When a member of a retirement fund passes away, there is likely to be a death benefit payable by the retirement fund. The Pension Funds Act (the Act) which governs retirement funds, requires the board of trustees to distribute the death benefit in terms of section 37C of the Act. The Act makes it clear that the trustees are not bound by the deceased member’s will and testament or beneficiary nomination form but must use their discretion in order to support social protection.
Where a benefit is payable to a major dependant or nominated beneficiary, the lump sum benefit is made available to them in cash. However, where it is very clear that the major beneficiary is unable to manage his or her affairs e.g. if the major beneficiary is mentally incapacitated, or where the benefit is payable to a minor beneficiary, the benefit may be paid to:
- The legal guardian of the minor or incapacitated beneficiary; or
- A trust if the deceased member or the legal guardian of the beneficiary requested it be paid to a trust; or
- A beneficiary fund.
The overriding decision should centre on how best to protect the financial interest and financial well-being of the minor or incapacitated beneficiary. In instances where the legal guardian may not know how best to manage the benefit to protect the financial interest and well-being of the minor or incapacitated beneficiary, the trustees may need to decide whether to pay the benefit into a beneficiary fund or a trust in the event that there was a request by the deceased member or the guardian of the beneficiary requests that the benefit be paid to a (family) trust.
Payment to a trust or beneficiary fund
In dealing with this decision, trustees need to understand the regulatory framework and consider the costs and size of the benefit as it applies to both the beneficiary fund and the trust, particularly in as far as the allocated benefit will be impacted. However, the most important fiduciary responsibility which trustees have when faced with a request to consider paying a beneficiary’s benefit to a (family) trust, is to ensure that the requirements of section 37C of the Pension Funds Act are met. This requires that the benefit allocation will need to be ring-fenced for the specific beneficiary so that it vests in full to the actual beneficiary and that it is utilised solely for the benefit of that particular beneficiary.
This is one of the most common challenges faced by retirement fund trustees when presented with a request to pay benefits to (family) trusts. Often the beneficiary is not the sole beneficiary of the trust, and the trust deed is established so that it does not vest the section 37C benefit to the actual beneficiary. If left unchecked, it will allow the trustees of the family trust to make decisions which are not necessarily solely in the best interest of the minor or incapacitated beneficiary. It could also result in the allocated benefit not being used for the exclusive benefit of the minor or incapacitated beneficiary. In addition, in most (family) trusts the benefit is re-distributed within the trust on the death of the beneficiary and it is not likely to evolve into the beneficiary’s estate.
When faced with the request to make payment to (family) trusts, retirement fund trustees often have to seek legal assistance in assessing the trust deed of the (family) trust, the cost of which may be levied against the distribution of the death benefit and deducted from the death benefit of the beneficiary if permitted for in the rules of the retirement fund, thus reducing the benefit. In the majority of cases, this assessment results in a list of specific requirements that the trust deed must comply with in order for a death benefit to be paid to the (family) trust. This causes unnecessary delays in finalising the death benefit payment to the detriment of beneficiaries.
In most instances beneficiary funds are better suited to handle the challenges that are faced by the retirement fund industry where benefits need to be placed in trust for minor or incapacitated beneficiaries. In fact, beneficiary funds were introduced via changes made to the Pension Funds Act with the aim of improving the regulation and strengthening the supervision of beneficiaries’ assets.
Why beneficiary funds may be considered more appropriate
Beneficiary funds have the express purpose of receiving death benefits allocated in terms of section 37C of the Pension Funds Act (and paid by group life policies) upon the death of retirement fund members and managing the administration, investment and payment of benefits to beneficiaries.
In beneficiary funds, a separate individual account is created for each beneficiary into which a death benefit is paid. This ensures that the benefit vests fully to each individual beneficiary whose money is invested according to a specific investment strategy that caters for the individual beneficiary’s financial needs.
In addition, beneficiary funds are regulated by the Pension Funds Act with oversight of the FSCA which means that they are subject to the same strict regulatory framework as retirement funds e.g. they have to undergo annual audits, they have the requirement to submit annual financial statements to the FSCA and to comply with Regulation 28 investment regulations.
Beneficiary funds are managed by boards of trustees which includes independent trustees. The board of trustees has a fiduciary responsibility to ensure that the benefits of minor and incapacitated beneficiaries are administered and invested objectively and in the best interest of such beneficiaries taking account of their individual needs. Independent trustees provide additional assurance in this regard. However, if beneficiaries have a grievance with the manner in which their benefits are being managed, they are able to escalate their complaints to the Pension Funds Adjudicator thus affording beneficiaries the comfort of having a regulated process to deal with concerns should they arise.
Importantly retirement fund trustees perform an assessment of the beneficiary fund which they would consider for the supervision of beneficiaries’ benefits. This assessment would typically include a detailed review of the operations of the beneficiary fund, its fee structure and an overview of the investment strategy applicable to beneficiaries’ benefits. This should provide retirement fund members who have minor children or major children who are mentally incapacitated with the assurance that in the event of their untimely death, their retirement fund benefits will be suitably administered for the benefit of their dependants.