Living Annuities and Divorce
In an significant ruling impacting divorce settlements, the Supreme Court has overturned a High Court ruling that excludes a living annuity from a spouse's estate. A 2016 a ruling by the Johannesburg High Court that a living annuity should not be taken into account for the purposes of calculating the assets in divorce proceedings has been overturned on appeal by the Supreme Court of Appeal (SCA). The SCA ruled in the case of Montonari v Montonari that the right to the revenue stream of a living annuity formed part of the assets of a marriage for the purposes of divorce.
The 2016 Montonari Judgment
The view of the High Court in the Montonari case ruled that a living annuity, underwritten by an insurer, are actually owned by the insurer and not the annuitant. They are not able to be incorporated as assets in the annuitant’s estate available for distribution in a divorce.
Even though an actuary provided evidence that the income of the living annuity had a economic value, which could be capitalised, this was dismissed by the court.
The court ruled that the month-to-month or periodical income from the living annuity could only be considered in respect of a maintenance claim by the other spouse, together with other income sources.
The case of ST v CT in 2018
The case of ST v CT (2018) was the very first time the issue of whether or not a living annuity forms part of the assets of a divorce had come before the SCA.
The judge reached a similar conclusion. It acknowledged that the capital backing a member held living annuity is possessed by the insurer and does not fall into the assets of the annuitant.
The month-to-month income generated from the living annuity, forms part of total income and has a bearing on whether the annuitant has the means to pay maintenance to the other spouse.
The court did not have to give consideration to the issue of whether the right to a future annuity is a right capable of valuation simply because evidence was not lead by the parties on this.
The 2020 Montonari Judgment – SCA
Leave to appeal the 2016 judgment was awarded to the spouse of the annuitant, which succeeded.
The SCA made an order that:
The value of the annuitant’s right to future annuity payments under a living annuity is an asset in his estate for the purposes of calculating the accrual in his estate.
The matter must be remitted to the trial court for the admission of evidence on the value of the annuitant’s right to receive future payments in respect of the living annuities.
The findings of the SCA
The SCA pointed out that in the 2016 High Court hearing, the parties were unsuccessful to define the issue correctly. The SCA observed that the High Court judgment and declaratory order perpetuated the misunderstanding that the applicant’s target was exclusively the underlying capital value of the annuities.
The witnesses gave evidence that the capital is held by the insurer and the annuitant is entitled to an income stream equal to between 2.5% and 17.5% of the capital.
The High Court should have determined that the annuity, and not the capital, is the asset that would be reflected in the annuitant’s balance sheet.
The actuary who gave evidence ventured an opinion when pressed, that a market value could be placed on the income stream produced at any given time. To that end, regard would be had to variables such as the investment return assumptions, and the annuitant’s mortality
The court acknowledged that the living annuity enjoys the protection provided by 37A and 37B of the Pension Funds Acts so an annuitant cannot give part or all of the living annuities to an ex-spouse in terms of a divorce order or agree to split the annuity income with the ex-spouse.
The SCA noted that the High Court in 2016 took the evidence of the actuary into account that future annuity income which the annuitant draws is an asset which can be valued, but then it mistakenly thought the annuity income to be relevant only for purposes of a maintenance claim. It should have found it to be an asset in the respondent’s estate, which is subject to accrual, and have allowed the actuary to provide a valuation of that income stream.
The case of De Kock v Jacobson 1999
The SCA relied on the decision of De Kock v Jacobson,1999 where a husband’s pension was seen as an asset in the joint estate of a couple married in community of property. Upon his retirement, prior to the divorce, he discontinued to be a member of the pension fund to which he had belonged and his pension benefit was altered into a pension. His right against the pension fund had two components; a right to a cash payment (which he conceded fell within the community of property) and a right to monthly payments by way of pension. In this case it was not a living annuity. The court in De Kock determined that there was no logical or legal reason why both the cash element and the accrued right to the pension should not form part of the community of property existing between the parties prior to the divorce. The SCA agreed with the reasoning and its wider application to this case which was not in community of property.
Comment
While the legal principle is sound that a right is capable of valuation and capitalisation, the practicalities of applying this to living annuity income is very complicated.
In the case of ST v CT outlined above, it was mentioned that in valuing living annuity income regard would be had to variables such as the investment return assumptions, the level of draw downs between 2,5% and 17,5% and the annuitant’s mortality. (The right to receive any particular annuity installment is subject to a condition of survivorship, particularly that the annuitant should be alive on the date on which the next annuity installment becomes payable. If the annuitant does not survive to the next date, the right to the annuity would cease.) These factors would need to be considered in the valuation of the right.
The case was referred back to the high court for valuation of the right to future payments. Although it would be very educational to see the way the living annuity is valued by actuaries, the parties may possibly potentially reach a settlement on the valuation of the right as the cost and delay of proceeding to court might dictate this. This was the situation in the De Kock case.
It is significant to note that this does not influence the obligations of the administrator to make payment of living annuity income to the annuitant only which is always protected in terms of section 37A of the Pension Funds Act. This case does not alter that at all. Living annuity income can still only be paid to the annuitant.
The actuarial computation of the capitalized value of the right to living annuity income will need to be managed by the divorce attorneys. Financial advisers might be required to assist by supplying them with the capital value of living annuity as well as a history of draw down rates for the purposes of valuation. It will be interesting to see how actuaries address this difficult exercise.
Even though this case dealt with the right to living annuity income, the concept would apply likewise to a right to income from a guaranteed annuity which might be easier to value than a living annuity.
Regardless of the difficulties in valuation, this case is a step in the right direction. There is a obvious injustice that during membership of a fund, the non-member spouse has a right to share in the pension interest. Nevertheless, on retirement when a living annuity is purchased from an insurer that right ends. The answer to the inequity is legislative intervention which has been proposed by industry organisations.
