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Making sense of beneficiary funds

01 November 2013 Grant Field, FedGroup

Pension fund trustees serve a vital function in managing the long-term provisions of funding for retirement.

Given independent authority, trustees make decisions according to their best judgement,
ensuring that member interests are protected. Should the member pass away, these interests become even more important to protect: they become children.

FedGroup Executive, Grant Field, has nine years experience in the beneficiary fund industry. His expertise and passion for beneficiary funds places him in a unique position to explore their use and relevance.

Explaining beneficiary funds

As a beneficiary fund provider and a trustee, I often see confusion around beneficiary
funds. They have a role to play, but they do not always make sense. Trustees need to
understand their role and what to look for in choosing a provider and a product.

To remove the complexity associated with the role of beneficiary funds, I like to draw
a comparison between a 37C death benefit and winning the lottery. Although different in
many ways, winning the lottery and a 37C death benefit bear one overriding similarity.
Both provide more money than we know what to do with.

In fact, I have found that advice given to lotto winners is similar to what is recommended
to the recipients of 37C death benefits: set up a trust, hire professionals and consider
annual payments rather than a lump sum.

Set up a trust

When a parent passes away, the responsibility of caring for his/her child passes to a
guardian. The problem is that a guardian is not always financially competent and may
never have dealt with an amount as large as a pension fund death benefit. Like the winner of a lottery, for most guardians it is the largest amount that they would ever have to manage. Thus, the resultant money is as difficult to deal with as winning the lottery would be.

Historically, a trustee would pay a death benefit directly to a guardian or administer
it within a trust. In 2009, beneficiary funds were introduced, replacing the role of trusts.
A beneficiary fund allows trustees to exercise fiduciary duty and ensure that the benefit is
appropriately utilised.

In choosing to use a beneficiary fund, trustees essentially move on to the next two pieces of advice given to lotto winners.

Hire professionals

There are currently over 20 beneficiary funds registered with the Financial Services
Board (FSB) and, according to Field, trustees should choose a provider that specialises in
beneficiary funds. A beneficiary fund is not a traditional investment.

Pension fund administrators, and many other administrators who are fully competent at pension fund administration, are ill equipped at administering beneficiary funds.A beneficiary fund receives one contribution and makes monthly payments, while a pension
fund has this reversed.

After short-listing a handful of providers, three areas should set one provider aside
from the rest: people, systems and service.

Annual payments

Products within the beneficiary fund industry are classified into two categories: instalment
products and managed products. An instalment product ensures that funds are available on a constant basis for the expected needs of a beneficiary, while a managed product goes a step further and typically sees the involvement of trustees on day-to-day decisions. This product even pays third-party providers to ensure proper utilisation of funds.

Because no two beneficiaries have the same needs, a product should be specifically selected to secure the best possible future for a beneficiary.

The beneficiary fund landscape

Beneficiary funds play an important role in ensuring that the needs of minor children
are taken care of. My advice to trustees navigating the beneficiary fund landscape
is to remember the purpose of a beneficiary fund. A beneficiary fund is not just a product, service or transaction that results in a monetary pay-out. A beneficiary fund looks after a child when his or her parents are no longer able to.

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