The new beneficiary funds, which will manage the benefits payable to dependants of retirement fund members who die before retirement, will not automatically protect dependants from every risk, Richard Krepelka, the chief executive of Fairheads Benefit Services, says.
Beneficiary funds, which will come into existence on January 1 next year, were created by the government as a safer alternative to umbrella trust structures after the Living Hands Umbrella Trust was plundered in the Fidentia debacle, leaving thousands of widows and orphans facing destitution.
Krepelka, whose company is the biggest administrator of benefits payable to dependants of re-tirement fund members who have died before retirement, says the new structure provides a lot more protection than umbrella trusts.
Most significantly, beneficiary funds fall under the Pension Funds Act and not under the Trust Property Control Act. The requirements for reporting and governance are far stricter under the Pension Funds Act, with the Financial Services Board charged with keeping a close eye on what is happening.
Krepelka says the danger does not lie in whether the money will disappear from a beneficiary fund, as it did from the Living Hands Umbrella Trust. The problem lies in how benefits are directed under the new system.
He says retirement fund trustees must undertake three main tasks when a member of their fund dies before retirement. They must:
- Identify all dependants;
- Decide how much each beneficiary must receive; and
- Decide how the amounts must be paid.
It is here where there is a fundamental difference between beneficiary funds and umbrella trusts - and a potential danger.
Under the existing system of umbrella trusts, the dependants are the sole beneficiaries of both the capital and the income.
But a beneficiary fund is a form of retirement fund. The dependant becomes a member of the fund, which pays out benefits.
In terms of the beneficiary fund legislation, benefits can be paid out to parties other than a member (dependant).
Who benefits
A beneficiary of a beneficiary fund can be the member (dependant), a legal guardian or care-giver. A caregiver is not necessarily a guardian but a person who looks after the member.
Krepelka says the problem is that a caregiver can change. For example, the caregiver could be a grandparent, who dies, or an aunt, who finds she cannot execute her responsibilities. And with the high incidence of HIV/Aids deaths, a caregiver could even be a sibling, who is also a minor.
He says trustees will have to take great care in selecting the beneficiaries to ensure that the money is spent on the dependant for whom it is intended.
Krepelka says even though the trustees have the final decision, it does not mean that retirement fund members cannot influence these decisions in the event of their untimely deaths.
He says it is absolutely essential that you tell your trustees:
- Exactly who your dependants are;
- How much money you would like allocated to each of your dependants; and
- To whom you would like that money to be paid (that is, who the beneficiaries of that money should be).
Wishes respected
Krepelka says that, in terms of rulings by the Pension Funds Adjudicator, retirement fund trustees must take all options and your wishes into account when reaching a decision on these important issues.
You need to inform your trustees of your wishes in writing. You also need to update these instructions regularly, particularly when your dependants change - for example, when a child is born or becomes financially independent.
However, the trustees do not have to channel your benefits through a beneficiary fund. You can ask them to pay the benefits into a trust fund established for the benefit of an individual beneficiary or to pay the money directly to the legal guardian (for example, a surviving spouse).
Association re-opens as Fiduciary Institute
Another victim of the Fidentia/Living Hands Umbrella Trust has been the Association of Trust Companies. It is not that the association has done anything wrong. It has decided to dissolve itself and to improve service to the trust industry and the public by reconstituting itself as the Fiduciary Institute of South Africa.
The first chairman of the institute, John Gibson, says fiduciary responsibility extends beyond trust companies and includes trustees of retirement funds, executors of deceased estates, and even lawyers and accountants.
All members will have to abide by a code of ethics, and the public will be able to complain to the new institute, which will have a disciplinary tribunal to deal with complaints. The tribunal will have the power to impose fines and suspend membership.