David Hurford, Chief Executive Officer
Fairheads Benefit Services
Beneficiary funds – supporting the guardian or caregiver rather than disempowering them
The Office of the Pension Funds Adjudicator (PFA) has recently highlighted that a Board of Trustees must have cogent reasons not to pay a S37C lump sum death benefit in the case of a minor to their guardian. Fairheads is on record as agreeing with this view, particularly so because the ultimate goal is to get the best possible outcome for the minor dependent, whether it be through the use of a beneficiary fund or through prudent and responsible use of a lump sum by the guardian.
We believe that the decision to place a minor’s benefits into a beneficiary fund should not be seen through the lens of depriving the guardian of their right to administer the benefit, but rather that of providing the guardian with the assistance required to navigate dealing with a large amount of money in a complex world.
In the matter of Ramanyelo v Mineworkers Provident Fund, the Adjudicator put forward some considerations in determining the mode of payment for a minor beneficiary’s benefit, including:
• The amount of the benefit;
• The ability of the guardian to administer the monies;
• The qualification (or lack thereof) of the guardian to administer the monies; and
• The benefit should be utilised in such a manner that it can provide for the minor until s/he attains majority.
We thought it would be helpful to unpack these considerations a little further in this article, in order to guide trustees on the questions that they should be asking before making a decision about the mode of payment of a death benefit. Foremost in mind should of course be the interests of the minor child.
The factors we describe below are not an exhaustive list of considerations but in our experience should form the basis for a retirement fund’s death benefit policy.
Legal standing of the caregiver
Unfortunately, South Africa suffers from very high rates of single parent households, driven by a combination of poverty, unemployment, HIV/AIDS and other social factors. As a result, many children are left in the care of a close relative or friend in the event of the single parent passing away.
It is therefore critically important that trustees make a distinction between a legal guardian, such as a parent or someone appointed by a court, and a caregiver, such as a family relationship or friend who looks after the child.
It is a given that aside from legal duties and responsibilities, most parents would move heaven and earth for their children. And so a different test should apply where there is a strong emotional and moral parental connection. A legal guardian has duties and responsibilities to the child codified in legislation but which are also intrinsic to the parental/guardian-child relationship.
In contrast, while a caregiver may have some legal obligations to a child, they are not a guardian by law and do not have the same level of decision making authority as a legal guardian. They may also not have the same intrinsic drive to care for the child as a parent would.
Consider the scenario where a single mother passes away and leaves her two children in the care of their aunt. The aunt, who has two children of her own, is now expected to use the money received on behalf of her sister’s children exclusively for their benefit. It is not far-fetched to imagine that the benefit would be ‘shared’ among all the children, and indeed the rest of the household. Taken a step further, imagine that the appointed caregiver was to pass away. How likely would it be that the two children’s benefit had been ring fenced from the rest of her estate and would be preserved for their specific benefit?
So what should trustees do?
Most often, simply asking the caregiver or guardian how they intend to manage the money to ensure that it is used for the benefit of the children is a good way to understand their intentions, and will give some insight into how likely their intentions will be fulfilled.
Consider the real life situation where the guardian of a disabled child stated quite plainly to Fairheads that her intention was to buy an unregistered vehicle, regardless of the fact that she did not have a driver’s licence, nor did she intend to insure the vehicle or register it in her name. Clearly she had good intentions to help her child, however her acting on her intentions could have dire consequences. Would it not have been preferable for the beneficiary fund to pay for transport for the child, whilst at the same time paying for driving lessons for the guardian and assisting and guiding her to purchase a registered and reliable vehicle?
And so trustees should look to the intentions of the guardian or caregiver, such as whether they have sought independent financial advice, or whether they have a plan for the investment of the money to take comfort that they are indeed capable of managing the death benefit for the child.
Education Level of the guardian / cargiver
Quite often the level of education and the ability to properly manage money are not in sync. Many of us would know of people who, while highly educated, make poor financial decisions. However, having a sound understanding of running a household budget, understanding the principles of basic investing (compound interest and the time value of money) and the ability to distinguish between get-rich-quick schemes and sound investments should inform the decision of the trustees. This can also be gauged by the guardian or caregiver’s own financial postition.
Financial Track Record
Perhaps the most important aspect for the trustees to consider is the financial track record of the guardian or caregiver. Do they have a track record of making sound financial decisions or not, which can be gauged by:
- Their credit record (default judgements, debt review, etc) – does the guardian or caregiver have a poor credit record with many creditors seeking repayment? Anyone who has been in the ‘debt-collection trap’ can attest to how stressful it is and how tempting it would be to use the benefits awarded to the child to settle these.
- Assets to liabilities – does the guardian or caregiver have a track record of asset accumulation in excess of their level of debt, in other words, do they use good debt to accumulate assets, or bad debt for consumption purposes?
- Income to expenditure – does the guardian or caregiver have sufficient income to meet their expenses? If not, how likely would it be that they would dip into the benefits awarded to the child?
In addition to the above, there are also other, non-financial considerations which are equally important.
Health of the guardian / cargiver
The health of the guardian or caregiver is important, because in the event of their death or incapacity, the benefits would likely form part of their estate unless measures had been put in place to ring-fence the money, as mentioned above. Such ring-fencing is not common in South Africa, where the majority of adults in reality do not even have a Will.
Linked to the health of the guardian or caregiver, a crucial aspect to explore is whether there are any signs of substance abuse or other mental health challenges on the part of the guardian or caregiver – or a major dependent for that matter. Paying a lump sum to an addict must be avoided at all costs.
Residential stabitity
Residential stability is perhaps a factor that can easily be overlooked. The minor dependent needs a safe roof over their head. So, does the guardian or caregiver have security of tenure? On its own this need not preclude the payment of a lump sum, but should be seen together with the factors discussed above as to the likelihood of the money being used in the best interests of the child. The temptation may be to use the lump sum death benefit, if large enough, to purchase a house. This is tricky to weigh up – the child needs a secure home and yet would there be funds remaining to fund the child’s education which, in our experience, is the single most important use of beneficiary funds? If a child can complete their education and be launched into adulthood, then the assets will have been used to optimal benefit.
I genuinely believe in the power of beneficiary funds, as witnessed by the many examples on a daily basis of guardians/caregivers thanking us for our support – and the successes I see with minors completing their education.
This is not to say that beneficiary funds are appropriate in all cases, but we believe that Boards of Trustees should consider the use of a beneficiary fund under certain circumstances, after a thorough examination of each Section 37C distribution. Beneficiary funds offer numerous benefits, some of which are not often understood.
Remember the advantages of beneficiary funds
Protection of minors’ assets
The assets are safe and the administration is powerful – in the form of a regular stipend paid to the guardian/caregiver after a careful budge ng exercise. Capital payments are paid on request at the discretion of the trustees, in the main to cover education or medical costs.
Expert investments and institutional pricing
Beneficiary fund trustees will follow an investment strategy with the objective of managing the funds optimally according to the amount of the lump sum and the age of the minor.
Investments are generally pooled, creating an opportunity for significant savings when it comes to fees.
Significant tax advantages
Funds are wholly tax exempt, both in terms of income and capital distributed from the fund.
There are in fact few better investment vehicles available in South Africa today from a tax perspective.
Minors’ education
Above all, the use of a beneficiary fund is one of the best ways possible to fund the education and subsistence costs of a child who – let us not forget – has the trauma of having lost a parent.
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