The pension funds adjudicator (PFA) has issued another ruling, this time against a preservation fund, the major issue involving the underlying investment in an Old Mutual smooth bonus policy.
Like the Alexander Forbes case that saw the company agree to pay out R380-million to pension fund members for not disclosing fees, the issue again boils down to disclosure.
In the preservation/smooth-bonus ruling, the member withdrew early from the smooth-bonus scheme, effectively losing 10% of his investment.
A smooth-bonus fund evens market movements over a period. By withdrawing early, especially in a negative market, a member can lose on the smoothing effect. The PFA was concerned here about the lack of disclosure in policy documents.
Disclosure is becoming the benchmark of how authorities, such as the PFA, Financial Services Board (FSB) and Competition Commission view financial services.
The message is clear — charge fees, but tell the customer what those fees are and how you arrive at them.
In that way the customer can decide whether the product offers value for money. Regulators are also concerned about product complexity, which results in lack of transparency.
The PFA raised concerns about possible ‘secret profits” that could arise out of smooth-bonus funds.
While this falls out of the PFA’s jurisdiction, it raised the question of what happens to bonuses that have accrued to policyholders who have withdrawn early.
As they are not paid to the member, are they added to the reserve fund to enhance policyholder returns or used to enhance shareholder returns?
Old Mutual has stated clearly that ‘during times of strong market performance, the build-up of funds is held in a stabilisation reserve account until periods of low or negative growth and then used to top up policy values.
‘The stabilisation reserve account is ring-fenced strictly for the benefit of policyholders. The surplus in the stabilisation reserve account is not transferable to shareholders as profit.”
The PFA’s deliberate and public step outside of its jurisdiction shows the financial industry that it is under attack. The authorities will be going through their businesses with a fine tooth comb.
Peter Moyo, CEO of Alexander Forbes, is cognisant of this and has appointed auditors Ernst & Young and law firm Deneys Reitz to review all of the company’s business practices, while at the same time putting aside a further R100-million in case there are any other skeletons in the cupboard.
On the issue of bulking it is clear from Dube Tshidi of the FSB, who spearheaded the Alexander Forbes probe, that companies need to fully understand the regulator’s position on bulking. Bulking is the practice of pooling together client funds to negotiate better interest rates with banks.
Tshidi says not only is bulking absolutely legal, it needs to be encouraged.
When companies report on their bulking activities, as required by the FSB, they had better bulk to enhance member returns. By not doing so they are not acting in the best interest of members and the FSB will take them to task.
In so much as bulking adds to administrative costs, by all means charge the funds, but disclose it down to member level and make sure the trustees agree.
The trustees in turn had better make sure that the fees are not exorbitant because then they have not acted in the best interests of members by accepting them.
The regulators will leave no stone unturned, but hopefully in doing so they will not set off an avalanche.
The challenge is in maintaining confidence in the evolving financial industry while bringing about long-term structural changes to the way companies treat policyholders. It also has to be remembered that policy-holders and pension fund members are also investors.