One of the most important responsibilities entrusted to retirement fund trustees is the exercise of discretion under Section 37C of the Pension Funds Act, yet it remains one of the most complex and misunderstood aspects of trusteeship. While much attention is rightly given to identifying dependants and allocating death benefits fairly, trustees’ fiduciary responsibilities do not end once beneficiaries have been identified. They must also determine the most appropriate way to pay those benefits – and in circumstances where one is dealing with complex circumstances and vulnerable dependants it becomes all the more important to ensure that those benefits achieve their intended purpose, which is to protect and support those financially vulnerable dependants.
Too often, this final stage of the Section 37C process is reduced to a simple choice between paying a lump sum directly to a guardian or placing the benefit in a beneficiary fund. Framing the issue this way risks overlooking what the law actually requires. The question is not
just which payment method is preferable, but also whether trustees can demonstrate proper consideration of the available and relevant options in reaching that decision. Their legal discretion to decide the payment method must be exercised properly, rationally and in the best interests of each beneficiary.
These issues were explored during a recent EBnet webinar, Unpacking Beneficiary Funds, hosted by Nathalie Burrows, where I joined David Hurford, CEO of Fairheads Benefit Services, to discuss the evolving responsibilities of trustees.
Fiduciary duty requires judgement
Trustees are fiduciaries, which means they are required to exercise care, diligence, skill and good faith in every decision they make. This responsibility extends beyond simply complying with legislation. It requires careful, considered and independent judgement based on the unique circumstances of every family.
For that reason, blanket policies should be avoided. Neither automatically placing every minor’s benefit into a beneficiary fund nor routinely paying every benefit directly to a guardian fulfils the obligation to exercise proper discretion.
Every case is different and the family circumstances needs to be properly understood. One guardian may be financially experienced and capable of managing a substantial lump sum responsibly, while another may be facing complex or severe financial pressures following the death of a breadwinner. Some beneficiaries may be best served through structured long-term financial management, while others may be adequately protected through direct payment. The law expects trustees to distinguish between these circumstances and decide the appropriate payment method for those particular circumstances rather than treating every case alike.
Investigation is the foundation of good governance
Recent determinations by the Pension Funds Adjudicator have consistently reinforced the importance of a thorough investigation. Trustees must be able to demonstrate not only the decision they reached, but also the process that led to it.
That investigation should go beyond identifying legal dependants. Trustees should seek to understand who is caring for the child, the family’s financial circumstances, whether a lump sum can realistically be managed in the child’s best interests, and whether guardians have been fully informed of all available payment options.
These enquiries are not administrative formalities. They are the practical expression of trustees’ fiduciary duties. A carefully reasoned decision supported by evidence will always be more defensible than one based on convention or an unwritten policy.
As South Africa moves towards an outcomes-based regulatory framework under the Conduct of Financial Institutions (COFI) Bill, this approach becomes even more important. Regulators are increasingly interested not only in whether trustees complied with legislation, but whether their decisions produced fair outcomes. Good governance therefore depends on documenting investigations, recording the factors considered and clearly explaining the reasoning behind every decision.
Beneficiary funds are a governance tool
The debate surrounding beneficiary funds has become unnecessarily polarised, with some viewing them as a solution of last resort. This overlooks their real purpose.
A beneficiary fund is simply one of several legitimate governance tools available to trustees when exercising their fiduciary responsibilities. Whether it is appropriate depends entirely on the circumstances of the individual beneficiary.
As David and I discussed, beneficiary funds should no longer be viewed as gatekeepers. They should rather be viewed as financial partners helping families make more empowered decisions about payment options.
That observation shifts the conversation back to where it belongs. The real objective is not to promote one payment mechanism over another, but to ensure that whichever option trustees select demonstrably serves the long-term interests of the dependant.
Empowering families through informed choice
Trustees also have a responsibility to ensure that guardians and caregivers understand the options available to them. Too often, decisions are made on the assumption that families simply want immediate access to cash, when many may benefit from and value understanding the flexibility and long-term protection that different payment structures can provide.
Providing meaningful information strengthens rather than weakens trustees’ decision making. It allows families to participate more effectively in the process while enabling trustees to exercise their discretion on the basis of informed discussions rather than assumptions.
Trustees should also recognise that children’s needs evolve over time. Educational costs increase, medical emergencies arise and family circumstances change. Decisions taken under Section 37C should therefore balance immediate financial needs with the long-term protection of vulnerable dependants, reflecting the same principle of balancing access and preservation that underpins the two-pot retirement system.
Conclusion
Ultimately, fiduciary duty is not about just selecting a particular payment mechanism. It is about exercising informed judgement through careful investigation, thoughtful deliberation and robust evidence.
Section 37C was deliberately drafted to give trustees discretion because every family is different and their particular circumstances deserve due regard. The most effective trustees understand that fulfilling their fiduciary duty requires more than following convention or adopting default positions. This requires asking better questions, gathering better evidence and making decisions that place the long-term interests of dependants, and particularly more vulnerable dependants, at the centre of every discussion.