Some funds have removed the reassured death benefit from their rules and provide these via a separate group scheme, while others are channelling their death benefits through a ‘benefit fund’.

In our opinion, where the purpose of the ‘benefit fund’ is to offer benefits upon death similar to those typically offered by a pension fund in the event of death of a member, the ‘benefit fund’ would most probably meet the definition of ‘pension fund’ and would then be required to register under the Pension Funds Act. Certainly in terms of the FIM Act, a beneficiary fund that administers, invests and pays benefits on the death of a member is covered by the definition of “fund” and every “fund” as defined has to be registered under the FIM Act.

In terms of the Income Tax Act, a ‘benefit fund’ is recognised as such if it has obtained tax approval. A benefit fund is an approved fund other than a pension fund, a provident fund or a retirement annuity fund as defined in the Income Tax Act, if it provides benefits for spouses, children, dependants or nominees of deceased members.  From the Pension Funds Act perspective a benefit fund, in our opinion, is a pension fund and has to register under the Pension Funds Act. Unlike pension funds, provident funds and retirement annuity funds, the application for tax approval of a ‘benefit fund’ does not require the fund to be registered under the Pension Funds Act. This in our opinion represents a tax loop-hole that will be closed sooner or later.

The benefit fund - pros and cons

Firstly, a ‘benefit fund’ is a concept that exists in the Income Tax Act but not in the Pension Funds Act. In terms of the Income Tax Act it enjoys preferential tax treatment similar to that of a pension fund or provident fund.

• The fund is not taxable (s 16(1)(d)) – same as pension and provident funds.
• Contributions by the employer are tax deductible (s 17(1)(0)) – same as pension and provident funds.
• Member contributions are not tax deductible (no provision to deduct) – tax deductible up to N$ 40,000 p.a. in case of pension or provident fund.
• Annuity/ pension benefits are taxable in the hands of the beneficiary (definition of gross income, sub-section (c)) – same as pension fund, provident fund does not pay any annuities.
• Lump sum benefits are tax free (definition of gross income, sub-section (c )) – 67% tax free in case of pension fund, 33% tax free in case of provident fund.

The definition of ‘benefit fund’ in the Income Tax Act is very similar to the definition of ‘pension fund organisation’ in the Pension Funds Act. We are consequently of the opinion that a ‘benefit fund’ as contemplated in the Income Tax Act is in fact a pension fund organisation as contemplated in the Pension Funds Act. It must therefore register as a pension fund under the Pension Funds Act and is then also subject to the Act.

This means that the principles of section 37 C have to be observed in distributing a death benefit. It should also comply with all other requirements of the Pension Funds Act such as having a board of trustees, appointing an auditor and actuary, submitting annual financial statements, statutory reporting etcetera. Where the benefit fund operates as an umbrella fund, participating employers are of course not impacted by the statutory requirements other than section s 37A, 37B, 37C, and perhaps 37D.

The employer owned group life policy – the worst alternative

Some funds have removed the death benefit from the rules to replace it with an employer owned group life policy that would pay directly to nominated beneficiaries. Either the reinsurance premium in respect of the death benefit is deductible by the employer but the benefit is fully taxable in the hands of the employer (section 17(1)(w) read together with the definition of gross income, sub-section (m)).  Alternatively, the premium is not deductible by the employer if the benefit accrues to the employee or a person who was dependant on the employee (section 17(1)(w)(v)).

The problem in this scenario is that the employer’s pension or provident fund is still sitting with the member’s fund credit that is subject to income tax and to section 37C of the Pension Funds Act. Furthermore the benefit is not subject to the protection of the Pension Funds Act and could be lost should the employer be insolvent or be liquidated, or should the beneficiary or his estate be insolvent.

The disposition of the reinsurance policy benefit is not subject to the Pension Funds Act which may make it easier to dispose of but this may not necessarily be in the interests of the deceased member.

Conclusion

Whereas a benefit fund thus offers a tax advantage on death benefit capital greater than N$ 98,000 per beneficiary over a pension fund and certainly over any provident fund death benefit, it does entail two administrative structures and the consequent duplication of costs, as the result of the reinsured death benefit being administered in the benefit fund while the benefit arising from the member’s accumulated capital is administered in the pension fund. Two boards of trustees need to apply their mind and allocate the two available capital amounts in their discretion in terms of section 37C of the Pension Funds Act. This could obviously present its own frustrations to beneficiaries and employers.

Arranging an employer owned group life policy renders the full benefit taxable and removes the protection of death capital offered by the Pension Funds Act that would apply to a pension- and a benefit fund benefit. From the tax point of view it is the least beneficial alternative but it is likely to be a cheaper alternative than the benefit fund while the distribution can be done more efficiently not being bound by the Pension Funds Act.

 Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.