Issue: September/November 2008
Important decisions for trustees
Trustees of a pension or provident fund often decide to whom the benefits of a deceased fund member must be paid.
Cathy McClune of Absa Trust outlines the critical factors that will help in making this decision.
Where a fund member has died, the first duty of trustees is to identify his or her dependants. The Pension Funds Act defines a dependant and basically creates three categories. These are legal dependants, non-legal (financial) dependants and future dependants.
After determining the dependants, the nomination of the deceased member must also be used as a guide to assist trustees’ decision-making. If minor children are involved, careful consideration must be given as to whether the benefit should be paid to the minor’s guardian or placed in a trust for the minor’s benefit. Where lump-sum death benefits are payable from the fund, the trustees should (within 12 months of the member’s death) pay the benefit to the dependants and nominees in proportions that the trustees deem equitable.
The Adjudicator has provided guidelines to interpret s37C on benefits distribution:
- If the member did not nominate a beneficiary but is survived by dependants, the trustees will divide the total benefit in proportions as they see fit. Dependants do not automatically qualify for a portion of the benefit. Trustees need not wait 12 months before dividing the benefit. Once the trustees are convinced that all reasonable steps have been taken to trace dependants, they are entitled to dispose of the benefit;
- If the late member nominates a person not dependent on him/herself, and the trustees cannot trace any dependants within the 12-month period, only then will the trustees have to pay the death benefit to the nominated beneficiary;
- Where there are dependants as well as beneficiaries, payment should be made within 12 months;
- Where dependants or beneficiaries can’t be traced or hadn’t been nominated, the benefit will become payable to the late member’s estate;
- Where no dependants can be traced within the 12-month period and the deceased member has nominated a beneficiary, the trustees should locate the nominee within the 12-month period. Reasonable steps should be taken to locate and identify dependants, and benefits should be paid to the nominated beneficiaries only after the 12-month waiting period once the trustees have ensured that there are no dependants.
Trustees must distribute benefits equitably between dependants. The Adjudicator has pointed out that trustees should have regard to the age of the parties, their relationship with the deceased, the extent of dependency, the financial affairs of the dependants, the future earning potential and prospects of the dependents, and the wishes of the deceased.
Critical also for trustees to decide is whether the payment should be made to the minor’s guardian or to a vehicle such as a trust for the the minor beneficiary. Trustees should apply their mind to justify their discretion in case the minor alleges that he suffered damages as a result of their decision.
There are three modes of payment to major dependants:
- Directly to the dependant: This is the default position. Any deviation from direct payment must be justifiable;
- To trust: This may only be done if the above option is not appropriate, e.g. where there’s a legal disability such as insanity, prodigality or insolvency. This must be proven by thorough investigation;
- In instalments from the fund: This may be done where the beneficiary has consented in writing. The beneficiary has the right to terminate the arrangement at any time and the full amount must then be paid to him/her.
There are four modes of payment to minor dependants:
- Directly to the minor: This is not advisable because generally minors are incapable of managing their own affairs;
- To the minor’s guardian: This is the default position, which arises from the guardian’s legal duty to manage the child’s financial affairs. Consider the amount of the benefit, the ability and qualifications of the guardian to administer the monies, the need to ensure that the benefit will be used so that it can provide for minor until the age of majority;
- To trust: Payment to a trust may not be automatically done without considering the default (payment to the guardian) and other possible modes of payment. Cost implications must also be considered for all the options available. [Trustees should consider risks associated with the default option and discuss possible alternatives with the guardian. They should record minutes of these meetings as well as the reasons for their decision. Trustees must use their discretion to make the correct choice which is not necessarily the easiest option.]
- In instalments from the fund: Since the age of majority is 18, trustees must bear in mind that any person over 18 will have to consent in writing.
Once all this has been addressed, says McClune, trustees can make their decision with the confidence that they have properly applied their minds.