The National Treasury has stepped in to ensure better protection for minors’ assets and avoid future Fidentia-type scandals. As early as the end of this year, it is proposed that death benefits be paid into a new vehicle called beneficiary funds, which will be regulated by the Pensions Fund Act.
Giselle Gould of Fairheads Umbrella Trust Company, speaking on behalf of the Association of Trust Companies (ATC), outlined the proposals at the Institute of Retirement Funds (IRF) conference this week.
She said: “Finance Minister Trevor Manuel raised the red flag in his March budget speech, vowing to investigate the state of play in the umbrella trust industry. The National Treasury and the Financial Services Board have moved swiftly, with the cooperation of the ATC and the IRF. Wider consultation will be take place in the coming few weeks.
“The aim is to beef up the regulation and supervision of funds paid to minor dependants, in order to avoid future losses of beneficiaries’ assets and to ensure that trustees adhere to their fiduciary duties. Until now, umbrella trusts have fallen under the jurisdiction of the Master of the High Court.”
Legislators regard the matter as so urgent that a special amendment will be made to the existing Pension Funds Act, ahead of the Act’s ongoing revision.
From the date of promulgation, there will be a phase-in period following which approved retirement funds will not be able to pay death-benefit funds into trust funds, but only into registered beneficiary funds. Administrators of beneficiary funds will also need to be licensed and meet prescribed requirements for systems and capabilities.
Gould said this means, in effect, that the R12-billion umbrella-trust industry will be phased out and replaced by the similar, yet regulated, regime of beneficiary funds. Existing umbrella trusts will continue to operate until all assets have been paid out.
The new system will bring additional advantages. For example, beneficiaries will be able to lodge complaints with the Pension Funds Adjudicator, whereas before they only had recourse to the FAIS ombudsman or the Master of the High Court. Assets invested on behalf of dependants will also be protected from insolvency and creditors’ claims.
The tax implications are favourable. Minors will pay no tax on benefits transferred directly from retirement funds into beneficiary funds. While the monies are in the fund, they will be tax-exempt except for income and capital payments and amounts paid upon termination.
Gould said the principles for the urgent amendments to the legislation are in place, but there remain a few issues still to be finalised. One of these is that no existing assets, say in trust funds, can be paid into beneficiary funds. Another topic still under discussion is that only benefits from approved retirement funds and approved group life can be paid into beneficiary funds.
She added: “But the legislation will go a long way to ensuring that the beneficiary-fund vehicle is used appropriately by all concerned in the interest of beneficiaries. It should provide peace of mind for retirement-fund trustees and beneficiaries alike.”