than disablement elaborated above. The retirement rule would normally provide for early, normal or late retirement where early retirement is normally at the discretion of the employee, normal retirement manifests the obligation of the employee to retire and late retirement is at the discretion of the employer.
As pointed out above, the terms and conditions applicable to a disabled member who is no longer employed are usually linked to the terms and conditions of the policy providing the benefit. Clearly in the absence of an employment relationship, there can be no termination of employment due to resignation, dismissal or retrenchment, yet the benefit has to cease at some stage. Rationally this is either death or normal retirement age and this is usually also what the disability insurance policies provide for. Where the rules of a fund link the disability benefit to the insurance policy, fund membership of the disabled member can only terminate as provided in the disability insurance policy. Where the rules do not explicitly link the disability benefit to the disability insurance policy we would argue that the only reason for termination of fund membership remains the termination of payment of the disability benefit by the insurance company, which would be upon the earlier of recovery, death or reaching normal retirement age.
We are regularly confronted with requests by disabled members receiving a disability income benefit, to terminate their fund membership for whatever reason but more often than not the member being after the ‘pot-of-gold’ he has in the pension fund. This would not be in the interests of the disabled fund member or his dependants who will lose the continued contribution by the insurance company, the benefit payable in the event of the death of the disabled member and any investment returns on the money that will continue to be invested on behalf of the disabled member, until the earliest of recovery, death or retirement.
Besides the fact that the early retirement of a disabled member will seriously prejudice the disabled member, section 37A of the Pension Funds Act explicitly prohibits the member to sacrifice his benefits in stating that “…no benefit provided for in the rules of a registered fund (including an annuity purchased or to be purchased by the said fund from an insurer for a member), or right to such benefit, or right in respect of contributions made by or on behalf of a member, shall notwithstanding anything to the contrary contained in the rules of such a fund, be 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, …, and in the event of the member or beneficiary concerned attempting to transfer or otherwise cede, or to pledge or hypothecate such benefit or right, the fund concerned may withhold or suspend payment thereof…”
The disabled member thus has a statutory right to the benefits offered by the rules to a disabled member which right cannot be disposed of by the disabled member or even allowed to be disposed of by the fund and these rights can be sued for by the disabled member and/ or his dependants at any time in future. Prescription will never apply to this right. Trustees are advised to ignore any request by a disabled member to be allowed to take an early retirement benefit.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.