<\/p>\n
Two fiduciary vehicles that are often overlooked are beneficiary funds and umbrella trusts, even though they have a long history in housing employer-related benefits as well as discretionary funds.<\/p>\n
These vehicles offer protection, and are cost-effective and professionally managed, says David Hurford, CEO of Fairheads Benefit Services, an independent administrator and service provider to the retirement and fiduciary industries.<\/p>\n
Fairheads spearheaded the concept of an umbrella trust \u2013 in essence a single trust deed under which many unrelated beneficiaries can participate and share costs.<\/p>\n
Umbrella trusts were used to house employment-related benefits stemming from the death of retirement fund workers.<\/p>\n
Pension fund regulations were tightened after the Fidentia scandal, where more than R1.4 billion in trust money \u2013 destined for widows and orphans of mineworkers \u2013 went missing.<\/p>\n
As a result, beneficiary funds were introduced in South Africa in 2009.<\/p>\n
Beneficiary funds<\/p>\n
These were incorporated into the Pension Funds Act. Fairheads was integrally involved in the establishment of these funds and was the first to register a beneficiary fund, called the Fairheads Umbrella Beneficiary Fund.<\/p>\n
These funds, a uniquely South African vehicle, are set up to receive, administer, invest and pay the death benefits due to the dependants of deceased retirement fund members, in most instances minor children.<\/p>\n
Beneficiary funds can only receive employment-related death benefits which include the deceased member\u2019s retirement fund credit, their risk insurance benefits or any other employment-related payment.<\/p>\n
Hurford explains that each member of the beneficiary fund has their own fund credit in a separate account but the fund offers aggregate investments and shared costs across the members (beneficiaries).<\/p>\n
A major benefit is that beneficiary funds are tax-exempt.<\/p>\n
Any member of a retirement fund can request that their retirement benefits must be housed in a beneficiary fund.<\/p>\n
\u201cLately, we have observed that when children who support their elderly parents pass away before them, the retirement benefits are paid into a beneficiary fund.\u201d<\/p>\n
In many instances the parents might be in frail care or suffer from dementia and cannot manage their financial affairs. There are also instances where people select a beneficiary fund for children who lack financial astuteness.<\/p>\n
In terms of Section 37C of the Pension Funds Act, the boards of trustees identify and allocate the death benefits. The retirement fund nomination form acts as a guide for the trustees.<\/p>\n
\u201cTell them about your life and who your dependents are. The trustees would like to have as much information as possible to make the right decision,\u201d suggests Hurford.<\/p>\n
\u201cIt is incumbent on us as trustees to partner with retirement fund members, to help them make better decisions for those who will be left behind.\u201d<\/p>\n
Umbrella trusts <\/p>\n
Fairheads developed the concept of umbrella trusts in the 1980s when Alexander Forbes approached it to find a solution for more efficient investment options to manage retirement death benefits.<\/p>\n
\u201cIn many instances then, the money ended up in a money market account or a bank account, and the management of the money was not great,\u201d says Hurford.<\/p>\n
Fairheads has seen increased demand for a trust-type structure that can house non-employer-related benefits, but something that was not as expensive as registering a family trust.<\/p>\n
The umbrella trust is a quick and cost-effective vehicle as the deed is already registered. It is regulated by the Trust Property Control Act.<\/p>\n
A family trust can take months to be registered with the Master of the High Court, and requires the appointment of an independent trustee, audited financial statements, the upkeep of a beneficial ownership register, and the submission of annual tax returns.<\/p>\n
All this complexity comes at a cost.<\/p>\n
\u201cIt makes no sense for people with an estate that is smaller than R2.5 million to go the route of a single trust structure.\u201d<\/p>\n
Too close for comfort <\/p>\n
Hurford attributes past failures in the umbrella trust industry to the unhealthy relationship between the trustees and investment managers \u2013 they were too close. The trustee business and the investment business were actually the same business.<\/p>\n
\u201cThat is a fatal flaw because nobody is holding the investment managers to account.\u201d<\/p>\n
Fairheads is completely independent from the investment managers. The company only uses well-established investment platforms who fit the risk profile of their members.<\/p>\n
Hurford stresses that Fairheads is not an investment manager.<\/p>\n
\u201cWe have experience in building asset allocation models, but we invest money at arm\u2019s-length best-of-breed fund managers, and we are able to negotiate fees because of our size.\u201d<\/p>\n
People may question the role of the board of trustees \u2013 whether they are trustworthy and whether the process disempowers beneficiaries.<\/p>\n
Fairheads believes in partnerships, says Hurford.<\/p>\n
Once it receives a benefit to manage on behalf of a minor or a dependent, it has a family interview with the caregiver or guardian. It explains the process and provides a financial plan. There is constant communication between the trustees and the caregiver and guardian.<\/p>\n
Pick wisely <\/p>\n
First and foremost is to know who the board of trustees of the umbrella trust are, advises Hurford.<\/p>\n
Are they people of integrity, do they have good standing in the community and do they have a solid track record?<\/p>\n
\u201cMake sure you understand the relationship between the trustees and the investment managers. You do not want them to be too close.\u201d<\/p>\n
Hurford says costs are important.<\/p>\n
Fees should not devour investment returns. This applies to investment fees and administration costs for both the beneficiary fund and the umbrella trust.<\/p>\n
Accessibility and track records are equally important considerations.<\/p>\n
People need proper advice on retirement benefit investments, to know the different options that are available, and to understand the advantages and disadvantages of their chosen product, says Hurford.<\/p>\n
As service provider and administrator, Fairheads is not an advisor \u2013 individuals need to engage with their financial advisor.<\/p>\n
Brought to you by Fairheads Benefit Services.<\/p>\n
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.<\/p>\n
#Pick #vehicle #retirement #benefits<\/p>\n","protected":false},"excerpt":{"rendered":"
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