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Beneficiary fund environment stands up to pandemic scrutiny

16 September 2020 Gareth Stokes

The management of beneficiary funds is under the spotlight following the economic hardships introduced by pandemic and lockdown. One of the consequences of poor economic growth and consequent reductions in income and job losses, is that many caregivers come under more pressure to provide the necessary support to the children in their care. “Against this backdrop, it is comforting to know that beneficiary funds have continued to fulfil their function of support to the dependants of deceased retirement fund employees,” said Giselle Gould, business development director at Fairheads. The financial services provider was the first to register a beneficiary fund and obtain a 13b administrator’s licence. Gould was presenting on the impact of the current crisis on the day-to-day operations at a beneficiary fund.

A response to financial shenanigans

Some history is indicated here. Beneficiary trusts were borne out of the shambolic experiences of ‘widows and orphans’ under the Living Hands Trust. Their ongoing struggles with administrative issues were further compounded when the trust invested a significant portion of its assets in Fidentia. At the time umbrella trusts were governed by the Trust Property Control Act, which made legal recourse complex and costly. The financial sector authorities, led by the then minister of finance, Trevor Manuel, worked with industry to come up with a beneficiary fund solution to replace umbrella trusts. 

The Pension Funds Act (PFA) was subsequently amended to classify beneficiary funds as a pension fund organisation with the necessary governance to keep minors’ assets safe and beneficiary funds came into being on 1 January 2009. Gould noted that the ambit of beneficiary funds was widened to allow all employee-related benefits to be paid into beneficiary funds, as opposed to only section 37C lump sums, from 2014. “This change, along with an increase in the tax-free threshold, has gone some way to increasing protection for children and helping blue-collar workers,” she said. Around 80% of the beneficiary fund money administered by Fairheads is used to pay for beneficiaries’ education. And a regular income is also paid to the caregiver or guardian for more than 95% of beneficiaries. 

Supplementing the social safety net

The income payments made by beneficiary funds often help to alleviate the financial strain on households that would have had to rely only on the existing social benefits available to South African children and caregivers. The child social grant, which is paid to the caregivers of around 12.5 million children, was increased to R740 per child in May 2020 to assist with pandemic-related expenses; but has since reduced to its base amount of R440 per child per month. Caregivers will continue to receive an additional R500 per month to assist with economic hardship as the country exits lockdown. 

There are thousands of children and caregivers who rely on the financial support paid from the myriad beneficiary funds set up to take care of the dependants of deceased retirement fund members. Fairheads is well placed to report on the impact of the recent pandemic on this critical aspect of financial management. “The number of claims for daily living expenses have increased above the norm,” notes Gould, who added that the fund had to relax certain of its restriction to accommodate the pandemic. She reported that trustees faced an ongoing responsibility to insulate those in its financial care from social harm while ensuring that the funds lasted until beneficiaries reached their majority. 

Expenses of daily living include the typical costs of providing for accommodation, clothing, and groceries, to name a few. Fairheads also saw an increase in claims for educational expenses as caregivers struggled with affordability decreased due to unemployment. A well-managed beneficiary fund is able to match future year payments against previous claims. Requests for monies for medical expense were on the rise through pandemic too, with many beneficiaries and caregivers without medical aid. “Payments for medical needs are subject to a verification process and are typically paid directly to third parties like medical institutions or doctors,” noted Gould. 

The proof of existence requirement

Beneficiary funds perform annual ‘proof of existence’ checks of their beneficiaries and also match their records against the Department of Home Affairs records. An interesting observation from the Fairheads pandemic experience is that there was no significant diversion from their typical death experience. This could be because many beneficiaries and their families reside in peri-urban and rural areas where the impact of pandemic appears to be less severe. 

Jolly Mokorosi, an Independent Trustee and Professional Principal Officer, participated in the Fairheads webinar to share thoughts on choosing a beneficiary fund. These considerations are important for employee benefit consultants, and retirement fund trustees, who would typically advise on and select such solutions. Top of the list is to consider the shortlisted funds’ industry standing: “Are they thought leaders in the beneficiary fund environment, and do they contribute to the betterment of the industry,” asked Mokorosi. A second important consideration is to investigate client experiences. 

Something that is frequently forgotten is to check that the fund has met all of the necessary regulatory hurdles. All aspects of fund governance should be scrutinised, including ensuring that the auditor, board, and independent trustees are in good standing and that the fund has appointed a professional principal officer. The remaining considerations focus on operational aspects at each prospective fund such as their ongoing communication and interaction with both beneficiaries and caregivers. “What does the prospective service provider do in terms of proof of existence,” asked Mokorosi, adding that there were too many examples of funds that continued to disburse funds to dead or incorrect beneficiaries. There were also too few funds that offered ongoing support to beneficiaries and caregivers in the application of funds. 

According to Mokorosi, one of the most important services that a beneficiary fund can offer is in preparing minors for life after attaining majority and guiding them through the difficult financial decisions at this point. “South Africa’s consumer financial literacy is really low; and the people who are most vulnerable, such as women, the young, and those in peri-urban and rural areas are often the beneficiaries of such funds,” she said. “The successful provider must take those things into account”. 

Choose your beneficiary fund partners wisely

Questions that should be asked include: Is there a clear understanding of the needs of beneficiaries? Does the beneficiary fund manager show empathy? Does the beneficiary fund communicate in the right language? And are there signs of relationships between beneficiary funds and their beneficiaries? Choosing the correct beneficiary fund partner is a crucial decision for retirement funds. “Beneficiary funds work well to take care of children till they become majors, and the first stage of that period,” concluded Gould. “We have discovered how well the beneficiary fund structure works through crisis; we believe that the system works well and has stood the test of time”. 

Writer’s thoughts:
The important role played by beneficiary funds in ensuring that the most vulnerable members in society receive their financial benefits is often overlooked. Have you interacted with beneficiary funds on behalf of any of your clients; and do you believe they adequately perform the function intended by the regulation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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