Issue: April/May 2007
Liberty Life


Retirement-fund members rarely factor education costs into their overall financial planning. They should! Bevan Heslop, head of marketing for the Liberty Life corporate segment, cautions that members might neglect it to the peril of their children.

Every parent should consider what would happen if he or she were suddenly unable to provide for their children’s education. The statistics are truly mind-boggling:

  • Every year, 240 000 South African parent- dependent children lose a parent;
  • 40 000 children have a parent become permanently disabled;
  • The average annual increase in education costs over the past five years has been four percent above the (inflation) rate of the consumer price index;
  • It currently costs R200 000 to educate a child at an average public school from Grade 1 to completion of a first diploma or degree;
  • The equivalent current cost of educating a child at an average private school is R570 000.

South Africans value education highly. We know that, for many, it provides the means to break free from a cycle of poverty and despair. Many parents make great sacrifices to ensure their children are well educated.

Sadly, when we lose a parent, we also know that economic pressures often mean that priorities change. Often through necessity, a child’s education is shortened, or its quality compromised. In many cases, the child has to mourn not only a lost parent but also an abandoned education.

Education needs specifically addressed

However, recent developments in the group and individual insurance markets have seen the emergence of new-generation education benefit products. These products provide cover specifically for use in offsetting the cost of children’s education in the event of the death or disability of the insured parent. While some South Africans do use savings plans to cater
for their children’s education, very few make contingency plans to fund their children’s education if the worst should happen; for instance, should they die or become disabled with Liberty before these savings have grown sufficiently.

don't let children make the sacrifice

The innovations in education insurance go beyond the savings approach, ‘ring-fencing’ the benefits for exclusive use in funding education. In most cases the insurer undertakes to pay the educational institutions directly, ensuring that the insurance benefit is applied for the purpose for which it was set up.

The new insurance products normally provide for both schooling and a first tertiary qualification. In many cases, benefits include allowances to cover the costs of uniforms, books and residence fees at tertiary level. Some insurers even accommodate the additional costs of schooling children with special educational needs.

Trustees and employers alike are finding these new insurance benefits a meaningful way to address both the concerns and the specific financial needs of many fund members as caring parents. It makes their group risk benefits more relevant and even more valuable within their family context.

Providing their children with the best possible education is a vital issue for most parents. So putting specific measures in place to cover education costs in the event of a tragedy ensures a legacy that can make many fund members proud.

Fiduciary duty of trustees in the investment of retirement funds’ assets

The legal maze can look rather complex. The principles, however, are really quite straightforward.

One of the key duties of a retirement fund trustee is to invest the assets of the fund. The fund rules authorise the types of investment that may be made. Where the rules are silent, the common law will apply.

In terms of the common law, a trustee must generally not take undue risks with trust monies. Since no “proper” list of investments exists, it is the trustee’s duty to show the care of a prudent and competent businessperson in the circumstances. This would mean the investment of fund assets in accordance with the investment regulations laid down by the Pension Fund Act while considering the obligations of the fund.

Regulation 28

The Pension Fund Act itself provides the parameters for the investment of fund assets. These are dealt with under Section 19 of the Act and in the investment regulations, known as Regulation 28. The regulations are referred to as the “prudent investment guidelines” applicable
to pension funds. They lay out the types of assets in whuch funds may invest as well as the proportions of the overall assets that may be invested in each asset type.
While it is likely that these guidelines will be reviewed as part the retirement-fund reform process, the latest reform document issued by National Treasury in February 2007 indicates that any new regulation of investment will still be a hybrid of prudent expert guidelines and quantitative limits.

As trustees are responsible for the management of their fund, they must ensure that the assets are selected and invested in a way that complements and is consistent with the ability of the fund to meet its present and future liabilities; in other words, to match assets and liabilities.

Powers to delegate

To do this, trustees will typically delegate the technical aspects of their duty to a valuator, investment manager or accountant. It remains the overall responsibility of the trustees to match the fund assets and liabilities and to continuously monitor investment returns and exposure to risk, attempting to achieve optimum balance between the two.

When trustees employ the services of an investment manager, they must be satisfied that such a person is properly qualified. Failure to do so would be a breach of their fiduciary duty. Trustees must remain fully acquainted with the investment manager’s actions and monitor them to ensure that reasonable care and attention is being exercised. Trustees must take an active interest in the investment of the fund’s assets.Choosing the manager Trustees who invest fund assets in pooled portfolios administered by financial institutions, where it is difficult to remain completely involved in the structure of the underlying portfolio, will fulfil their duty if they are satisfied that:

  • The investment manager administering the portfolio is competent;
  • The core asset holdings of the fund’s portfolio are sound;
  • The core asset holdings are appropriate to the investment strategy of the fund.

