Finance:Beneficiary fund

About

A beneficiary fund is defined as a pension fund organisation in the Pension Funds Act No.24 of 1956 of South Africa , as amended in 2008. It is designed to accept and administer lump sum death benefits allocated in their discretion by pension fund trustees to the minor dependants of deceased pension fund members, as set out in section 37C of the Act.

Beneficiary funds were introduced in January 2009. They play an important social role in Southern Africa, particularly among blue-collar worker families where guardians may not be sufficiently financially astute to manage minors’ funds on their own. Minor children stand a better chance of completing their education if their assets are managed in the beneficiary fund vehicle which is protected under the Pension Funds Act and overseen by a board of trustees. Beneficiary funds are designed to protect the assets of children and therefore any retirement fund member, regardless of their level of income, can consider their use in estate planning as an alternative to a testamentary trust, by stipulating on their pension fund nomination form that the trustees consider the use of a beneficiary fund in the event of their death.

Advantages of beneficiary funds are that they are cost effective and tax effective, and offer institutional investment returns. Beneficiary funds are taxed in the same manner as retirement funds in South Africa, that is no tax is paid in the fund. Furthermore, any payment out of a beneficiary fund, whether capital or income, is tax free.

Although some beneficiary fund accounts run into millions of rands, the average size is around R100 000 which, if carefully managed, can provide a monthly income and finance a child’s entire education through to tertiary level. When the member turns 18, the account is terminated and the funds paid out unless the member requests they remain in the beneficiary fund.

At March 2014, according to the website of the Financial Services Board (South Africa), there were 24 beneficiary funds registered in South Africa. These funds manage minors’ assets totalling approximately R7 billion. Rapid further growth is expected as the industry becomes better known and the umbrella trust vehicle, which preceded the beneficiary fund, is phased out (see below under Background).

Governance

A beneficiary fund needs to comply with the same regulatory and governance standards as any other South African retirement fund in terms of the Pension Funds Act. The beneficiary fund has a board of trustees which needs to register a set of rules with the Financial Services Board. The board also needs to draw up a number of policies in terms of Pension Funds Circular 130, for example a member communication policy, investment policy, code of conduct and a risk policy.

Parties involved

Pension funds appoint to their fund a service provider which needs to have an administrator licence in terms of section 13B of the Pension Funds Act. Service providers include large banks and institutions such as Old Mutual, Sanlam Employee Benefits, Standard Bank, ABSA and Nedgroup, Alexander Forbes as well as a few independent service providers such as FedGroup, Fairheads Benefit Services and Bophelo Benefit Services. Once the funds are in a beneficiary fund, the trustees of the beneficiary fund take over the fiduciary duty from the retirement fund trustees. They consult with the guardian who may need to draw up a budget. Taking into account the capital amount, the age of the child and the income requirements, an appropriate allocation of funds is made. Investment management varies among service providers but best practice is to outsource this to independent asset managers. Investments need to be in line with Regulation 28 of the Pension Funds Act, which stipulates strict prudential guidelines. The members of a beneficiary fund are the minor beneficiaries to whom assets have been left. They have a right to benefit from these assets and in the event of any maladministration or complaints they and their guardians have recourse to the Pension Funds Adjudicator. Communication generally takes place between the beneficiary fund and the minor’s guardian or caregiver.

Background

The concept of managing minors’ funds was first introduced in South Africa in 1989 through section 37C of the Pension Funds Act, which provided three options for the trustees of pension funds to dispose of death benefits due to minor dependants: retain the assets for administration within the pension fund; pay a lump sum directly to the minor’s guardian; or pay the lump sum into an umbrella trust. Umbrella trusts fall under the Trust Property Control Act 57 of 1988 and are not as strictly regulated as beneficiary funds. In 2006 the industry was rocked by a major fraud scandal relating to minors’ assets in the Living Hands Trust administered by the Fidentia group. This led to the South African government introducing the beneficiary fund vehicle which provides strong protection to its members, the minors whose assets it manages. From 1 January 2009 pension fund trustees were obliged to pay section 37C death benefits (so-called approved benefits) into beneficiary funds instead of umbrella trusts. So-called unapproved benefits, such as group life cover and other non-pension fund benefits, were however still to be paid into umbrella trusts.

More recent amendments to the Pension Funds Act, effective from 28 February 2014, allow unapproved benefits also to be paid into a beneficiary fund, as long as they are related to employment. This means that the umbrella trust industry will gradually reduce in size. Adding to their demise, there are lobbying efforts under way to persuade the authorities to allow transfer of assets from umbrella trusts into beneficiary funds in order to provide more minors the better protection afforded by beneficiary funds.

Industry issues

The beneficiary fund industry is complex and still evolving. The South African authorities, including National Treasury and the Financial Services Board, consult the industry regularly on various issues with a view to improvements in regulations. The industry is lobbying for the age at which members can be paid out from 18 to 21, as the reality of social and educational circumstances means that the average 18-year-old in South Africa is not financially mature enough to invest or use large sums of money responsibly. Another complexity relates to the task of pension fund trustees to allocate benefits equitably by ensuring that all dependants of deceased pension fund members are identified. In this task they can be guided by the member’s nomination form but in practice this form is either not complete or out of date. In Southern Africa there are further challenges relating to customary marriage, ‘and city’ and ‘rural’ families of migrant workers, often making it difficult to trace dependants. The January 2014 amendments to the Pension Funds Act allow pension fund trustees to pay benefits into an unclaimed benefits fund if they have been unable to trace dependants after 24 months. Some role players believe this is not in the best interests of vulnerable children.