Issue: April/May 2007

Case for umbrella trusts

The debacle at Fidentia should not obscure some very real advantages of umbrella trusts, provided fund trustees are vigilant in the selection of their service provider. GISELLE GOULD, marketing director of Fairheads Umbrella Trust Company, explains how they work and emphasises what trustees must consider in the selection process.

When a retirement-fund member dies, leaving minor children as his or her beneficiaries, the fund trustees may decide to pay the death benefit into an umbrella or employee-benefit trust. Although the average benefit is only around R30 000 per beneficiary, careful investment and management of this amount through a trust can educate and sustain a child until he or she reaches majority age.

Such trusts are managed with the input of several parties:

  • Trustees of the umbrella trust;
  • Administrators of the trust;
  • Investment managers.

Ideally, to avoid the possibility of interest conflicts, these three parties should be legally independent of each other. In practice, retirement-fund trustees choose an administrative service provider which manages the process between the three parties. Also in practice, so that advantage may be taken of specialist skills and knowledge, the administrative service provider often acts as a trustee. In line with retirement-fund industry standards, the service provider should ensure that at least 50 percent of the trustees are independent.

Shift of fiduciary responsibility

Once the trust has been established, the umbrella trust's trustees take over the fiduciary responsibility from the retirement fund's trustees.

The trust-fund administrator assumes the primary responsibility of ongoing communication with the guardian and/or beneficiaries.

Once an administrator has been appointed to manage a trust for beneficiaries, it is neither ideal nor easy to move existing trusts to another administrator. The consent of the umbrella trust's trustees is required for this to happen. As the umbrella trust's trustees have accepted a fiduciary duty for the full term of the trust, it is not something they can relinquish merely on the basis of notice from a retirement fund.

To motivate such a switch, the retirement fund's trustees would have to present a strong and provable case against the trust fund's trustees that the latter had not fulfilled their duties. This would require that the existing trust-fund trustees resign, via the Master of the High Court who regulates umbrella trusts, and then the monies in the trusts would have to be moved under jurisdiction of the new trustees.

The new trustees would have to decide afresh on a trust administrator and beneficiaries' trusts would have to be restarted on a new administration platform. This is a complex process, unlikely to serve the best interest of beneficiaries as it is administratively burdensome and costly. Retirement fund trustees should therefore follow a thorough selection process in the initial appointment of a service provider.

The buck stops with the umbrella trust trustees

If a trust administration company is acquired by a third party, the existing trust-fund trustees have the option to ensure that the new administration company can meet the administration criteria required by the trusts. If the new administration company cannot meet these criteria, the trust-fund trustees have the right to move the trust administration to an appropriate service provider. (Fidentia had acquired the Matco administration company through which the Living Hands trust fund was administered.)

Choosing a service provider

Compare the options:

  • A number of service providers, with good track records and reputations, are available. Smaller service providers might have difficulty in competing with the larger on price; the smaller the base, the higher the costs to be spread for systems and compliance.
  • Costs vary amongst service providers. Trustees should carefully consider what vaiue for money is obtained. Investment fees must also be reviewed and added to total cost of the product.

Upfront checks, taking the form of selection criteria, should regularly be done on the service provider. They include these questions:

  • Does the service provider have a licence under the Financial Advisory & Intermediary Services Act {FAIS}?
  • Is it considered reputable and does it have a clean audit report? (Although there are no legal requirements to have umbrella trusts audited, by virtue of their very public nature they should be audited and have up-to-date financial statements made available for perusal by the retirement-fund trustees.)
  • Does the service provider carry sufficient professional indemnity and directors/officers liability cover?
  • Does it have a disaster recovery plan?
  • Is there a proper trust deed registered with the Master of the High Court and confirmation of tax registration?
  • Is there an administration agreement between the trust-fund trustees and the administrator?
  • Is there a service level agreement between the retirement fund and the trust administrator?
  • Is there in place an investment strategy policy, as required by FAIS?

Ongoing monitoring

Possibly the single most important task for trustees is to monitor the service providers performance on an ongoing basis. At the minimum, insist on:

  • An annual or six-monthly trust register to obtain an update on existing trusts;
  • Audited financial statements of the umbrella trust;
  • Quarterly investment reports and bi-annual newsletters;
  • Regular exception reports, to ensure proper administration of the trusts;
  • Confirmation that trustees of the umbrella trust have met at least quarterly.

Extra mile

For your own peace of mind, monitor the number and nature of complaints made by guardians/beneficiaries to service providers:

  • Are the complaints attended to and resolved swiftly?
  • How does your service provider communicate with guardians/ beneficiaries? If a call centre is used, in how many languages is the service provided? If letters are sent out, are these written in plain language for guardians/beneficiaries to understand?
  • Are there workshops for guardians?
  • What is done to communicate procedures and concepts to clients?

If anything in your relationship with the service provider seems odd or lacking transparency, act promptly to get to the bottom of it.

For more information, you're invited to contact Giselle Gould, marketing director of Fairheads Umbrella Trust Company on (011) 883 9755 or She'll be happy to attend to your queries.