When selecting investment managers to assist in exercising this duty, trustees should also ensure that the investment manager:

  • Will serve the fund’s interest and not those of anyone else;
  • Is competent, with the necessary academic and practical experience;
  • Is not owned or controlled by the participating employer;
  • Is in fact able to comply with any instructions, limitations or prohibitions placed on him or her by the fund;
  • Properly understands the investment objectives of the fund;
  • Can reasonably be expected to meet these objectives.

When assessing the appropriateness of fund investments and the investment manager’s performance, the trustees should seek independent advice in order to be able to evaluate such matters objectively. When selecting or appointing an investment manager, the trustees should also ask these questions:

  • Philosophy: Is the investment manager’s investment philosophy compatible with the views of the trustees?
  • People: Does the investment manager have a stable team of well-qualified people to assist him or her?
  • Portfolio: Does the investment manager offer suitably adaptable investment portfolios?
  • Strategies: Are the trustees comfortable with the strategies adopted by the investment manager?
  • Infrastructure: Does the investment manager have the necessary infrastructure for research and analysis of the investment market’s economic climate?
  • Risk: What is the profile of the investment manager as measured by past performance?
  • Past performance: Does the investment manager have the sort of track record that inspires confidence in his or her ability to perform during both good and bad markets?

Recent scandals have highlighted the responsibility that rests with trustees in respect of their fiduciary duty to invest fund assets appropriately. The Financial Services Board has formulated proposals in respect of trustees’ good governance in draft circular PF 130. This document contains principles relating to trustees’ conduct when investing their funds’ assets.

In addition, National Treasury’s discussion paper on Social Security and Retirement Reform (published in February 2007) makes much of the need for improved fund governance and the responsibilities of trustees. Accordingly, it’s to be expected that additional regulation and revision will further direct this important fiduciary duty into the future.


This article on retirement funds is sponsored by Liberty Life to inform trustees in the public interest. Liberty Life does not endeavor to promote, through the content, its own products or services.

Tax Changes Galore

Explaining the breaks for lump-sum payments from pension funds

It was reported in March that sweeping changes to the taxation of pension-fund and retirement-annuity lump sums will be implemented from October 1.

These changes, consistent with proposals in National Treasury’s second discussion paper on retirement reform released in February, form part of government’s overhaul of South Africa’s retirement funding system.

The changes also follow hot on the heels of the announcement by Minister of Finance Trevor Manuel, in his February 2007 Budget speech, that retirement funds’ tax of nine percent on the build-up of funds’ investments will be abolished with effect from the March 1 2007.

Less complicated

The proposed changes will replace the complex calculations of the tax liability for lump sums. The proposed changes are the following:

  • The current tax-free portion, which is generally an amount of R120 000, will be increased to R300 000;
  • Additional tax-free amounts will be allowed in respect of members’ accumulated retirement fund contributions which were not deducted over the course of their working lives;
  • The complex average-rate formula will be replaced with a flat rate of 18% on amounts between R301 000 to R600 000 and a rate of 36% on those amounts of R600 001 and above;
  • The full commutation amount for pension and retirement annuities is increased from an annuity amount of R1 800 per annum to R50 000 per annum.

The new tax regime on lump-sum amounts will end all reliance on members’ years of service and salary.


Manuel.. big impact of reforms
No longer will the complex formulae “A” and “B” will be used to calculate tax liability. This implementation will favour lower and middle-income earners. It also means that high earners will no longer be able to manipulate their income in the two years before retirement by using tax-free preference dividends to reduce their tax liability.

The formula that will still remain applicable is Formula C. This is the calculation in respect of tax-free amounts for civil servants and in respect of service accumulated prior to 1998.

It has also been indicated that the tax-free lump-sum amounts that fund members are to receive will be accumulated over their lifetimes.

Numerous changes are still expected during the course of the rest of the year, with National Treasury promising the release of a further document in the near future.


This article on tax changes affecting retirement funds is sponsored by Liberty Life to inform trustees, taxpayers and their advisors in the public interest. Liberty Life does not endeavor to promote, through the content, its own products or services.