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A new savings vehicle for death benefits

30 October 2008 Gareth Stokes

Have you ever wondered what happens to the death benefits of a retirement fund member? At the moment there are a number of options the retirement fund trustee can choose from. Funds can be paid directly to the named dependants, retained in the retirement fund, paid out to a guardian or caregiver or placed in trust. But from 1 January 2009 the retirement fund industry has another option available to it.

A beneficiary fund is a new savings vehicle to which trustees may transfer the lump sum benefits paid out upon the death of a retirement fund member. In time, this vehicle will replace the loosely-regulated umbrella trust which is currently the preferred destination for such funds.

Greater regulatory protection for the poor

The inclusion of a beneficiary fund in the Pension Funds Amendment Bill is seen as government’s response to the massive financial fraud that occurred at Fidentia. Government wants to improve the transparency and regulation of an industry which looks after the money of many of the country’s poorest. By regulating beneficiary funds stakeholders will enjoy the protection of both the Pension Funds Adjudicator and Financial Services Board. Of course the new regulation doesn’t rule out the repeat of a Fidentia-type fraud...

A beneficiary fund is a new ‘form’ of pension fund which is created by legislation from 1 January 2009. Section 37 C (2) of the Pension Funds Act states that “no payments may be made in terms of this section to a beneficiary fund which is not registered under the Act. Speaking at their Beneficiary Funds Media Seminar, Fairheads chief executive, Richard Krepelka said: “The corporate governance requirements for beneficiary funds are extensive. This is good, but it means that some players will struggle to have systems in place to qualify for licences and register beneficiary funds before the 1 January deadline.” And that could delay the much needed shift form umbrella trusts to the new vehicle.

Krepelka pointed out that the umbrella trust industry comprises assets in excess of R15bn. The average death-benefit payout per beneficiary is R50 000 and approximately 300 000 minors benefit from the application of these funds. Fairheads says that the majority of these benefits are applied to education.

Rushing to put regulations in place

While designed to make the administration of death-benefits simpler, the latest regulatory changes have created a number of fresh issues. Top of the list is the question of approved versus unapproved funds. Approved funds are defined as normal retirement money in terms of the Act. But unapproved funds which are currently not regulated by the Act cannot find their way into a beneficiary fund. Trustees will also have to deal with complex tax issues and decide between beneficiary funds and trusts. Complex legal issues exist where the transfer of funds from an umbrella trust to a beneficiary fund are concerned.

On the facts presented a beneficiary fund makes more sense than an umbrella trust in most cases. But we can’t help thinking government rushed this legislation through in a knee-jerk reaction to the Fidentia case. Fairheads director of umbrella trusts, Giselle Gould has been in frequent contact with the Financial Services Board in recent months. She says the ideal solution would be to enact separate legislation for the beneficiary fund as it wasn’t a perfect fit for the Pension Funds Act.

As an interim measure the decision to introduce the desired ‘protection’ through the Pension Funds Act was the best solution.

Editor’s thoughts:
Beneficiary funds will have to be registered under the Pension Funds Act by 1 January 2009. At present the industry is in discussions with the Financial Services Board to finalise regulations for beneficiary funds. Do you think these regulations will be ready for the in time? Add your comments below, or send them to gareth@fanews.co.za

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