Legacy Trust

Beneficiary Funds – We all share the responsibility

By Giselle Gould, Director: Business Development

Looking back on 2018, I believe it is a time for deep reflection on our society. What a year it has been, with a change of President, several changes of Finance Minister, and a few commissions of enquiry under way. The Nugent and Zondo commissions have been unearthing horror upon horror and yet – much as the Truth and Reconciliation Commission went some way to healing wounds of the past – so too I hope that the investigations into State Capture and all its related evils will make space for a better ethical environment to take root.

Very few industries have been untouched by the culture of corruption, sadly the beneficiary fund industry among them.

Let us be frank. There are various stakeholders involved when entities like beneficiary fund service providers fall apart in the financial services sector. The most recent example is exceedingly unfortunate, especially given that it is only just over 10 years since a similar corruption scandal hit umbrella trusts.

If a child has lost a breadwinner and is dependent on the assets that they were allocated by a retirement fund, then it is incumbent on all stakeholders in a caring society to work together to support such children 100 per cent.

A beneficiary fund is registered with the Financial Sector Conduct Authority and it is also regulated by the FSCA. Regulation is regulation and it needs to be scrupulous. Fund trustees are responsible for sourcing preferred service providers to the fund and ensuring that they apply proper procurement principles. Trustees also have to monitor the service provider against the expected service standards for which they have appointed them.

Appointing a service provider

Following below is a reminder for trustees of what needs to be done in the appointment of a beneficiary fund service provider:

  • What steps have been followed in the selection process for a service provider? Have you kept properly minuted records of this process?
  • Are you following a scorecard process? For example, the Preferential Procurement Policy Framework Act provides guidelines on how to rate a provider in terms of technology, capacity, reputation and history.
  • Have you done proper reference checks on your service provider? Including going beyond the names that they gave you?
  • Does your service provider have a governance policy?
  • Is the service provider subjected to an annual audit? Which auditor is used and is there auditor rotation?

Monitoring

Simple checks and balances should be in place like whether families that should be receiving income are actually receiving it. Do children who become of age receive their final benefits within a reasonable time? What is the track record of your service provider in this regard? Has it enabled the support and education of these minors to allow them to become financially active citizens – as it promised?

You should be requesting regular updates of the status of beneficiary accounts.  Ensure that financial statements are submitted on time and that they are unqualified.  Satisfy yourself that the investment returns are reasonable. Compliance always has to be of the highest standard.

Sometimes these simple checks are all that is required and yet they can make the world of difference – especially to those whose livelihoods are influenced by the decisions that trustees may make on their behalf.

Beyond age 18

Has the beneficiary fund been able to build enough trust with members so that they may actually trust them to take further care of their assets while they are at a tertiary institution or acquire other employable skills? At Fairheads we are noting a growing rate of “discretionary money”, that is accounts that are not terminated at age 18 through the choice of the member as they know that their money is safe with us – indeed safer and more beneficial than some bank accounts.

Corporate governance

As a trustee, you should make sure that the benefits promised in terms of the beneficiary fund rules are actually delivered; that the benefits are optimal with minimal risks; and that the process of delivery of these benefits is credible and worthy of the trust of the beneficiaries.

The benefits

At a time like this, it is important to remember the many benefits provided by beneficiary funds:

Protection of minors’ assets

  • Minors’ funds are taken care of, invested in prudential investment vehicles and stretched as far as possible to cater for educational and other well being needs.
  • Lump sums that are paid out to a minor’s guardian or caregiver are not guaranteed to be used in the best interest of the child, and in many cases, this leads to money being squandered, leaving little for the child’s care.
  • The guardian or caregiver will be paid a regular stipend, with additional amounts requested being subject to the scrutiny of the trustees. These capital payments are usually paid directly to the provider of the goods or service (e.g. the school) to ensure the money is used appropriately.

Expert investments and institutional pricing

  • The investment management and asset allocation of beneficiary funds allows members to benefit from expert investment knowledge which has been gained over many years of managing minors’ money, which is quite different from the investment management of contributory retirement funds.
  • Investments are pooled, creating an opportunity for significant savings when it comes to fees.

Significant tax advantages

  • Beneficiary funds are wholly tax exempt, both in terms of income and capital distributed from the fund. There are few better investment vehicles available in South Africa today from a tax perspective.

Value for money pricing

  • Beneficiary fund costs, like those of retirement funds, have reduced over time despite the extensive benefits of a very well-tailored service.

In conclusion, trustees are well advised to remind themselves of the many benefits that beneficiary funds offer. And to do the checks that are listed above. Returning to my opening theme, perhaps above all it is important to interrogate a potential service provider about how committed they are to the responsibility of governance. Unless they can deliver in the way they promised and are 100 per cent compliant, do not appoint them.

Published in Fairheads Times December 2018