To sum up. Parties cannot hide their liquid sum by purchasing a living annuity and then claiming based on the law that it does not form part of the accrual anymore.
The 2016 Montonari Judgment
The view of the High Court in the Montonari case ruled that a living annuity, underwritten by an insurer, are actually owned by the insurer and not the annuitant. They are not able to be incorporated as assets in the annuitant’s estate available for distribution in a divorce.
Even though an actuary provided evidence that the income of the living annuity had a economic value, which could be capitalised, this was dismissed by the court.
The court ruled that the month-to-month or periodical income from the living annuity could only be considered in respect of a maintenance claim by the other spouse, together with other income sources.
The case of ST v CT in 2018
The case of ST v CT (2018) was the very first time the issue of whether or not a living annuity forms part of the assets of a divorce had come before the SCA.
The judge reached a similar conclusion. It acknowledged that the capital backing a member held living annuity is possessed by the insurer and does not fall into the assets of the annuitant.
The month-to-month income generated from the living annuity, forms part of total income and has a bearing on whether the annuitant has the means to pay maintenance to the other spouse.
The court did not have to give consideration to the issue of whether the right to a future annuity is a right capable of valuation simply because evidence was not lead by the parties on this.
The 2020 Montonari Judgment – SCA
Leave to appeal the 2016 judgment was awarded to the spouse of the annuitant, which succeeded.
The SCA made an order that:
The value of the annuitant’s right to future annuity payments under a living annuity is an asset in his estate for the purposes of calculating the accrual in his estate.
The matter must be remitted to the trial court for the admission of evidence on the value of the annuitant’s right to receive future payments in respect of the living annuities.
The findings of the SCA
The SCA pointed out that in the 2016 High Court hearing, the parties were unsuccessful to define the issue correctly. The SCA observed that the High Court judgment and declaratory order perpetuated the misunderstanding that the applicant’s target was exclusively the underlying capital value of the annuities.
The witnesses gave evidence that the capital is held by the insurer and the annuitant is entitled to an income stream equal to between 2.5% and 17.5% of the capital.
The High Court should have determined that the annuity, and not the capital, is the asset that would be reflected in the annuitant’s balance sheet.
The actuary who gave evidence ventured an opinion when pressed, that a market value could be placed on the income stream produced at any given time. To that end, regard would be had to variables such as the investment return assumptions, and the annuitant’s mortality
The court acknowledged that the living annuity enjoys the protection provided by 37A and 37B of the Pension Funds Acts so an annuitant cannot give part or all of the living annuities to an ex-spouse in terms of a divorce order or agree to split the annuity income with the ex-spouse.
The SCA noted that the High Court in 2016 took the evidence of the actuary into account that future annuity income which the annuitant draws is an asset which can be valued, but then it mistakenly thought the annuity income to be relevant only for purposes of a maintenance claim. It should have found it to be an asset in the respondent’s estate, which is subject to accrual, and have allowed the actuary to provide a valuation of that income stream.
The case of De Kock v Jacobson 1999
The SCA relied on the decision of De Kock v Jacobson,1999 where a husband’s pension was seen as an asset in the joint estate of a couple married in community of property. Upon his retirement, prior to the divorce, he discontinued to be a member of the pension fund to which he had belonged and his pension benefit was altered into a pension. His right against the pension fund had two components; a right to a cash payment (which he conceded fell within the community of property) and a right to monthly payments by way of pension. In this case it was not a living annuity. The court in De Kock determined that there was no logical or legal reason why both the cash element and the accrued right to the pension should not form part of the community of property existing between the parties prior to the divorce. The SCA agreed with the reasoning and its wider application to this case which was not in community of property.
Comment
While the legal principle is sound that a right is capable of valuation and capitalisation, the practicalities of applying this to living annuity income is very complicated.
In the case of ST v CT outlined above, it was mentioned that in valuing living annuity income regard would be had to variables such as the investment return assumptions, the level of draw downs between 2,5% and 17,5% and the annuitant’s mortality. (The right to receive any particular annuity installment is subject to a condition of survivorship, particularly that the annuitant should be alive on the date on which the next annuity installment becomes payable. If the annuitant does not survive to the next date, the right to the annuity would cease.) These factors would need to be considered in the valuation of the right.
The case was referred back to the high court for valuation of the right to future payments. Although it would be very educational to see the way the living annuity is valued by actuaries, the parties may possibly potentially reach a settlement on the valuation of the right as the cost and delay of proceeding to court might dictate this. This was the situation in the De Kock case.
It is significant to note that this does not influence the obligations of the administrator to make payment of living annuity income to the annuitant only which is always protected in terms of section 37A of the Pension Funds Act. This case does not alter that at all. Living annuity income can still only be paid to the annuitant.
The actuarial computation of the capitalized value of the right to living annuity income will need to be managed by the divorce attorneys. Financial advisers might be required to assist by supplying them with the capital value of living annuity as well as a history of draw down rates for the purposes of valuation. It will be interesting to see how actuaries address this difficult exercise.
Even though this case dealt with the right to living annuity income, the concept would apply likewise to a right to income from a guaranteed annuity which might be easier to value than a living annuity.
Regardless of the difficulties in valuation, this case is a step in the right direction. There is a obvious injustice that during membership of a fund, the non-member spouse has a right to share in the pension interest. Nevertheless, on retirement when a living annuity is purchased from an insurer that right ends. The answer to the inequity is legislative intervention which has been proposed by industry organisations.
To sum up. Parties cannot hide their liquid sum by purchasing a living annuity and then claiming based on the law that it does not form part of the accrual anymore.