Retirement fund trustees have to clear a high bar in law if they want to deprive a guardian of control of a death benefit allocated to a minor, although a recent amendment to the Pension Funds Act may give trustees wider discretion in this regard.
This emerged during a panel discussion on death benefit allocations under section 37C of the Act, which was hosted by the Pension Lawyers Association in Cape Town recently. The panel consisted of Naleen Jeram, a senior legal adviser at financial services group MMI and an adjunct professor in the law faculty at the University of Cape Town; Karin MacKenzie, the head of pension law at law firm Herold Gie; and Jonathan Mort, a director at Jonathan Mort Incorporated.
Very few High Court cases address the circumstances in which a guardian can be deprived of the right to control a minor’s assets, but those that do stress that retirement fund trustees must show good cause before they can exercise their discretion to do this, MacKenzie says.
A minor’s death benefit can be paid directly to a guardian, or to a trust that has been nominated by the (deceased) fund member. If the fund does not want the guardian to have any control over how the benefit is administered, it can either pay the money to a beneficiary fund or the fund itself can pay the benefit to the minor in instalments.
MacKenzie says the test for determining when a guardian can be deprived of the right to control a minor’s benefit was formulated in a series of cases by the Pension Funds Adjudicator (PFA). She referred to the 2005 case Baloyi v Ellerine Holdings Ltd Staff Pension Fund, where the adjudicator stated that “payment of a minor’s benefit to his or her legal guardian should be done in the ordinary course of events, unless there are cogent reasons for depriving the parent of the duty to take charge of his or her minor children’s financial affairs and the right to decide how the funds due to the minor should be utilised in the best interests of the minor”.
In practice, MacKenzie says, this test means that only “a huge impediment” can serve as sufficient cause for trustees to deprive a guardian of control of a benefit – for example, where a guardian intends to use the minor’s benefit to defray debt in the estate, or where it has been established that the guardian abuses alcohol or drugs.
Jeram agreed that it is not easy for trustees to deprive a guardian of control of a minor’s death benefit, and common law and case law support the expectation that these benefits will automatically be administered by the child’s guardian.
He says trustees can “easily defend” depriving the guardian of control where the guardian openly declares his or her intention to use the benefit for purposes that are not in the child’s interests, but they will find it very difficult to mount a defence where this is not apparent.
Taking a different view, Mort says the crucial test for determining how a fund should pay out a minor’s death benefit is what is in the best interests of the child. Disagreeing with the approach adopted by the PFA in the Baloyi case, he says the question that trustees have to answer is whether it would be more beneficial for the child if the money were not paid to the guardian.
Mort says his approach is supported by an amendment to section seven of the Pension Funds Act. This amendment, which took effect in February, states that trustees have a fiduciary duty towards beneficiaries when paying out benefits.
Jeram says although the Baloyi test appears to be correct in law, there are reservations about whether it works well in practice. This legal test is based on the premise that financial competency will result in the benefit being used in the minor’s interest. However, Jeram questioned whether having a guardian who is well qualified in finances and financial planning and who has a good track record of handling money automatically means that he or she will use the money in the minor’s best interests.
Moreover, if the various rulings by the PFA are examined, he says it is patently clear that this discretion is extremely difficult to exercise and poses an enormous administrative and quasi-judicial burden on the trustees. Even if they exercise the discretion correctly, it can still lead to the death benefit not being used in the minor’s interest.
According to Jeram, the government’s retirement reforms, particularly the annuitisation of all retirement benefits and the move away from lump-sum payments, support a view for a change to the legislation dealing with the payment of a minor’s death benefit.
For example, from March 1, 2016 (or a date still to be determined), a member of a provident fund will no longer be permitted to receive his or her entire benefit in cash on retirement and will have to take at least two-thirds of the benefit in the form of an annuity, as is the case with pension and retirement annuity (RA) funds.
Thus, Jeram says, there is an anomaly: on retirement, a member of a pension fund, RA fund, preservation fund or provident fund cannot take his or her entire benefit (including a disability/ill-health benefit) in cash, yet the Pension Funds Act permits the entire lump-sum death benefit of a minor to be paid to the guardian. (Similarly, a death benefit due to a major beneficiary can also be paid as a lump sum.) He says this contradiction is difficult to justify in the current pension and savings environment.
Jeram says these issues raise the question of whether the time has come for National Treasury or the Financial Services Board to amend the legislation so that lump-sum death benefits cannot be paid to guardians of minor children. Instead, such benefits should be paid to a beneficiary fund, a trust arrangement or paid on an instalment basis from the fund.