Issue: July/August 2005
Edutorials
Fairheads

Umbrella Trusts - What trustees should know

WHAT ARE UMBRELLA TRUSTS?

Umbrella trusts, also known as employee-benefits trusts, cater for the disposal (under s37C of the Pension Funds Act) of death benefits from retirement funds. Increasingly, lump sums held in trust are used to educate dependents. The idea is for the dependent to be able to pay for an education from these funds so that, as an adult, he or she will have better opportunities for employment to provide for financial independence.

WHAT GOVERNS THE RELATIONSHIP BETWEEN RETIREMENT FUND TRUSTEES AND UMBRELLA TRUST SERVICE PROVIDERS?

There is no legal obligation for umbrella trusts (as opposed to umbrella retirement funds) to enter into a special contract with retirement fund trustees. This is because a death benefit, once paid into trust, becomes the responsibility of the umbrella trust’s board. These trustees have the fiduciary duty to ensure that the trust is properly managed for the beneficiaries.

Most trust-service providers are sensitive to the fiduciary responsibilities of retirement fund trustees. They acknowledge that there is a strong business case for providing them with a level of comfort in monitoring performance of their services.

WHAT SHOULD TRUSTEES DO?

Fairheads Umbrella Trusts recommends to trustees seeking to find a trust-service provider that:

  • Trustees should carefully assess the suitability of the trust-service provider. Experience, appropriate licensing, system capacity, compliance and risk management and professional indemnity cover should all be considered in this assessment.
     
  • Trustees of the umbrella trust should appoint a suitable administrator and insist on a detailed administration agreement setting out service levels, fees and reporting requirements. Such standard service level agreements will help clarify possible confusion around umbrella trust administration, and generally boost the standards of governance in the burgeoning R10 billion umbrella trust industry.

For more information, you’re invited to contact Giselle Gould at Fairheads Trust Consultancy on 011 883 9755 or Giselle@fairheads.com. She’ll be pleased to assist, without charge or obligation, on any queries you might have.

Southern Africa’s leading service provider in retirement fund death benefits.
Fairheads is a niche fiduciary, trust and investment management group, established in 1925