Bulking is the new buzzword in questionable practices among pension funds and their administrators.
Bulking is when pension administrators put all their members’ funds together to obtain preferential rates or to lower costs.
The Financial Services Board (FSB) has now raised the question of whether pension funds are making secret profits from bulking, which are not being handed down to members.
Leading pension-funds administrator Alexander Forbes is in the process of calculating the fees it received from banks through the bulking of its pension funds. Given MD Peter Moyo’s assurance that all clients will be contacted to ”ensure that this matter is dealt with to their satisfaction”, it is possible that members could receive some reimbursement as a result of the additional fees it received from banks up until September 2004.
Alexander Forbes used bulking for its members’ current accounts. These accounts were used for day-to-day servicing of the pension funds, such as for claims payments, and made up a small percentage of total funds under administration. As current accounts do not offer high interest rates, Alexander Forbes bulked the current accounts of all member funds in order to negotiate a better interest rate. This rate was passed on to members, but Alexander Forbes received a service fee from the banks which it did not disclose to members. In 2002, based on legal advice, it did inform members, who accepted the arrangement.
When the Financial Advisory Intermediaries Services Act came into force in 2004, requiring pension-funds administrators to specify what fees they received per member, the task of calculating and meeting compliance complicated the deal and Alexander Forbes decided to stop accepting fees from the banks.
Although the practice was suspended two years ago, it has spurred the FSB to investigate whether any secret profits are being made, to the detriment of the member funds. Even though bulking itself is not necessarily a problem, non-disclosure is a very real issue. If pension-funds administrators are making money and not declaring it, they are going to be in hot water. The FSB has given the pension fund industry until the end of April to come clean about these practices.