The Age 18 issue – Can we finally get there?
Fairheads has over many years advocated and lobbied for the age at which lump sum death benefits are paid to the dependants of deceased retirement fund members to be increased from age 18 to 21.
This is because we have witnessed first-hand the impact of paying out a large lump sum to someone who has yet to finish school. There are very few 18-yearolds with the financial wisdom to handle a lump sum wisely – and there is often also pressure from extended family members to access the money for their own purposes. And so we are once again lobbying the authorities on the Age 18 and other issues.
STATISTICS TELL THE STORY
The Children’s Amendment Act 41 of 2007 changed the age of majority from 21 years to 18 years. As a consequence of this Act, a widely held view has been that pension funds must pay out lump sum death benefits at age 18 to their members or beneficiaries other than where there is a legal disability which prevents them managing the money themselves.
In the South African context, the assumption is that minors attain the age of 18 in Grade 12, if they are in their age-related grade. However, a low percentage of children are in matric at age 18 with many in lower grades and others having already dropped out of school completely without attaining a grade 12 or equivalent qualification.
The below graph, based on Fairheads membership statistics from 2009 to present, paints the picture clearly:
The number for the group still in school is startling – 78,54% of members aged 18-19 are still at school!
The logical question that follows is whether it is in the best interests of these members to pay out large benefits to them before they have completed their schooling and have the required maturity and skills to use the benefits wisely.
EARLIER ENGAGEMENT WITH MEMBERS
In an effort to assist members to choose wisely, in 2015 the Fairheads Sponsored beneficiary fund implemented a strategy to communicate with members about their benefit from the age of 15, which would become due to them at aged 18. This strategy was aimed at providing these members with an understanding of the opportunity available to them beyond schooling.
As a result of our strategy, many members have opted not to terminate their membership of the fund but have explicitly consented to leaving their benefits invested so that they are able to continue their studies. Around 8% of assets in the Fund belong to such members. We have run a few case studies in Fairheads Times showing how some members have gone on to complete their tertiary education successfully.
WHAT ABOUT MAJOR MEMBERS IN BENEFICIARY FUNDS?
Another piece in the beneficiary fund puzzle is whether the trustees of a retirement fund are empowered to place S37C death benefits into a beneficiary fund for major dependants of the deceased? A widely held interpretation of S37C is that consent needs to be obtained from the major dependant before doing so.
Yet it is our view that beneficiary funds were established by the Authority precisely so that due care and discretion can be applied by trustees when determining whether it is in the best interest of the dependent to pay out the lump sum benefit.
There is no suggestion that adopting this view gives the trustees an unfettered discretion. Their duty to apply their minds remains, and if in doing so they find that payment into a beneficiary fund is the best solution for a major dependant, then that decision should stand.
In the Pension Fund Adjudicator’s determination in the case of Vellem (obo Vellem) v Auto Workers Provident Fund and Another  1 BPLR 134 (PFA), paragraph 5.6 of that determination states the following:
“In distributing death benefits the trustees may pay benefits allocated to a minor dependant to such a dependant’s legal guardian, trust fund or a beneficiary fund. Their preference to pay such a benefit in any one of the methods set out above must be informed by the dependant’s best interests. In the same manner, a major dependant’s benefits may be paid to him in cash or into a beneficiary or trust fund. The preferred method of payment must be duly cognisant of the beneficiary’s best interests. There must also be a link between the preferred method of payment and the rationale behind it, especially in instances where payment into a beneficiary or trust fund is elected by the trustees over cash payment to the dependant’s legal guardian (in a minor dependant’s case) or the dependant himself (in a major dependant’s case)”
This is best illustrated using the example of a beneficiary who displays clear signs of substance abuse. Would it be in the best interest of that beneficiary for the lump sum simply to be paid out upon attainment of the age of majority?
This view has been given effect in the rules of our Sponsored beneficiary fund which have been amended to incorporate the definition of Termination Date to allow the Board of Management to use their discretion to determine the major’s ability to “… properly manage the fund credit.”
It should be clear from the above that we believe strongly that there has got to be a better solution for 18-year-olds who are still at school and need professional help in managing their funds precisely at this formative stage during which they will hopefully finish matric and obtain a tertiary education – put simply, to “cross the line”. As a society, we are doing them a disservice by not changing the dispensation.