When a retirement fund member passes away, dependants are entitled to a death benefit of at least the late member’s fund credit. Section 37C of the Pension Funds Act grants trustees discretion over both the allocation and mode of payment. In Mbatha v Transport Sector Retirement Fund[1] , the court confirmed that such decisions constitute administrative action under the Promotion of Administrative Justice Act 3 of 2000, requiring fairness, rational reasoning and accountability.
For retirement fund trustees, an important consideration is the appropriate mode of payment. Each choice carries significant consequences for the financial security of beneficiaries, and trustees must weigh these implications carefully.
Section 37C
Section 37C of the Pension Funds Act empowers trustees to determine the most appropriate mode of payment of death benefits and establishes a protective framework for the distribution, particularly where beneficiaries are vulnerable and unable to manage such benefits themselves. The provision recognises that minors, as well as adults lacking capacity, cannot directly receive or administer these funds.
When considering the mode of payment trustees must consider, in the case of minors, factors such as:
- value of the benefit;
qualifications (or lack thereof) of the guardian or caregiver to administer a benefit; - ability of the guardian or caregiver to administer a benefit; and
- that the benefit should be utilised in such a manner that it can provide for a minor until he/she attains the age of majority[2].
A similar process applies to adult dependants who lack capacity. In Mafe v Barloworld (SA) Retirement Fund[3], the Pension Funds Adjudicator held that trustees must not fetter their discretion or rely on assumptions about a major’s ability to manage funds. Instead, they are required to conduct their own investigation, distinguish between legal incapacity and perceived incapacity, and properly consider the costs and appropriateness of different modes of payment before deciding to place benefits into a trust or other structure.
This discussion will focus specifically on situations where beneficiaries lack legal or practical capacity to manage benefits themselves.
Trusts
Trusts established to receive benefits under section 37C are governed by the Trust Property Control Act 57 of 1988, the Income Tax Act 58 of 1962, and other relevant legislation. In certain cases, these trusts may also be required to obtain a FAIS license if they provide financial services[4].
The trust deed must ensure that the benefit vests in a named beneficiary rather than a group of beneficiaries. Trusts offer flexibility and can be tailored to the specific needs of beneficiaries. Importantly, trust assets are legally separated from the personal estates of trustees managing the trust[5], guardians, or caregivers.
The advantages of making payments to trusts include the protection of beneficiaries’ assets, regular distributions for education and living expenses, and continuity of financial support. However, trusts also present challenges. Administration is complex and requires a thorough understanding of the regulatory framework. Increasing compliance obligations raise administration costs, and the effectiveness of a trust depends heavily on the competence and integrity of its trustees. Beneficiaries, guardians, or caregivers may also experience reduced flexibility, as access to funds is restricted by the terms of the trust deed.
Direct payments to guardians
Direct payments to guardians or caregivers offer the advantage of immediacy. Guardians or caregivers gain access to funds without delay, allowing them to meet urgent needs such as food, housing, or medical care.
However, direct payments also pose significant risks. In practice, these funds are generally managed in the guardian’s own name, with the expectation that they will apply them for the beneficiaries’ maintenance. Once outside the regulated environment of a retirement fund, there is no structured oversight, which increases the likelihood of misuse. If a guardian dies while holding the benefit, funds may even form part of their estate, jeopardising the beneficiaries’ entitlement.
Beneficiary funds
Beneficiary funds are designed to address the oversight gap inherent in direct payments and potential risks associated with trusts. These regulated structures provide regular disbursements to ensure that beneficiaries receive sustained support. They also allow for prudent investment growth, preserving benefits for long‑term needs such as education and healthcare. The use of beneficiary funds is also available to adults, with consent, as a voluntary option for the administration of benefits in a tax-exempt environment.
The structure of beneficiary funds ensures that assets are legally protected and ring‑fenced for the benefit of the beneficiary. They are excluded from any other person’s estate, and investment growth accrues directly to the beneficiary. Oversight is provided through fiduciary regulation by the Financial Sector Conduct Authority.
The advantages of beneficiary funds are considerable. They are highly tax‑efficient, regular disbursements provide continuity of financial support, and transparency and governance are built into the system.
The limitations of beneficiary funds relate mainly to fund costs, as fees may reduce net benefits slightly. Even so, the regulated environment, tax efficiency, and strong governance framework make beneficiary funds a secure and dependable mechanism for safeguarding the interests of vulnerable dependants.
Conclusion
Section 37C entrusts boards with a discretion that must be exercised fairly, rationally, and with due regard to the circumstances of each dependant. Trustees must investigate the facts of each case, evaluate the suitability and ability of guardians or caregivers, and consider whether adult dependants truly lack capacity. Ultimately, trustees must balance efficiency, oversight, cost, and flexibility while safeguarding the long‑term welfare and financial security of vulnerable beneficiaries.
[1] [2020] ZAGPJHC 18.
[2] Ramanyelo v Mine Workers Provident Fund [2005] 1 BPLR 67 (PFA).
[3] [2008] 1 BPLR 67 (PFA).
[4] Financial Advisory and Intermediary Services Act 37 of 2002. [5 ]Trust Property Control Act 57 of 1988, S12