Can 18 year olds handle death benefit lump sums?

Giselle Gould, Business Development Director of Fairheads Benefit Services.

FSB asked to consider changing section 37c of Pension Funds Act.

A submission has recently been made to the Financial Services Board to amend pension fund legislation such that death benefit lump sums administered by beneficiary funds, umbrella trusts or retirement funds on behalf of minor dependants not be automatically paid out to such minors when they turn 18.

The submission was made by a leading beneficiary fund service provider, supported by 10 boards of trustees of pension and provident funds. It was made on behalf of the industry via the Institute for Retirement Funds Africa (IRFA).

Beneficiary funds and their umbrella trust predecessor vehicle manage approximately R19 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 the guardian of the minor member, as well as capital amounts for expenses such as school fees. Once the member turns 18, they are entitled to the remaining funds.

Giselle Gould, Business Development Director of Fairheads Benefit Services, says: “It is not uncommon for service providers to pay out R100 000 or more on termination of accounts. 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.”

“The assumption is that minors attain the age of 18 in Grade 12 (Matric), if they are in their age-related grade. Statistically however, fewer than 50% of children are in matric at age 18, with some in lower grades and others having already dropped out of school completely having never reached matric,” Ms Gould says.

Based on feedback from guardians and caregivers, and in Fairheads’ experience:

• A large number of children have elected to drop out of school once they receive their lump sum at age 18. This has an impact on their continuing education prospects, their future employment opportunities and in turn possible financial support that they might otherwise be able to provide to their families if they did have an education and employment.
• At the age of 18, very few (if any) of these children have the financial knowledge and skill to properly manage that money. There is a very real risk that the children receiving these lump sums often spend these funds carelessly and recklessly, with little thought of acquiring the skills to become financially independent.
• Where 18 year old beneficiaries are counselled to seek financial advice or on how to manage their finances responsibly, less than 5% follow this advice.
• When given the option by a retirement fund to place their portion of a death benefit in a beneficiary fund, because they are still at school, beneficiaries seldom exercise this option.
• Further, beneficiaries who are still at school seldom consent to retaining their funds in beneficiary funds on attaining the age of 18 years.

Ms Gould says that the proposal to the FSB requests that lump sums only be paid out at termination date if the beneficiary is at least 18 and has a matric certificate or an equivalent NQF Level 4 qualification; or they are at least 21 years of age. Boards of trustees would be able to use their discretion under certain circumstances.

“If the proposal is implemented, there is a greater likelihood of the beneficiary or member being more mature, more educated and therefore, hopefully more financially literate to manage their own financial affairs. The chances of them being able to sustain themselves would therefore be higher. Further the proposal could possibly also incentivise beneficiaries to stay in school or go back to school to obtain a matric or the equivalent of a NQF Level 4,” she said.