COSATU INPUT ON THE “BULKING” OF RETIREMENT FUNDS ACCOUNT BY FUND ADMINISTRATORS
SUBMITTED TO THE PORTFOLIO COMMITTEE OF FINANCE
20-21 June 2006
Introduction
1.
The Editor of Personal
Finance reported about the “not lawful” secret profiteering by Alexander Forbes
since March 2006. At the time when these activities were reported they were
received with a total denial from those who were involved. What was also
disturbing was attempts by Alexander Forbes to threaten and silence Personal
Finance.
This was followed by public
condemnation of this abuse of trust by many in the retirement industry,
including ourselves and some honest service providers.
Subsequently the Deputy Registrar of
Pension Funds issued a General Circular to Fund administrators on Secret
Profits, dated 24 March 2006.
2.
In that circular,
the Deputy Registrar highlighted the following:
2.1
Administrators
consolidate or “bulk” credit balances of retirement fund bank accounts under
its control and thereby procure a higher rate of interest from the banks. All
interest yielded is not passed on to the retirement funds entitled thereto.
Instead, the additional interest derived from the consolidated amount goes for
the benefit of the administrator. This “secret profit” is also not disclosed to
the boards of management of the pension funds.
2.2
Another example
mentioned deals with a situation where the administrator is part of a group of
companies which includes a bank. In this case there is no negotiation to
increase possible interest rates payable to the funds being administered, but
the group as a whole benefits.
2.3
The net results in
each instance are that an improper benefit or perquisite is gained by the
administrator at the expense of the funds under its management, and without
full disclosure being made to the funds.
3.
As a result of
this conclusion, the Registrar required the Administrators to make full frank
disclosure on this matter;
3.1
practises
and methods, such as that mentioned above, but
not necessarily confined thereto, whereby secret profits were made
directly or indirectly by administrators or associated companies to the
detriment of retirement funds whose money they controlled;
3.2
the
pension funds involved;
3.3
the amounts
of which individuals funds were deprived; and
3.4
how it
is proposed redress will be made to the funds.
4.
It is against this
background that the following submissions should be considered.
5.
Administrators are
financial institutions in terms of the FSB Act, and as such fall to be
supervised by the FSB and are in particular subject to the provisions of the FI
Act and the FAIS Act.
6.
The Registrar has
confirmed that bulking itself is not unlawful for as long as it benefit funds
and not administrators.
FUND ADMINISTRATORS’ VIEWS
7. The
view of administrators varies:
7.1
If they don’t do bulking – each fund receives the same interest as an individual entity;
7.2
Another view is that a fund receives a higher
rate of interest through bulking but the
administrator benefits, either through an agreed fee or not;
7.3
Where bulking takes place, each fund receives
the full benefit of that.
8. What is the content of
“fiduciary duty”?
8.1
Per Philips v
Fieldstone Africa (Pty) Ltd 2004 (3) SA 465
(SCA) –
8.2 Also,
per Philips v Fieldstone Africa (Pty) Ltd, supra –
“It is
the nature of the relationship, not the specific category of act involved that
gives rise to the fiduciary duty. The categories of fiduciary, like those of
negligence, should not be considered closed…(the) relationship in which a
fiduciary obligation has been imposed are marked by 3 characters –
8.2.1
scope for the exercise of some discretion or power;
8.2.2
that power or discretion can be used unilaterally so as to affect the
beneficiary’s legal or practical interests; and
8.2.3
a peculiar vulnerability to the exercise of that discretion of power.”
9.
In terms of Robinson
v Randfontein Estates 1921 AD 168 -
“Where one man stands to another in a
position of confidence involving a duty to protect the interest of that other,
he is not allowed to make a secret profit at the other’s expense or place
himself in a position where his interests conflict with his duty. The principle
underlies an extensive field of legal relationship. A guardian to his ward,
solicitor to his client, an agent to his principal afford examples of persons
occupying such a position…the doctrine is to be found in the civil law, and
must of necessity form part of every civilized system of jurisprudence. It
prevents an agent from properly entering into any transaction which would cause
his interests and his duty to clash. If he is employed to buy, he cannot sell
his own property; if employed to sell, he cannot buy his own property; nor can
he make any profit from his agency save the agreed remuneration; all such
profits belongs not to him but to his principal. There is
only one way by which such transactions can be validated, and that is by the
free consent of the principal following upon a full disclosure by the agent.”
10. There is one rule only, that a fiduciary may
not receive any benefit than the agreed remuneration, and only one exception to
this: on the fully informed consent of the principal.
11. In terms
of Philips v Fieldstone, it is no defence by the agent (administrator)
to say that -
11.1 the fund did not suffer a loss;
11.2 the fund
could not have made use of the opportunity, or probably would not have done so;
11.3 the fund,
although it could not have used the opportunity, has refused it;
11.4 there is
no contractual relationship between the fund and the third party from whom the
benefit was received, and the benefit would not have accrued to the fund
anyway;
11.5 the
administrator was not obliged to obtain the benefit for the fund.
11.6 the
administrator acted reasonably and honestly.
12. What is
the standard of care required of an administrator? This is relevant to the
issue of whether bulking is lawful or not.
13. The
standard of care is that of a reasonable competent administrator. This is a
specialised task which is regulated (by the FSB) and to which the courts would
require to involve a high level of skill and care. Van Wyk v Lewis 1924 AD 438.
