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Retirement Planning
Thursday, May 22, 2014 - 02:16
Go ahead for beneficiary funds

The effects of the 2007 Fidentia corruption scandal continue to work their way through the legal system. A recent amendment to the Pension Funds Act will make it easier for additional death benefits to be administered in beneficiary funds, the protective vehicle that government created to replace the more loosely regulated umbrella trust that was the subject of the Fidentia saga.

The Financial Services Laws General Amendment Act, published in the Government Gazette on the 16th January 2014, contains amendments to the Pension Funds Act. In terms of the amended definition of a “pension fund organisation”, beneficiary funds can now receive so-called unapproved benefits in addition to approved benefits, meaning that death benefits paid out of group life policies may now also be paid into beneficiary funds instead of into an umbrella trust.
Speaking at a mini-conference of the Principal Officers’ Association in Johannesburg min-February, Giselle Gould, Business Development Director of Fairheads Benefit Services, explained the difference in approved and unapproved benefits: “Many companies have a group life policy, accident cover or other risk benefit with a service provider that is separate from the company’s retirement fund. These are called unapproved benefits whereas the fund credit from the retirement fund is called an approved benefit.”
Gould says the recent development is welcome as it removes a degree of “clumsiness”, and so will provide better protection for vulnerable minors and ease the burden on guardians who sometimes have to oversee two accounts on behalf of the children in their care.
In terms of section 37C of the Pension Funds Act, the trustees of a retirement fund are required, on the death of a fund member, to identify and trace the dependants of the deceased and use their discretion whether to pay the money into a beneficiary fund, administer it within the retirement fund or pay it directly to the guardian or major.
The use of a beneficiary fund is a popular option for minor dependants as it provides effective protection by law for the management of minors’ inheritance, enabling many children to complete their education. Beneficiary funds have grown to around R7 billion since January 2009, while there is an estimated R13 billion still in umbrella trusts that will run their course. The beneficiary fund industry will get a boost now that it can receive unapproved benefits.
“The next logical step,” she says, “is for the authorities to allow assets to be transferred from the dying umbrella trust vehicle into the beneficiary fund, and this will provide better protection and allow smaller unviable trust funds to be closed down.”

Beneficiary funds

Beneficiary funds are aligned with the Pension Funds Act and are designed to receive lump-sum death benefit payments in terms of section 37c of that act. Upon the death of a retirement fund member, the trustees identify the dependants and use their discretion whether to pay the money into a beneficiary fund, administer it within the retirement fund or pay it directly to the guardian. They are guided in this complex decision by service providers such as Fairheads, which has developed tools such as a guardian assessment process to assess whether a guardian is financially literate and capable of investing and administering minors’ assets for their benefit.
Once in a beneficiary fund, the trusteeship of the assets passes to the board of the beneficiary fund. Beneficiary funds are structured similarly to retirement funds. They offer greater protection for minors as they are regulated by the Pension Funds Act and all stakeholders have recourse to the Pension Funds Adjudicator; there are strict corporate governance requirements; and investments are prudentially managed in line with regulation 28. When the minor turns 18, he or she is entitled to the remaining assets in the beneficiary fund.
Once the funds are in a beneficiary fund, the trustees of the beneficiary fund take over the fiduciary duty from the retirement fund trustees. In consultation with the guardian who needs to draw up a budget, the trustees assess the income needs of the minor and, taking into account the capital amount and the age of the child, conduct an asset allocation exercise, inserting the child into a specific asset allocation matrix.
In Fairheads’ experience, the average beneficiary fund account is around R100 000 which, carefully managed, can provide a monthly income and finance an 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.
Fairheads has found that over 70% of all special requests for capital payments from beneficiary funds are education-related, be this for school or tertiary education fees, books, uniform and so on.

Investment strategy

The investment strategy for a beneficiary fund is distinctly different from that of a retirement fund. Individual members of a beneficiary fund have very different needs and this requires an asset allocation matrix for each category of members. Essentially this is a type of life-stage investment model, but determined by the trustees in consultation with asset consultants. For example, a one-year old member will have very different needs from a 16-year old member in high school and therefore would fit into a separate asset allocation matrix. In line with best practice, Fairheads outsources the investment of beneficiary funds to a number of investment houses.
 

Copyright © Insurance Times and Investments® Vol:27.5 1st May, 2014
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