Grave concerns about security and financial control of Guardian’s Fund

Almost half of the more than R17 million that was stolen from the government’s Guardian’s Fund in April this year has been recovered, and efforts to recover the rest are ongoing.

The Department of Justice and Constitutional Development, the custodian of the fund, says it is premature to pronounce how the beneficiaries of the fund will be compensated if the full amount is not recovered.

In the meantime, the four officials implicated in the misappropriation are still on precautionary suspension with full pay and will remain on suspension until the matter is brought to finality, the department’s spokesperson Stephen Mahlangu says.

Read: Most recipients unpaid after millions stolen from Guardian’s Fund

Beneficiaries only started receiving payments at the end of June after the department suspended all payments “out of caution and to establish the magnitude of the problem”.

The fund was established by statute to receive and manage inheritance money on behalf of people who are legally incapable (minors) or do not have the ability to manage their affairs (mentally or physically disabled).

Lack of accountability

Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa, says the apparent lack of security and financial control at the fund is a matter of grave concern. The department will have to make up for any shortage should the full amount not be recovered, he says.

The fund, much like many other state-run institutions, suffers from “extreme inefficiency and lack of accountability”, says David Hurford, CEO of Fairheads Benefit Services.

“We believe that the most recent breach is simply the tip of the iceberg and that far more has been lost to beneficiaries due to the lack of transparency, communication and poor processes.”

Indeed, a “high-profile misappropriation” took place in 2001 when a Master of the High Court stole hundreds of thousands of rands from the Guardian’s Fund, says Deenisha Nadesan, executive director of estates and fiduciary services at Capital Legacy.

“It’s a frightening thought that your child’s inheritance could be exposed to this sort of maladministration,” she adds.

Regulated vehicles

Hurford is firmly of the view that paying benefits to the Guardian’s Fund should be avoided wherever possible, particularly because there are other, more strictly regulated vehicles available.

He refers to beneficiary funds that are governed by the Pension Funds Act and regulated by the Financial Sector Conduct Authority. Umbrella trusts, administered by a reputable service provider with a long track record, are another option.

Umbrella trusts started receiving death benefits on behalf of minor dependants of deceased retirement fund members in the late 1980s. However, these trusts lost their appeal following the Fidentia scandal. The firm embezzled more than R1 billion from the Living Hands Umbrella Trust.

Read:
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“These trusts have gone through a rather difficult period, but we are seeing a resurgence in the need for them because of the cost involved in setting up a separate trust deed. People who do not have a big estate, but need a trust structure, can still use an umbrella trust,” says Hurford.

An umbrella trust is a normal trust but can hold benefits on behalf of multiple unrelated beneficiaries. Each beneficiary has their own ‘sub-account’ in the trust. It has similar benefits to a trust, but because of the beneficiary scale costs are shared.

Beneficiary funds gained momentum after the Fidentia scandal. They are designed similarly to umbrella trusts and run in exactly the same way, but the governance requirements are higher. Firms that administer beneficiary funds have the same reporting requirements as pension funds.

Planning

Without setting up a vehicle for minors or people who are unable to manage their affairs, the inheritance will pass to the Guardian’s Fund, or the guardians will be the custodians until they turn 18, says Nadesan.

“Claiming money from the Guardian’s Fund is a laborious process and, as we have seen now, the risk factor is growing bigger.”

Van Vuren says the cost of trusts has been negatively impacted by the “massively increased compliance burden” placed on trustees in recent years.

However, leaving it in the hands of a guardian can also be problematic. “Nobody will be monitoring the use of the money, and the minor will, upon reaching majority, have to seek recourse if the money was not properly managed.”

Reputable trustees will be the preferred option as they will guard their good reputation jealously and ensure proper administration. This comes at a cost, which makes it less than ideal for smaller amounts, Van Vuren acknowledges.

Nadesan strongly advises people to draft or update their will to ensure they set up the correct structure to safeguard their legacy and not leave their dependants’ inheritance exposed to risks.

Read:
Reporting requirements for trusts and PBOs now final
What to know when nominating your trustees
What to consider when making your beneficiary nominations
Drafting a will: make your intentions clear