Edition: March - May 2015



By DAVID HURFORD, Head of Fairheads Umbrella Beneficiary Fund

Both objectives can be achieved, even in volatile markets. Andrew Kemp, head of investment product solutions at Liberty Corporate, explains how.

Since 2009 the beneficiaryfund industry has grown to an estimated R9 billion. Add to this the umbrella trust sector valued at around 10 billion and it is clear that these vehicles are used to look after the benefits due to a significant number of vulnerable children who have lost a parent.In selecting a beneficiary fund service provider, trustees need to satisfy themselves that the child's benefits will be safely administered and used for the purpose for which they were placed in the beneficiary fund, that is to pay education related costs and general well-being expenses.

For example, some service providers charge annual administration fees as low as 0.5% of assets under administration, but a closer look at their investment fees reveals fees of 1.5% pa and more for the equivalent of a money market invesbnent while. That is before adding in transaction fees, funds costs and termination fees. It is for this reason that cost comparison model should be adopted by the industry which is modelled on the total expense ratio (TER) for investment funds. Such a model should include all fees and charges payable during the life of the beneficiary fund, based on a set of standardised assumptions.

Getting the ball rolling Fairheads Benefit Services has developed a Comparison Rates' model which has been reviewed by an independent actuary to provide a simple, standardised way for retirement fund trustees to Compare the costs associated with beneficiary funds and umbrella trusts.

For example, the Comparison Ra1es for a child aged five at inception of a new beneficiary fund with a lump sum of R100 000 shown in the graph. Each bar represents a different service provider. The rates vary between 2,68% and 3,61% per annum, a discrepancy of almost 1% per annum. This pattern remains consistant for various amounts and various terms.

Do you know what you are paying for? Trustees need to ask exactly what services they are getting for the fees quoted. What appear to be the lowest fees may not be in the best interests of the minors whose benefits trustees are paying into the beneficiary fund.

The type of questions they should ask are:

  • how easy is it for guardians/caregivers to access funds for the child through either face-to-face contact or other channels?
  • what is the investment approach and is it independent from the administration of the fund?
  • to what extent does the administrator maintain contact with the guardian/caregiver and the child?

Such questions will enable fund trustees to accurately compare various service providers in terms of their overall cost, and make informed decisions about the value that they add to the lives of those whose funds they administer.


1 The actuary verified the accuracy of Fairheads’ model bet suggested an alternative term to “TES” so as to avoid confusion with the definition of TER as used by ASISA (The model takes initial and termination costs into account; and computes the TER over the life time of the “investment” as opposed to a 12-month period)

For more information please contact me at david@fairheadl.com

Fairheads Benefit Services is Southern Africa's largest independent administrator of beneficiary funds and umbrella trusts.


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