Fedsure's 'risky' fund raises questions

David Le Page

One of South Africa’s most prominent financial services companies stands accused of exposing policyholders’ funds to excessive risk.

Senior figures in the financial services industry this week took the rare step of raising serious questions on the record about Fedsure’s handling of their smoothed bonus Guaranteed Fund.

Such funds are designed to provide an inflation-beating investment for policyholders that pulls lower returns than actively managed portfolios, but also lower risk.

Pensioners invested in the fund have for years been vulnerable to a crash in the value of financial services stocks.

The fund is managed by Fedsure on behalf of various company pension and provident funds.

Fedsure CEO Arnold Basserabie this week denied that the Fedsure Guaranteed Fund, or smoothed bonus fund, is underfunded. The insurance industry has been rife with rumours that the fund, in which many pensioners’ retirement expectations are bound up, is 30% underfunded.

But Basserabie’s assurances have raised questions as to why Fedsure is not prepared to pay the guaranteed value to anyone wishing to withdraw their funds.

Questions also remain about the management of risk in the fund, and Fedsure’s new owners, Investec, were cautious on the issue this week. “Whether [the fund has] been structured in the best interests of policy holders, that’s a question one would have ask Mr Basserabie,” said Investec’s Ciaran Whielan.

Fedsure’s own mandate for the fund states that it is roughly 50% invested in equities, 10% in property, 30% in bonds and 10% in money market instrument.

“As this is a fund with smoothed bonuses, our aim is to be in equities whose earnings, and hence whose market value, contains as little volatility as possible.”

But the fund has suffered recently and declared an unusually low bonus of 0% at the end of last year, which independent employee benefits consultant Chris Bosenberg describes as “an absolute disgrace”.

“The Fedsure Guaranteed Fund investment portfolio attracted a negative return partly because it was heavily weighted in financial shares [30%], in particular Saambou and Inhold. Fedsure was unable to liquidate these shares during the year,” said the company bonus declaration.

“Our bonus performance last year was low, but it wasn’t because of the performance of the underlying investment,” say Basserabie and Bernstein.

They were not prepared to specify what investments led to the fund’s under-performance. But Fedsure Group Benefits managing director Andrew McGinn said that there have been “various financial issues” at Fedsure and “a necessity to write down certain assets, and a need for restructuring of the guaranteed fund”.

McGinn said that the fund has certain holdings, in Saambou and Inhold, which it cannot liquidate in hurry. “There is a fear that there might be a significant run on the [fund] money. When we quote a market value on termination, we are quoting values which are sometimes quite significantly below book value. Sometimes that figure is close to 30%.”

He said this is done in order to “protect current policy holders. There are certain assets we cannot realise in a hurry, property, certain unlisted securities in the guaranteed fund.”

Richard Derman, head of Fedsure Asset Management until the Investec takeover, describes Fedsure’s Saambou/Inhold position as an “historical position”, dating from 1992.

“There was a strong intention to reduce that position. We were endeavouring to reduce our exposure to those counters, but it wasn’t easily achieved.”

Both McGinn and Derman referred questions on the degree of exposure to Inhold and Saambou, to Basserabie.

Basserabie acknowledged that Fedsure’s Net Main Life Fund, which includes the guaranteed fund, is approximately 20% invested in Inhold, and that this amounts to being highly exposed to the movements of that share. But he said that policyholders aren’t directly exposed to this risk.

“Up until the end of 1999 we had an exceptionally good five-year bonus record. At the end of the day, it’s what the policyholders get that counts,” he said.

But others argue that Fedsure should have minimised the risk to which members were exposed by the size of the Inhold/Saambou holding.

“In both incidences the shares [Inhold and Saambou] seem to be appropriate,” said Anthony Asher, professor of actuarial science at Wits University. “It’s just that they’re over-exposed.”

Bosenberg puts it more strongly. “We would expect less investment in equities for a smoothed bonus policy. They put all their eggs in one basket.”

Asher warns against withdrawing from the fund. “[Pension fund] trustees can now hold Fedsure to a far higher standard of management. But you don’t want to now sell those [Saambou and Inhold] shares at a firesale price.”

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