The age of responsibility

Published in FA News. 1 April 2015

By Giselle Gould, Business Development Director, Fairheads Benefit Services

The age of responsibility 

A submission was recently made to the Financial Services Board (FSB) to amend the pension fund legislation so that death benefit lump sums administered by beneficiary funds, umbrella trusts or retirement funds on behalf of minor dependants may 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).

Financial maturity

Beneficiary funds and their umbrella trust predecessor’s vehicles manage approximately R19 billion of assets on behalf of orphans or single-parent children. They receive lump sum death benefit payouts from retirement funds in terms of section 37C of the Pension Funds Act. Accounts are set up in an umbrella beneficiary fund which pays out an income to the guardian of the minor member, as well as capital amounts for expenses such as school fees. Once the member turns 18, he or she is entitled to the remaining funds.

It is not uncommon for service providers to pay out R100 000 or more on the termination of accounts. Yet the reality of social and educational circumstances means that the average 18-year old in South Africa is not financially mature enough to invest or use large sums of money responsibly.

The assumption is that minors attain the age of 18 in Grade 12 (Matric), if they are in their age-related grade. Statistically however, fewer than 50% of children are in Matric at the age of 18, with some in lower grades and others having already dropped out of school completely without reaching Matric.

Notable characteristics

According to Fairhead’s experience and feedback from guardians and caregivers:

  • A large number of children elect to drop out of school once they receive their lump sum at the age of 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 money. There is a very real risk that the children receiving these lump sum payouts will 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 retirement funds to place their portion of death benefits in beneficiary funds, because they are still at school, beneficiaries seldom exercise this option.
  • Furthermore, beneficiaries who are still at school seldom consent to retaining their funds in beneficiary funds on attaining the age of 18 years. 

Proposed changes

The proposal to the FSB requests that a lump sum only be paid out at the termination date if the beneficiary is at least 18 years old and has a Matric certificate or an equivalent NQF Level 4 qualification; or if he or she is at least 21 years of age. Boards of trustees would be able to use their discretion under certain circumstances.

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 his or her own financial affairs. The chances of the beneficiary 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 Matric or the equivalent of NQF Level 4 qualifications.