Select the Ideal Vehicle for Retirement Benefits
Beneficiary funds and umbrella trusts are two fiduciary vehicles that often go unnoticed, despite their crucial roles in managing employer-related benefits and discretionary funds over the years.
These vehicles offer protection, are cost-efficient, and are managed by professionals, as noted by David Hurford, CEO of Fairheads Benefit Services, an independent provider in the retirement and fiduciary fields.
Fairheads was the pioneer behind the umbrella trust concept, which essentially allows multiple unrelated beneficiaries to share expenses through a single trust deed.
Umbrella trusts were initially created to handle employment-related benefits after the death of retirement fund members.
In the wake of the Fidentia scandal, where over R1.4 billion in trust money intended for the widows and orphans of mineworkers was lost, regulations around pension funds were strengthened.
This change led to the establishment of beneficiary funds in South Africa in 2009.
Beneficiary funds
Beneficiary funds were incorporated into the Pension Funds Act. Fairheads played a pivotal role in setting up these funds, being the first to register a beneficiary fund—known as the Fairheads Umbrella Beneficiary Fund.
Tailored specifically for South Africa, these funds manage, invest, and disburse death benefits to dependents of deceased retirement fund members, typically minor children.
These funds can only accept employment-related death benefits, including retirement fund credits, risk insurance, or other related payments from the deceased member.
Hurford points out that each member of a beneficiary fund has a separate fund credit in an individual account, while reaping the benefits of collective investments and shared costs among beneficiaries.
A significant advantage of beneficiary funds is their tax-exempt status.
Any member of a retirement fund can request that their retirement benefits be allocated to a beneficiary fund.
“Recently, we’ve observed instances where children who financially support elderly parents pass away first, leading to their retirement benefits being redirected to a beneficiary fund.”
Often, the parents may be in frail care or suffer from dementia, making financial management challenging. There are cases where a beneficiary fund is preferred for children lacking financial acumen.
Under Section 37C of the Pension Funds Act, trustees are accountable for identifying and allocating death benefits, with the retirement fund nomination form serving as a guiding document.
“Provide your life details and information about your dependents. Trustees need thorough information to make well-informed choices,” advises Hurford.
“Trustees have a responsibility to work with retirement fund members in making more informed decisions for their beneficiaries.”
Umbrella trusts
The umbrella trust concept originated from Fairheads in the 1980s when Alexander Forbes sought more efficient investment options for retirement death benefits.
“Back then, funds were frequently just placed in money market or bank accounts, which resulted in inadequate fund management,” explains Hurford.
Fairheads has noted a rising demand for a trust-type structure that accommodates non-employer-related benefits, all while avoiding the steep costs of establishing a family trust.
An umbrella trust is a quick and economical option since the deed is already in place. It falls under the governance of the Trust Property Control Act.
Setting up a family trust can take months and requires appointing an independent trustee, maintaining audited financial records, a beneficial ownership register, and filing annual tax returns.
These complexities incur additional expenses.
“Creating a single trust structure makes little sense for estates valued under R2.5 million.”
Too close for comfort
Hurford attributes past failures within the umbrella trust sector to an unhealthy proximity between trustees and investment managers, often mixing roles.
“This represents a significant flaw, as no one holds investment managers accountable.”
Fairheads remains wholly independent of investment managers, exclusively partnering with reputable investment platforms that align with their members’ risk profiles.
Hurford stresses that Fairheads does not act as an investment manager.
“While we focus on crafting asset allocation models, we engage top-tier fund managers distantly, leveraging our size for fee negotiations.”
Concerns about the integrity of board trustees are common, as is questioning whether the process disempowers beneficiaries.
Fairheads promotes collaborative partnerships, according to Hurford.
Once they accept a benefit to manage on behalf of a minor or dependent, they conduct a family interview with the caregiver or guardian, explaining the process and drafting a financial plan. Continued communication is upheld between trustees and caregivers.
Pick wisely
Hurford suggests that knowing the board of trustees’ identities and reputations is paramount.
Are they reputable, respected in the community, and possess a solid track record?
“Ensure there’s clarity about the relationship between trustees and investment managers; they must not be too closely intertwined.”
Costs are a crucial consideration.
Fees should not detract from investment returns, accounting for both investment fees and administrative costs associated with beneficiary funds and umbrella trusts.
Accessibility and historical performance are also vital factors.
Individuals need proper guidance on investing retirement benefits, including an understanding of diverse options and their respective advantages and disadvantages, asserts Hurford.
As a service provider and administrator, Fairheads does not deliver financial advice; individuals should consult their financial advisors.
Brought to you by Fairheads Benefit Services.
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