Advocate Sankie Morata CFP®, CEO of Sanlam Trust
One of a parent’s biggest concerns is what will happen to their children if something happens to the parent. Who will care for the children? How will they be provided for? While the emotional loss can be overwhelming, financial security can provide some comfort and stability at this difficult time. Beneficiary funds can play a vital role in ensuring that minors (children aged under 18) continue to receive financial support from their deceased parent’s retirement or group life benefits.
Beneficiary funds act as financial guardians for children who’ve lost a parent, making sure their inheritance is handled wisely until they’re ready to manage it themselves. Without these safeguards, children could face financial hardship and this can compound their loss.
The concept of beneficiary funds emerged as a response to financial mismanagement and exploitation in the former trust-based system. Prior to 2009, these funds were held in trust structures, which unfortunately led to abuse, most notably the widely reported Fidentia scandal, where it’s reported that around R1.1 billion, meant for widows and orphans, was embezzled.
To prevent such financial crimes from happening in future, the law was amended in 2009 to introduce beneficiary funds under the Pension Funds Act. This brought greater oversight by placing beneficiary funds under stricter regulatory governance, ensuring that minors receive the full benefits intended for them.
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Role of trustees and administrators in protecting minor beneficiaries
Trustees and principal officers of retirement funds play crucial roles in deciding how benefits should be allocated. They must assess the governance, efficiency, and overall value provided by a fund to ensure it meets the needs of beneficiaries, while also ensuring funds are managed sustainably, with investments that secure the child’s future. Trustees must also maintain up-to-date records to ensure benefits reach the right recipients.
Being a trustee is a lifelong journey and trustees should continuously upskill themselves in order to perform their duties. The Financial Sector Conduct Authority (FSCA) Trustee Training Toolkit is a powerful tool that ensures trustees are competent and skilled in executing their fiduciary duties.
While trustees are responsible for ensuring that funds are appropriately managed and allocated, beneficiary fund administrators play a critical role in ensuring these funds directly benefit the intended children, and are responsible for ensuring that minors receive their rightful benefits without unnecessary delays or misuse.
According to recent research by Neil Roets, CEO of Debt Rescue, data shows that nearly 20 million South Africans go to bed hungry every night. Access to adequate and nutritious food is at the core of one of South Africa’s most urgent human crises. We need to ensure that beneficiaries do not go hungry.
Funds should provide practical support, like vouchers for groceries or school needs, ensuring they address the real daily challenges faced by orphaned minors in South Africa.
Financial literacy
It is not enough to provide financial benefits – we must also equip young beneficiaries with financial literacy skills to ensure they can manage their inheritances responsibly. A structured approach to financial education can prevent young adults from falling into financial distress when they receive their final payouts.
Preparing minors for financial independence is a key challenge. Without financial literacy, they may mismanage their inheritances. This risk extends to guardians too, as direct payments could lead to poor financial decisions, leaving minors without support.
A real-life example is a minor child – let’s say ‘Karabo’ – from Klerksdorp, whose funds were paid to an aunt. When the aunt passed away, Karabo’s benefits became entangled in the aunt’s deceased estate administration process. Karabo wasn’t mentioned in the aunt’s will and the aunt’s own children were the sole beneficiaries of her estate, so Karabo lost her benefit.
This case emphasises the fact that as trustees and administrators we need to recognise the family-focused nature of South Africans, and be mindful of the unique living situations for many in our country. This includes blended and extended families, and the ‘sandwich’ generation, where adults are simultaneously caring for their aging parents and their own children.
Proper financial education, better oversight, and careful decision-making by trustees can help prevent predicaments like Karabo’s.
Ripple effect of unclaimed benefits
Unclaimed benefits remain a serious issue in South Africa, with billions of rands sitting idle due to poor record-keeping or missing documentation.
A significant contributor to this problem is the lack of proper identification. Many children are not registered at birth, making it difficult to claim their rightful benefits. Trustees and administrators must ensure that records are complete and should undertake outreach efforts to locate rightful beneficiaries.
Allowing benefits to remain unclaimed increases the risk of misuse, fraud, and corruption.
When orphans’ benefits remain unpaid, we have children who are not at school. This could open the door to a life of crime, drug abuse and even land them in prison. The unfortunate social ills that we find in our communities.
Ensuring proper processes and tracking systems are in place is a matter of financial integrity and justice for these children.
The future of beneficiary funds in South Africa
So, are beneficiary funds still relevant today? The answer is a resounding yes. Beneficiary funds provide a crucial safety net for minor children who lose a parent.
Even more can be done to enhance the positive impact. Financial advisors should proactively include beneficiary funds in estate planning, while more funds should establish bursary schemes, like the Sanlam Trust Bokamoso Bursary Fund, to support minor beneficiaries’ education. It’s also crucial that parents and guardians understand the importance of proper beneficiary nominations on their retirement and insurance policies.
The Sanlam Legacy 2024 Wills Survey found that 51% of respondents believe it’s a high priority to build generational wealth to leave as an inheritance for their dependents. Beneficiary funds can help parents secure a legacy of confidence for their children, building a better future for South Africa’s next generations.