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Retirement fund industry not ready for post-Fidentia savings vehicle

29 October 2008 Fairheads Umbrella Trust Company

The retirement fund industry is working against the clock to prepare itself for the introduction of a new savings vehicle designed to protect the assets of “widows and orphans” and avoid Fidentia-type scandals in the future.

From 1 January, so-called beneficiary funds will replace umbrella trusts as the savings vehicle trustees can choose for lump-sum benefits paid out upon the death of a retirement fund member. Unlike loosely-regulated umbrella trusts, beneficiary funds fall under the Pension Funds Act, bringing both protection and recourse to the Pension Funds Adjudicator and the Financial Services Board for stakeholders.

Yet it is doubtful whether the industry is ready for the new fund which was legislated for in September, through amendment to section 37C (2) of the Pension Funds Act. This is the view of Richard Krepelka, CEO of Fairheads Benefit Services, speaking at a national roadshow on beneficiary funds.

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.”

Krepelka also questions whether retirement fund trustees, consultants and financial planners will have time to digest the complexities and implications of the new vehicle. Some elements of the legislation are still open to interpretation. There is also the challenge of explaining the new fund to minors and guardians, among whom financial literacy is low.

Notwithstanding the tight deadline, Krepelka says beneficiary funds are an overdue, innovative development, which will afford vulnerable members of South African society far greater protection than in the past.

The umbrella trust industry is estimated at around R15 billion, following rapid growth over the past decade, largely as a result of AIDS deaths. The average death-benefit payout per beneficiary from a retirement fund is R50 000 and can serve a vital role in educating and sustaining minors. Some 300 000 minors benefit from the industry. Umbrella trusts will continue to run their course alongside the new beneficiary funds, and will still be used under certain circumstances, particular in the case of unapproved benefits.

Krepelka predicts that beneficiary funds will attract significant interest because of the advantages they offer. Funds will need to comply with Regulation 28 of the Pension Funds Act which provides prudential guidelines for investments. Furthermore, there are tax advantages: unlike an umbrella trust, capital transferred to a beneficiary fund is tax-exempt at the beneficiary level, and the beneficiary fund itself is also tax-exempt.

Financial planners and individuals will be interested in a further innovation brought about by the new legislation, namely the ability for retirement fund members to nominate a family, testamentary or umbrella trust as the vehicle to receive a lump-sum benefit upon the member’s death.

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