Beneficiary funds and umbrella trusts are two fiduciary tools often neglected, despite their established significance in managing employer-related benefits and discretionary resources.

According to David Hurford, CEO of Fairheads Benefit Services, an independent provider in the retirement and fiduciary fields, these vehicles offer protection, cost efficiency, and professional management.

Fairheads was instrumental in creating the umbrella trust concept—a unified trust deed allowing multiple unrelated beneficiaries to share expenses and benefits.

Originally, umbrella trusts were intended to oversee employment-related benefits after the passing of retirement fund members.

In the wake of the Fidentia scandal, where over R1.4 billion meant for the widows and orphans of mineworkers went missing, pension fund regulations were tightened significantly.

This resulted in the establishment of beneficiary funds in South Africa in 2009.

Beneficiary funds

These funds were incorporated into the Pension Funds Act, with Fairheads playing a vital role in their inception by being the first to register a beneficiary fund, known as the Fairheads Umbrella Beneficiary Fund.

Designed specifically for South Africa, these funds are responsible for receiving, managing, investing, and distributing death benefits to the dependents of deceased retirement fund members, typically minor children.

Beneficiary funds can only accept employment-related death benefits, which may include retirement fund credits, risk insurance payouts, or other employment-related financial contributions from the deceased member.

Hurford points out that every member of a beneficiary fund has an individual fund credit in a distinct account while enjoying the advantages of collective investments and shared costs among beneficiaries.

One major benefit is that beneficiary funds are tax-exempt.

Any retirement fund member can request for their retirement benefits to be allocated to a beneficiary fund.

“Recently, we’ve observed that when children who support their elderly parents die first, their retirement benefits are deposited into a beneficiary fund.”

Often, the parents may be in frail care or suffer from cognitive decline, making financial management challenging. There are also cases where a beneficiary fund is preferable for children lacking financial acumen.

According to Section 37C of the Pension Funds Act, trustees are tasked with identifying and allocating death benefits, while the retirement fund nomination form serves as a guideline.

“Share your life experiences and details about your dependents. Comprehensive information is essential for trustees to make informed decisions,” suggests Hurford.

“As trustees, it is our responsibility to work with retirement fund members to help them make informed choices for their beneficiaries.”

Umbrella trusts

The umbrella trust concept was created by Fairheads in the 1980s when Alexander Forbes sought more effective investment solutions for managing retirement death benefits.

“In many cases at that time, funds were merely kept in money market or bank accounts, resulting in inadequate fund management,” states Hurford.

Fairheads has noted an increasing need for a trust-like structure accommodating non-employer-related benefits without the high costs involved in registering a family trust.

An umbrella trust offers a swift and economical solution, as the deed is already registered and it is governed by the Trust Property Control Act.

Setting up a family trust can take considerable time and involves appointing an independent trustee, keeping audited financial records, a beneficial ownership register, and submitting annual tax returns.

These complexities add to overall costs.

“Establishing a single trust structure is impractical for estates valued under R2.5 million.”

Too close for comfort

Hurford attributes past failures in the umbrella trust sector to an unhealthy proximity between trustees and investment managers, often blurring the lines between the two roles.

“This flaw means that no one holds investment managers accountable.”

Fairheads operates with complete independence from investment managers, exclusively utilizing reputable investment platforms that correspond with their members’ risk profiles.

Hurford emphasizes that Fairheads does not function as an investment manager.

“While we excel in developing asset allocation models, we work with top-tier fund managers at arm’s length, leveraging our size to negotiate fees.”

Concerns often arise regarding the integrity of board trustees and whether the process empowers or disempowers beneficiaries.

Fairheads values partnerships, as stated by Hurford.

Upon accepting a benefit to manage for a minor or dependent, they conduct a family interview with the caregiver or guardian, explaining the process and providing a financial plan. Continuous communication is maintained between trustees and caregivers.

Pick wisely

Hurford underscores the importance of knowing the identities and reputations of the board of trustees.

Are they reliable, respected within the community, and do they have a proven track record?

“Ensure there is transparency regarding the relationship between trustees and investment managers; they must not be excessively close.”

Costs are a crucial consideration.

Fees should not eat into investment returns, including both investment fees and administrative costs associated with beneficiary funds and umbrella trusts.

Accessibility and historical performance are also significant considerations.

Individuals need proper guidance on investments related to retirement benefits, including understanding various options and their pros and cons, according to Hurford.

As a service provider and administrator, Fairheads does not provide financial advice; one should consult with a financial advisor.

Brought to you by Fairheads Benefit Services.

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