Inappropriate fees charged to pension funds could cost the funds as much as 0,2%, or R3-billion, a year, a pension fund expert has estimated.
Actuary Rob Rusconi said that South Africa has R1,7-trillion of pension fund assets under management.
Inappropriate fees arise from a number of sources, among them poor decision-making by trustees, misinformation by service providers and unethical behaviour across the industry — including corruption, as the Mail & Guardian‘s SA Quantum revelations have highlighted.
Low levels of financial literacy and trustees’ lack of training are often to blame. But graft and unethical practices involving trustees and collective organisations at the expense of members are playing a growing role.
Umbrella structures, such as bargaining council or sectoral funds, which involve more than a single employer, are more open to abuse, as the funds pay running costs.
A high-profile example is the national provident fund of Cosatu’s commercial workers’ affiliate, Saccawu, which was placed under curatorship in 2002.
Curator Tony Mostert claimed that retirement fund money was lent to companies with connections to the trustees of both the fund and Saccawu’s investment arm. In addition, service providers to the fund, including Old Mutual, were required to pay commission to the union for signing on members.
Apart from corrupt deals, some trustees use members’ funds to supplement their salaries. In Saccawu’s case, what tipped off the regulator to possible irregularities was the suspicious fact that trustee expenses increased from R318 153 in March 2000 to more than R1,7-million a year later.
The Financial Services Board (FSB) recently removed the board of trustees of the Private Security Sector Provident Fund for, among other reasons, “the abuse of the trustees with regard to reimbursements”.
The Pension Fund Act does not prohibit the remuneration of member trustees. But Jurgen Boyd, the FSB’s deputy executive officer, said that member trustees are given time off work to fulfil their duties and that it is inappropriate for the fund to pay them over and above their normal salaries, although reimbursement of costs is acceptable.
Abuses
Boyd said abuse can occur when trustees are remunerated for attending meetings, as this encourages them to meet as often as possible by setting up sub-committees.
Expenses are also an area of abuse and the FSB has encountered cases in which trustees organise meetings at five-star hotels, drink Johnny Walker Blue and stay the night — all at the fund’s expense.
Over-claiming of travel expenses and hiring luxury cars are among the more common abuses. “Abuse is not widespread, but where we do find it, it is really excessive,” said Boyd. He said malfeasance is more common in funds that have members who earn low salaries and where high expenses have a material impact on members’ savings.
The FSB is investigating a fund where the average income of members is R4 000 a month, yet where members elected as trustees are being paid about R25 000 a month from the fund’s coffers — effectively increasingly their salaries fivefold.
When the FSB investigates abuse of reimbursements, it often has a full-blown investigation on its hands, as the trustees may be complicit in hiding abuses by service providers.
The administrator provides the single safeguard against trustee abuse, as it manages funds’ running costs and can become a whistle-blower.
When a board is corrupt, trustees often award the administrator the business in return for kick-backs and turning a blind eye. The upshot is that members’ retirement funds line the pockets of trustees and service providers. Generally, corruption comes to light only when there is a falling-out among thieves.
Even if the FSB intervenes and removes the board of trustees, it cannot force the trustees to repay the money. The fund then has to take legal action, at a further cost to members.