Beneficiary Funds – Do they Offer Good Value?

By Ryan Campbell-Harris, Associate Actuary

Since 2009, beneficiary funds have become very familiar, but the question posed by many trustees is: Do they offer good value?

Beneficiary funds were introduced in South Africa in January 2009, after the industry was rocked by the Fidentia umbrella trust scandal in 2006. They are special purpose retirement funds that are used to receive lump sum retirement fund death benefits (net of tax) in respect of minors.

We performed a cost analysis of 8 (of the 23) beneficiary funds, including the top 5 in terms of assets under management at the end of 2016. At first glance, beneficiary funds’ fees look quite expensive, as many of the fees are expressed as a percentage of the beneficiary’s fund credit.

However, since the average beneficiary fund credit is currently around R100 000, the administration fees do not translate into big numbers for the average beneficiary.

In the first example we compared an investment of R100 000 with a regular monthly withdrawal of R1 000 escalated by inflation each year. We assumed that a balanced investment portfolio (or the fund’s equivalent portfolio) was used by each service provider and that the investment return would be a gross nominal return of 10% per annum, with inflation being 6% p.a.

The comparison illustrates that there is a 6-month difference in the number of payments made by the fund with the lowest fees and the fund with the highest fees.

Beneficiary Fund

We also looked at an investment of R20 000, with a regular monthly withdrawal amount equivalent to the current monthly child grant of R380 p.m. escalated by inflation each year. In this example we see that in most cases the fees paid exceed the net investment growth. This is due to the fact that some of the fees have minimum fixed values, as well as fees that are expressed in rands/cents per member per month.

Beneficiary Funds

This is very important information for trustees who have to determine whether to pay relatively small amounts into the beneficiary fund, or pay them to the natural guardian. Option B would provide such a child with 55 payments of R380 p.m. (plus inflation), which amount to a return of the capital invested plus 15%. 

Assessing the value proposition

However, cost can only be considered in the context of the services offered. There can be a vast difference in the quality of service delivery, especially in respect of regular and transparent communication to trustees, guardians and beneficiaries.

Based on the above results, the fee structures of the top beneficiary funds are spread in a fairly narrow band. To be able to compare the value of these offerings trustees will have to consider the services offered, as well as the level of security and operational efficiency they experience.


Disclaimer: This publication provides information and opinions of a general nature. It does not constitute advice and no part thereof should be relied upon without seeking appropriate professional advice.