A key player in the beneficiary fund industry has called on government to reverse the age of majority from 18 back to 21 as an exemption for this fast-growing financial services sector. The age of majority was changed to 18 by the Children’s Act of 2007.
Talking at a conference of the Pensions Lawyers Association in Cape Town today, Giselle Gould, business development director of Fairheads Benefit Services, said: “It is not uncommon for beneficiary fund service providers to pay out R100 000 or more on the termination of an account when the fund member turns 18. Yet the reality of social and educational circumstances means that the average 18-year old in South Africa is not financially mature enough to invest or use large sums of money responsibly.”
Beneficiary funds and their umbrella trust predecessor vehicle manage approximately R15 billion of assets on behalf of orphans or single-parent children. They receive lump sum death benefit payouts from retirement funds in terms of section 37C of the Pension Funds Act. Accounts are set up in an umbrella beneficiary fund which pays out an income to beneficiaries (usually their guardians), as well as capital amounts for expenses such as school fees. Once the beneficiary turns 18, they are entitled to the remaining funds.
Ms Gould said: “It is estimated that only half the children who start school actually get to matric. Of that half, only 70% pass. So the number of 18-year olds with a good education and the ability to make sound financial or business decisions is very low.”
“There are also social realities. According to last week’s National Budget, nearly 16 million people are now on social grants. And a recent report by the SA Institute of Race Relations showed that children on the child support grant account for 70% of all people on social welfare and the number of social grants for children has risen 13-fold since 2011. You can imagine the family pressures on 18-year-olds who receive large payouts to use the funds for the family, instead of investing them for tertiary education or seed capital for a small business, for example.”
Fairheads met over 4 000 guardians and caregivers during an educational national roadshow in 2011. Many guardians said that many 18-year-olds drop out of school when they get a lump sum of money or stop working. Some squander the money and kill their chances of a better life in the future.
Fairheads makes a point of counseling beneficiaries and members before their funds terminate, in order to encourage them to use the funds wisely. But financial literacy levels are low and Gould says Fairheads has therefore started a formal lobbying process for an exemption to the age of majority for trusts and beneficiary funds to run until 21.
“This is undoubtedly a controversial topic but we believe that those extra three years could give thousands of young people time to think carefully and be more mature about how to use lump sum payouts,” says Gould.
Fairheads has started to engage the authorities and other stakeholders on the issue.