Durr v ABSA Bank 1997 (3) SA 448 (SCA)
14. Bulking is
not unlawful in the sense that it is prohibited by law or contrary to legal
obligations. Sackville West v Nourse 1925 AD 156. Estate Richards v Nichol 1999
(1) SA 551 (SCA)
15. A
competent administrator, having the requisite high level of skill and care, and
operating within a financial services environment, should be aware of the
benefits of bulking and should endeavour to obtain it.
16. The bank
treats all the flagged fund bank accounts as one for the purpose of determining
the interest rate applicable to each, and all that interest is then credited to
each bank account by the bank. The bank administrator may then debit an
additional fee from the bank account; or the bank may make payment of a rebate,
which would otherwise have accrued to each fund bank account as interest,
direct to the administrator so that it does not appear in the bank account of
the fund.
17. A sweeping
arrangement occurs, whereby all the interest attributable to each account of
all the funds administered by the administrator are paid into a single bank
account in the name of the administrator, and then allocated from there by the
administrator amongst the bank accounts of each fund after deduction of the fee
by the administrator.
18. The
problem is where the administrator includes its own funds to the pool of monies
of the funds in order to receive the high rate of interest that the funds
receive.
19. Where the
bulking arrangement requires a minimum total amount and the administrator adds
its own funds to ensure that this limit is obtained; but also benefits from
this.
20. Where the
bank concerned is an associated entity of the administrator
21. Where the
fee is a proportion of the interest, and the amount of the benefit for the
administrator may not bear any relationship to the cost of the service.
22. Where the
fund administrator circumvent the Act by creating or establishing a company
where all funds contributions will be deposited into, an improper benefit or perquisite is gained by the administrator at the
expense of the funds under its management, and without full disclosure being
made to the funds.
HOW SHOULD A BULKING
ARRANGEMENT BE STRUCTURED FOR THE BENEFIT OF FUNDS?
23. An
administrator should disclose to the fund –
23.1 that the fund bank account will form part of a
portfolio of accounts to be bulked for
the purpose of negotiating interest rates with the bank; for the benefit of
members
23.2 the extent of the enhancement in interest rates
through indication of the extent of the potential benefit (in Rands);
23.3 if it is retaining a proportion of the enhanced
benefit for itself to compensate for the additional costs involved in putting
the arrangement in place additional costing;
23.4 Script lending;
23.5 Rebates;
23.6 Soft commissions.
24. Trustees
themselves owe fiduciary duty and must therefore be very careful about agreeing
to, or ratifying, any additional benefit which a service provider may seek. In
this matter it would unacceptable for trustees to party to arrangements where
the administrators are allowed with these improper benefit from bulking
25. With the
current bulking issue, trustees should ask their service providers whether they
have received any benefit in respect of their services to the fund other than
the agreed remuneration. “Any benefit”
should be interpreted broadly.
26. As with
every aspect of the remuneration due to service providers, any benefit which
the service provider receives should bear some relation to the services
rendered to the fund; and should also be competitive.
27. As a
general principle, every contract between a fund and its service provider
should include a warranty by the service provider that it will not accept any
benefit from any source in respect of its service to or administration of the
fund, other than what is set out in the contract, without the agreement of the
fund.
28. The Congress of South African Trade Unions (COSATU) rejects suggestions
that if an administrator has paid a few million rands to the Financial Services
Board for trustee training, it can escape the might of the law.
28(a) A conducive climate for the working poor to
save for their retirement should be sustained and any one who secretly profits
from workers’ savings should face the full rigour of the law.
29(a) COSATU is very concerned that a signal from the
industry is that you can steal from the poor as much as you can and when you
are caught, pay back what you have stolen and the matter is closed. We reject
this. We reject suggestions that it is a costly exercise to bring criminals to
book in the retirement fund industry. We reject the idea that big institutions
can do as they like since the law will not catch up with them.
29(b) That some administrators created investment
companies to circumvent sec 13 A and B the Pension Funds Act of 1956 as amended
so that they take secret profits from retirement funds against their own
internal and outside legal advice, shows what we deal with here. Directors of
administrators who creatively benefit improperly from retirement funds should
face the might of the law.
29(c) COSATU continues to supports the Registrar of
Pension Funds for all initiatives taken to protect the interest of poor workers
who sacrifice lots for their families to save for their retirement, only to
find they have instead made huge secret profits for administrators.
30 On the basis of all the available
evidence and after careful consideration of the various suggestions, it is the
considered view of Cosatu that a Commission of Enquiry needs to be established
by the Minister of Finance to investigate all other irregular practices in the
Financial Services Industry in general and Retirement Funds in particular[J1] [J2] in relation to the administration of retirement funds. The terms of
reference of such of commission of enquiry should include an investigation of
the history and background of bulking or "improper" benefit practices
of the Life and Private Sector Fund Administration companies.
31 This investigation should also relate
to the regulation and enforcement relating to the monitoring and control of
Life and Private Sector Fund Administration companies in respect of conflict of
interests in the industry, a conducive environment for development of bad
practices such as bulking. In addition, the investigation should aim to reveal
pattern of governments and/or commission and omission which allowed the problem
to develop.
32 COSATU will embark on a national wide campaign
to name and shame those administrators who are secretly profiting from bulking
and we might also ask all our members instruct their fund trustees to move
their funds to administrators who are not and were never involved in such
shameful activities.
19 JUNE 2006
CONTACT COSATU HEAD & PARLIAMENTARY OFFICE
011- 339 49110 or 021- 461 3835