Pension fund cull sparks unease
A battle over a project to cancel thousands of dormant pension funds at the Financial Services Board (FSB) has raised questions for some of the country’s largest retirement industry players.
The Mail & Guardian reported last week that the deputy registrar of pensions, Rosemary Hunter, had approached the courts to get the FSB to release, among other things, a report by auditing firm KPMG into the closure of thousands of dormant pensions funds between 2007 and 2013.
The KPMG investigation came after Hunter voiced long-standing concerns about the process involved in cancelling more than 4 000 funds.
She believes the way in which they were closed was unlawful and may have prejudiced their members, former members and beneficiaries.
Although Hunter’s court action is not directed at any specific retirement company, the case laid out in court documents questions whether the large firms did not benefit from the cancellations project.
It was motivated by large retirement fund administrators, including the Liberty Group and Alexander Forbes, Hunter said in her affidavit.
Many of these companies had a large number of dormant funds on their books, with one firm, Liberty, holding about 80% of the dormant funds after it took over the business of a number of other funds.
But firms approached by the M&G said the work to address the problem was done in good faith and with the interests of their members in mind.
But Hunter believes that “the manner in which the cancellations project was conducted was designed to protect and advance the interests of providers of financial products and services to the affected funds”.
According to her, these financial interests may include the closure of funds that were owed pay-outs of secret profits earned through what is known as “bulking”.
Alexander Forbes was embroiled in a bulking scandal after it was found that it joined the accounts of its clients together to earn better interest rates at banks. But, between 1996 and 2004, the benefit of the additional income this bulking earned was not passed on to its clients. The company set aside about R385-million to repay the affected funds.
Hunter alleged that the registrar had permitted the closure of about 29 funds without these “secret profits” being paid to them.
She also suggested that the firms stood to benefit by charging administration fees to the dormant funds, even though no meaningful administration work was done. This was possible after their representatives had been appointed to dormant funds, under the auspices of two regulatory circulars sent out by the registrar, or a 2007 amendment to sections 26 of the Pension Funds Act.
Hunter has maintained that neither of these regulatory or legislative measures gave the registrar the power to appoint “authorised representatives” or section 26(2) trustees’ to dormant funds with the intention of shutting the funds down.
In response to Hunter’s concerns, the FSB’s board appointed retired Constitutional Court judge Kate O’Regan to investigate the cancellations project.
In a draft report, she found there was a risk that a court might conclude that the registrar had acted beyond his powers.
Hunter also asserted that the registrar could not have been confident about the information provided to him by these representatives to justify fund cancellations. She said in one case a single Liberty employee was appointed as the trustee for 923 funds, which were cancelled between 2012 and 2013.
She also claimed that fund administrators stood to gain by establishing unclaimed benefit funds. In 2008, tax law amendments allowed for the establishment of special purpose funds to house unclaimed benefits and many of these funds had been set up.
Hunter said many fund administrators with dormant funds on their books, or entities related to them, established unclaimed benefits funds. The growth of these during the time that the cancellations project ran was substantial.
The FSB estimates that, in total, about R20-billion worth of unclaimed benefits is owed to about three million beneficiaries.
In the most recent annual report from the registrar’s office, released in March 2015, both Liberty and Alexander Forbes each hold two unclaimed benefit funds. They are all listed in the top 100 list of top pension funds by membership.
In one example, the Liberty Corporate Unclaimed Benefits Provident Preservation Fund has assets that have grown from just over R1-million in 2009 to more than R753-million by 2014.
In her draft recommendations, O’Regan suggested that government policy relating to unclaimed benefits funds be overhauled. She recommended the establishment of a national unclaimed benefits fund to be run by the FSB or a similar state agency.
Edward Kieswetter, the group chief executive of Alexander Forbes, said it did not have access to all the court documents so could not comment in detail at this stage.
But, he said, regarding the balance of the unclaimed benefits funds, “Alexander Forbes and the Financial Services Board, including Ms Rosemary Hunter, have been working together in good faith to find a mechanism of making payments for the benefit of these funds, so that they are not simply paid to the state but benefit the funds or members”.
Shirley Koaho, the divisional director of communications at Liberty, said the company had participated in an industry initiative to deal with dormant and orphan funds to move these funds “out of limbo into better regulated funds that would accelerate the tracing of and disbursement of member benefits”.
She said Liberty believed the FSB’s processes in this regard were in the best interest of members.
The closure and deregistration of the Liberty administered dormant and orphan funds was dealt with within the regulatory framework, she said, and Liberty believed this regulatory process “reflects the law and its members’ best interests”.
She denied that Liberty had unlawfully benefited from the cancellations project. Fees charged to funds were in the “normal course of business in terms of contractual agreements with funds”. Liberty’s commitment to this initiative was evidenced by the commitment of its own financial resources in respect of the accelerated winding up of retirement funds, she added.
According to Liberty, moving these funds into unclaimed benefits funds had achieved a number of positive outcomes. They included improved transparency, governance and cost efficiency, decreased risk to members and had enabled the tracing of members and the paying out of benefits.
The Institute of Retirement Funds did not respond to the M&G’s questions.
The FSB again declined to comment on the matter this week. But a submission made to O’Regan during her review of the cancellations project provide some insight into the organisation’s position.
The submission was made by Jurgen Boyd, the former deputy registrar of pension funds. In it, he emphatically denies Hunters’ allegations that the measures taken by the office of the registrar to deal with orphan funds “amounted to a severe dereliction of his duties”. He also argued that no evidence of material prejudice to funds or their members had surfaced.
He conceded that, although the measures taken to address this, notably the appointment of trustees and authorised representatives, might not be interpreted as lawful, the steps implemented were “bona fide”, “practical solutions to a historic problem” and were “thoroughly exercised with due care”.
According to Boyd, where the FSB had identified cases of funds that had not been paid the bulking money owed to them, these funds were reinstated and only cancelled after the bulking proceeds were distributed.
On the matter of fees charged, he said the majority of section 26 trustees were employed by the fund administrators and so did not charge for the duties performed. In cases where fees were charged, the appointment letter by the registrar included the details of the approved fees.