Pension Fund Trustees serve a vital function

In his presentation to the 2012 Institute of Retirement Funders conference, FedGroup Executive Grant Field stressed the importance of Beneficiary Funds. He said that despite improving the protection and management of death benefits their relevance is sometimes questioned by Trustees.

"As a Beneficiary Fund provider and a Trustee, I often encounter confusion around Beneficiary Funds,” he said. "These funds have a role to play, but it does not always make sense to use them”. Trustees must understand the role that Beneficiary Funds play as well as how to distinguish between products and providers.

Field explained the complexity of Beneficiary Funds by comparing the recipient of a 37C death benefit to a lottery winner. "Winning the lottery and a 37C death benefit bear one overriding similarity, both provide more money than we know what to do with,” he said.

The advice given to lottery winners is similar to that offered to the recipients of 37C death benefits… They are told to establish a trust, hire professionals and consider annual payments rather than a lump sum.

When a parent passes away, the responsibility of caring for their child passes to a guardian. The problem is that a guardian is not always financially competent and may never have dealt with the large sums involved in a Pension Fund death benefit pay-out.

For most guardians this pay-out is the largest amount that they will ever have to manage. The death benefit windfall is therefore as difficult to deal with as the proceeds from a lottery win.

Historically, the Trustee had two options for the disbursement of a death benefit. He could either pay the benefit directly to the guardian or choose to administer it within a Trust. In 2009, Beneficiary Funds were introduced, replacing the role of these Trusts.

"A Beneficiary Fund allows Trustees to exercise fiduciary duty and ensure that the benefit is appropriately utilized,” explained Field. By choosing the Beneficiary Fund option Trustees essentially move on to the next two pieces of advice given to lottery winners…

Lottery winners are advised to hire professionals to manage their windfall. There are currently more than 20 Beneficiary Funds registered with the Financial Services Board (FSB) which means that Trustees should choose a provider that specialises in such funds.

Beneficiary Funds are not the same as traditional Pension Funds and many competent pension fund administrators are ill equipped to administer them. A Beneficiary Fund receives one contribution and makes monthly payments from it whereas a Pension Fund reverses this process. "After shortlisting a handful of providers you can set one provider aside from the rest by considering its people, systems and service”, said Field.

Most products in the Beneficiary Fund industry are classified under two categories, namely Instalment and Managed. An Instalment product ensures that funds are available on a constant basis for the expected needs of a Beneficiary. A Managed product goes a step further and typically requires the involvement of Trustees on any day-to-day decisions. It even pays third party providers to ensure proper utilisation of funds.

Because no two Beneficiaries have the same needs the product should be specifically selected to secure the best possible outcome for each Beneficiary. The role that Beneficiary Funds play in ensuring that the needs of minor children are taken care of is widely acknowledged throughout the industry.

Trustees navigating the Beneficiary Funds landscape need to remember the purpose of a Beneficiary Fund. It 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 do so.