Olefile Moea Fairheads

Age 18 – Is it appropriate?

June 2015

By Olefile Moea, Consultant

Following years of verbal engagement, a formal written submission was recently made to the Financial Services Board to amend pension fund legislation such that death benefit lump sums administered by beneficiary funds, umbrella trusts or retirement funds on behalf of minor dependants not be automatically paid out to such minors when they turn 18.

The submission was made on behalf of the industry via the Institute for Retirement Funds Africa (IRFA).

Background

The Children’s Amendment Act 41 of 2007 changed the age of majority from 21 years to 18 years.  As a consequence of this Act, retirement funds, trusts and now beneficiary funds (which the Pension Funds Act first provided for in 2009) have had to pay out lump sum death benefits at age 18 to their members/beneficiaries. (Exceptions to this are if a beneficiary has a legal disability which prevents them managing the money themselves, or if the beneficiary has consented to the money continuing to be administered by the beneficiary fund or trust for themself.)

In the South African context, the assumption is that minors attain the age of 18 in Grade 12 (Matric), if they are in their age-related grade.  Statistically however, less than 50% of children are in matric at age 18, with some in lower grades and others having already dropped out of school completely having never attained matric.

Since the reduction in the age of majority to 18 years, it has become quite evident that paying lump sums from beneficiary funds/trusts and retirement funds to children aged 18 years, and who are still at school, is not ideal for the following reasons:

  • A very low percentage of learners achieve matric, or any other NQF level 4 qualification, at age 18, as the statistics from the Department of Education demonstrate.
  • Based on feedback from guardians and caregivers, and from the actual experience of Fairheads Benefit Services which administers 11 beneficiary funds and trusts with 106 000 active beneficiaries in total:
    • A large number of children have elected to drop out of school once they receive their lump sum at age 18.  This has an impact on their continuing education prospects, their future employment opportunities and in turn possible financial support that they might otherwise be able to provide to their families if they did have an education and employment.
    • At the age of 18, very few (if any) of these children have the financial knowledge and skill to properly manage that money. There is a very real risk that the children receiving these lump sums often spend these funds carelessly and recklessly, with little thought of acquiring the skills to become financially independent.
    • Where 18 year old beneficiaries are counselled to seek financial advice or on how to manage their finances responsibly, less than 5% follow this advice.
    • When given the option by a retirement fund to place their portion of a death benefit in a beneficiary fund, because they are still at school, beneficiaries seldom exercise this option.
    • Further, beneficiaries who are still at school seldom consent to retaining their funds in beneficiary funds on attaining the age of 18 years.

Age 18 legislation

In Fairheads’ experience over the past five years, most guardians and caregivers have been strongly opposed to children receiving lump sum pay-outs at age 18, while they are still completing their school education. Many of these children are still living at home and are not willing to make a financial contribution to the household.

Feedback has also been received over the years at roadshows conducted by various beneficiary funds and trusts from guardians and caregivers who have advised the presenters that they have refused to hand over documentation for their children to complete, where it is evident that at age 18 the children will receive lump sums while they are still attending school. This is because of their serious concerns that the children will squander the money and possibly drop out of school after receiving the money.

Proposed changes

To address the concerns set out above it is proposed that section 37C(2) be amended to provide for the following:

  1. A dependant or nominee (defined as a “beneficiary” in the Pension Funds Act), whose death benefit is being administered by a retirement fund (and not a beneficiary fund or trust), as well as any member of a beneficiary fund, should only be allowed to receive a lump sum benefit (ie any balance remaining for them in the retirement fund or the beneficiary fund at termination date) if:
    • They are at least 18 years of age and have a matric certificate or an equivalent NQF Level 4 qualification; or
    • They are at least 21 years of age
  2. It is suggested that it would also be prudent to retain discretion for the trustees to be able to pay the lump sum benefit to a beneficiary or member of the beneficiary fund who does not meet the above conditions. This is because there may well be good reasons to allow such a payment, for example, the beneficiary or member is under age 21 but is employed and is unlikely to return to school to obtain the necessary qualification, or the remaining lump sum benefit is a small amount. The need for a wider discretion, as opposed to stipulating certain additional circumstances, is that it is not possible to anticipate all the various situations in which a lump sum payment to a beneficiary or member of a beneficiary fund may be justifiable even though the above two conditions (a) and (b) have not been met. This discretion would only be available to boards in the case of beneficiaries or members that have reached 18 years of age.

To give effect to the above proposal, it is suggested that section 37C(2) of the Pension Funds Act be amended to include a new subsection (c) which will read as follows:

“(c) Notwithstanding anything to the contrary in any other law, a beneficiary or a member of a beneficiary fund will not be eligible to receive his or her remaining benefit as lump sum until:

  • he or she is at least 18 years of age, and has acquired a matric certificate or equivalent NQF Level 4 qualification, or
  • he or she has reached age 21, whichever event occurs earlier.  If, however, the board of a retirement fund or beneficiary fund is of the view that there are sound reasons why the lump sum benefit should be paid despite the conditions in (i) or (ii) not having been met, it may pay the balance of the benefit remaining for the beneficiary or member as a single lump sum, provided the beneficiary or member is at least 18 years of age.”

 Benefits of the proposal

If the proposal is implemented, there is a greater likelihood of the beneficiary or member being more mature, more educated and therefore, hopefully more financially literate to manage their own financial affairs. The chances of them being able to sustain themselves would therefore be higher. Further the proposal could possibly also incentivise beneficiaries to stay in school or go back to school to obtain a matric or the equivalent of a NQF Level 4.

It is to be hoped that the authorities will take the proposal seriously and act expeditiously.

Published in Fairheads Times, Issue 31, June 2015