What does it mean, the Government Employee Pension Fund (GEPF) is a defined benefit fund, as opposed to a defined contribution fund?
GEPF is a defined benefit fund, not a defined contribution fund. This means that benefits are calculated using fixed formulas, based on length of service and final salary, as defined. For example, a member who resigns is entitled to a gratuity or transfer benefit calculated as follows: 7.5% of his or her final salary multiplied by the period of his or her pensionable service, and increased by ten percentage points for each full year of pensionable service between five and 15 years.
Therefore, unlike a defined contribution fund, the benefit eventually payable to a member is not the sum of contributions made by a member, plus growth. There is, accordingly, no ring-fenced amount per member in GEPF. All contributions made to GEPF go into a collective pool from which benefits are paid out according to a formula per member when the member exits.
When GEPF pays the divorce interest on behalf of a member to a former spouse, the amount paid cannot therefore be subtracted from the “member’s money/savings” in GEPF, as no member has any amount of money in GEPF specifically allocated to him or her.
Will the member have to repay the portion of the pension interest allocated by the court and paid to the former spouse?
Yes. It is very important to understand that the member will now owe GEPF the amount paid to the non-member spouse and that this amount will also accrue interest. This is so because GEPF paid, on the member’s behalf, the debt he or she owes to the non-member spouse. Where GEPF pays the portion of the pension interest allocated by the court to the non-member spouse it’s funding is reduced and it loses the growth on the money paid.
It is extremely important that members should try to pay off the debt immediately. Otherwise the member may end up having very little pension money, if any, left over when he or she exits GEPF because the debt has been accruing interest and will be subtracted from any pension benefits payable on exit.
GEPF is a defined benefit fund, not a defined contribution fund. This means that benefits are calculated using fixed formulas, based on length of service and final salary, as defined. Therefore, unlike a defined contribution fund, the benefit eventually payable to a member is not the sum of contributions made by a member plus growth. There is no ring-fenced amount per member in GEPF.
Where a divorce order declares that a portion of a member’s pension interest be paid to the former spouse, GEPF is obliged to pay the said portion awarded to the former spouse. It has no discretion in the matter – by order of court and by law, as passed by Parliament.
Where GEPF is required to pay a portion of the pension interest to the former spouse, it is settling a debt on behalf of the member. This debt must be repaid by the member as GEPF is out of pocket and is losing income on the money paid. The member is not obliged to immediately repay GEPF. He or she may choose not to. Then interest will run on the debt amount and this interest will be deducted, along with the debt, from the eventual pension benefit payable to the member. If the member immediately pays the debt, the member will receive his or her full pension benefit at exit. The member will also have saved on the interest.
If the amount of the divorce debt exceeds the amount of the gratuity (lump sum) and there is an annuity (monthly pension) payable to the member on exit, then the divorce debt must be recovered from the gratuity and annuity and the gratuity and annuity be reduced pro-rata.