PFA rulings highlights need for clarity
Recent determinations by the Pension Funds Adjudicator (PFA) have highlighted the need for clarity on the use of trusts, the definition and rights of guardians in respect of death benefit payments, and the need for further trustee education, to avoid inappropriate trustee decisions.
It is unfortunately true that many retirement fund trustees fail to fulfill their responsibilities by evaluating all the options and tend to use umbrella trusts as a default option when dealing with death benefits. Many of the complaints that trust administrators and the Pension Funds Adjudicator (PFA) deal with are about inappropriate retirement fund trustee decisions.
A recently-reported ruling by the PFA criticised Liberty Life and its trustees for paying a death benefit into trust rather than directly to the minor's caregiver, his grandmother, on the grounds that she was not the legally appointed guardian (AK Kokwa AK vs Corporate Selection Retirement Fund). In essence, the PFA overruled the trustees' decision, suggesting they had not used their discretion in their decision and had neglected to put the interests of the child first.
A different picture in practice
A detailed discussion of this particular case is beyond the scope of this article, but two broad comments can be made. Firstly, the determination does indeed point to discrepancies between what happens in practice and what is legislated when it comes to the rights of guardians versus caregivers. Although not all relevant sections of the Children's Act have been promulgated, these sections need to be interpreted appropriately. It is also important that the original reason for the complaint be borne in mind in relation to the beneficiary's interest.
Guardian competency
Secondly, the PFA suggested that the retirement fund trustees should have assessed the care-giver's financial literacy, competency and her financial position. Guardian competency is indeed a major factor to consider when trustees need to determine dependants. As a trust administrator, we offer a guardian assessment on behalf of our clients, using a tool that we developed to ascertain guardians' financial competency and beneficiaries' income needs. Recognising the need for grassroots financial literacy, we also offer guardian counseling, and occasional guardians' workshops.
Small benefits
We are often asked what the minimum amount of a benefit is for a trust sub-account in an umbrella trust. Our current recommendation is that amounts below R15 000 per beneficiary are not cost effective and therefore the umbrella trust option would not be in the interest of the beneficiary. Many sub-accounts reduce in capital value over time due to monthly income payments and capital requests, mainly for education. The trustees of various trust funds have agreed that amounts below R3 000 per beneficiary will be paid out to the guardian.
The PFA appealed to trustees to put the interests of the child first, acknowledging that what is actually in the best interests of a child is obviously a question of fact in each case. We firmly maintain that where trustees have properly applied their minds, and provided the amount of the death benefit is sufficient and age of the beneficiary is appropriate, the use of a trust or beneficiary fund can be extremely effective in managing the funds and ensuring that the child is maintained and educated.
