Beneficiary Funds – Promoting a savings mindset

Many retirement funds have not yet appointed a beneficiary fund service provider to their funds and very few funds include beneficiary funds as an option on member nomination forms or indeed educate their members about beneficiary funds. Intermediaries, too, are often not aware of the benefits that these funds offer in maintaining and educating minor children whose parent(s) have died. When will this change? After all, the trust concept is well known in South Africa as a vehicle for housing assets for middle class and wealthy individuals and families. Why not beneficiary funds?

Recent research undertaken by Fairheads emphasises the major role beneficiary funds play in education. Of the total number of ad hoc payments made to guardians of members in the Fairfund Umbrella Trust and Fairfund Beneficiary Fund in 2012, more than 70% of these were related to education. (Ad hoc payments are those made on request by guardians, over and above monthly income payments.)

The table below shows the categories in which education-related payments occurred. Of all payments, nearly 51% were for school fees, followed by uniform and transport costs.

This research points gratifyingly to the way in which beneficiary funds are helping to promote a savings mindset among guardians, in which children’s assets are used first and foremost for education. This is a mindset that the authorities are trying hard to promote and the private sector needs to do all it can to assist.

Through our annual guardian workshops, Fairheads had face-to-face contact with some 5 000 guardians and members around southern Africa last year. These workshops serve an important educational purpose in themselves as we explain to guardians how beneficiary funds work, emphasise the importance of updating contact details and address questions guardians may have, one on one, in the guardians’ home language of choice.

Many guardians express concern about what will happen to funds when children turn 18. They question whether 18-year-olds have the understanding and discipline to use a lump sum payout sensibly. In the experience of many service providers in the industry, funds are rarely kept in the account and used for tertiary education, but rather withdrawn and spent irresponsibly. This situation has prompted the industry to approach the authorities with a request to reverse the age of majority from 18 back to 21, specifically for beneficiary and trust funds. The response has been positive and further discussions are now taking place.

Another way in which beneficiary funds are promoting a savings culture in South Africa relates to budgeting. Once the funds have been paid into a member account, the trustees ask the guardians to give a breakdown of costs needed for minor children in their care. This basic exercise is helping with financial literacy.

Indeed, although there is often confusion surrounding the retirement fund trustees’ decision to use a beneficiary fund, we are finding that once the member account is set up and running, the guardians and members themselves often express and acknowledge the benefits of the fund as a means of protecting assets and using them appropriately.

Since the introduction of beneficiary funds in 2009 they have grown into a multi billion rand industry, currently estimated at around R5 billion. This, together with the old umbrella trusts administered prior to the introduction of beneficiary funds has a current estimated market value of approximately R14 billion. Therefore the combined amount administered out of death benefits for minors is close to R20 billion. This sector continues to grow strongly and therefore we encourage all stakeholders to inform themselves about an industry which will continue to grow rapidly.