I am often amazed at the assumptions people make about how the financial needs of their minor children will be cared for in the event of their death. The treatment of financial benefits varies depending on the type of benefit. In this article we touch on two sources of retirement fund benefits: the retirement fund credit and so-called approved group risk insurance cover provided by the retirement fund (“approved group risk insurance” is an insurance policy owned by the retirement fund); and the so-called unapproved benefits (“unapproved group risk insurance” is an insurance policy owned by the employer). Outside this, there are of course non-retirement fund benefits/assets which are outside the scope of this article.
Your retirement fund credit and approved group risk insurance
Apart from your house, your retirement fund credit is probably your biggest asset. Together with your approved group risk cover, which usually pays out a multiple of your annual salary, this money will be paid to your dependants and the nominees you have included on your retirement fund nomination form.
What most people do not realise is that this money does not form part of your estate; in other words you cannot dictate in your will who will receive the benefit. Instead, it is the trustees of your retirement fund who must, according to Section 37C of the Pension Funds Act, determine who your financial dependants are and the extent of that dependency, determine an equitable distribution between those dependants and finally determine an appropriate mode of payment (particularly relevant for minor dependants). Of course, the trustees cannot simply ignore your nomination form which must be considered when they deliberate on how to distribute these benefits.
These benefits are typically paid out to your dependant as a lump sum in the case of a major dependant (or the major dependant can elect to purchase an annuity or place it into a beneficiary fund), or they can be paid into a beneficiary fund in the case of a minor dependant.
A beneficiary fund is an entity regulated by the Pension Funds Act, in which the assets are ring-fenced for your child and professionally managed and invested, with an income paid to a guardian or caregiver and capital ad hoc payments made for education and medical costs. Advantages of a beneficiary fund include cost-effectiveness (as assets are pooled, leading to economies of scale); and tax advantages (the fund is not taxed; neither is income paid; nor the residual amount due to the member upon termination at age 18).
The trustees can also elect to pay the lump sum death benefit directly to the minor dependant’s guardian or caregiver, but the trustees must satisfy themselves that the money will be safeguarded for the benefit of the minor dependant if they choose this option.
Further, there is an argument to suggest that payment to someone other than a legal guardian may not represent the full discharge of the trustees’ fiduciary duty towards the minor who may have a later claim against the fund for non payment of the claim.
The option to pay the benefit to the Guardian’s Fund is also available. This is not optimal however because, while this governmental body was set up with laudable objectivesthe fund has been plagued by theft and fraud; the guardian must jump through all sorts of administrative hoops to draw money for maintenance, education, clothing, medical costs and so on; and the delays and dysfunction which reportedly still beset many Master’s Offices do not help.
Furthermore, the Guardian’s Fund monies are paid a government-fixed rate of interest, currently 4.25% per annum, which is both below inflation and an unattractive alternative to the earnings potentially available to discretionary funds.
Your unapproved group risk benefits
Changes introduced by the Insurance Act prescribe that benefits of unapproved group risk insurance policies must be paid according to the beneficiary nomination or, in the absence of a nomination, to your estate.
This highlights the importance of completing a beneficiary nomination form, and to review it regularly. It furthermore begs the question about how to provide for your children if you have an unapproved policy. After all, the benefit cannot be paid to a minor. You therefore need either to nominate someone you trust to receive the benefit on their behalf, or nominate a beneficiary fund or trust provider to safeguard the money until they are old enough to receive it themselves.
Should you omit to make provision on your retirement fund nomination form, as mentioned above, the benefit will fall into your estate.
I hope here to have clarified some basic questions that retirement fund members and trustees may have around the definition and treatment of approved versus unapproved group risk insurance.
