Liberty Life Submission On ‘Bulking.’

To: Portfolio Committee on Finance

Liberty Life thanks the Committee for inviting us to participate in its hearings on “bulking”. We appreciate the opportunity to position our role, in line with our understanding of the invitation.

1. Overview and background

Pension funds provide retirement benefits and, in many cases, other benefits such as death in service benefits. In addition, disability benefits as a lump sum or income protection are often provided in conjunction with fund benefits, although usually through separate legal vehicles.

To provide these benefits, funds may contract with various service providers, including pension fund administrators, consultants, investment managers, insurers, collective investment schemes, stockbrokers, etc.

Any entity who acts as a pension fund administrator must be registered for this in terms of the Pension Funds Act. Pension fund administrators may administer a fund’s contributions and benefits, or its investments, or both. A written administration agreement is entered into between the administrator and the fund, setting out the administrator’s duties. Legally, the administrator acts as an agent of the fund, and stands in a position of trust (fiduciary relationship) to the fund.

So-called “third party pension fund administrators” generally only carry out administration functions, and the fund enters into separate agreements with other service providers to provide additional services.

Most insurers (including Liberty Life) are registered as pension fund administrators. However, if the fund concerned is invested in policies of insurance with the same insurer, the insurer acts as both administrator and insurer.

This dual role applies particularly in the case of so-called “underwritten funds”, which will be discussed in more detail below.

2. An overview of Liberty Life’s fund business

Liberty Life administers different types of funds. These include:

Ø Retirement annuity funds

o No employer-employee relationship

o Voluntary membership

o Only individual members

o Members choose investment structure, retirement dates (within limits) and contribution size

o Total assets of approx R25bn

Ø Funds with employer – employee relationship

o Either free-standing funds for a single employer

o Or “umbrella” funds which enable multiple employers to participate in a single fund

o 10,000 employer groups, in about 2,000 separate funds with the other 8000 participating in umbrella funds

o Total assets of approx R20bn

o Each employer group has an average of 35 members

o Our focus is on retirement provision for employees of SME’s. This is generally an under-serviced part of the employment market in respect of access to financial services

3. The FSB’s enquiry and Liberty Life’s response

The Registrar of Pension Funds made an enquiry into the practices of all pension fund administrators. It requested information on:

Ø “Bulking” of credit balances of pension fund bank accounts

Ø Cases where a pension fund administrator was part of a group including a bank

Ø Other issues relating to the responsibilities of pension fund administrators – particularly regarding practices “whereby secret profits were made directly or indirectly by administrators or associated companies to the detriment of pension funds whose money they controlled”.

Liberty Life understands “bulking” as the notional aggregation of bank accounts in order to negotiate more attractive terms for the benefit of the account holders.

Liberty Life has responded to the questionnaire. We confirmed that we believe we have not breached our obligations as a pension fund administrator by making secret profits to the detriment of the funds we administer.

The funds Liberty Life administers fall into two broad categories: Privately administered funds and underwritten funds.

On “bulking” in particular, we confirmed to the Registrar that:

Ø Liberty Life derives no benefit from monies held in the bank accounts of privately administered funds which we administer.

Ø Bulking is not an issue for underwritten funds.

Differences between these types of funds must be understood in order to understand the relevance of bulking and related practices.

4. Privately administered funds (sometimes also called “self-administered” funds)

Administration of these funds is a very small proportion of Liberty Life’s fund business. (By number of employers, less than 1%).

These are funds whose assets are not necessarily limited to policies of insurance, but usually own other assets too. Where they do own insurance policies, the policies are not limited to Liberty Life policies. These funds have their own bank accounts, and Liberty Life administers contributions and benefits paid into and out of these accounts. Liberty Life also administers payments to and from other service providers (e.g. investment managers or other insurers) with whom the funds have contracted.

All administration fees charged by Liberty Life are fully disclosed in the administration agreements, and all interest earned on credit balances in the fund bank accounts is passed on to the funds. Liberty Life earns no other fees or rebates on these credit balances.

5. Underwritten funds

The majority of funds administered by Liberty Life are in this category. As shown by the average size of employer groups that we administer, it would not be economically viable for most of these funds to arrange their own separate investment management, or other services separate from the fund administrator.

Underwritten funds are exempt from certain provisions of the Pension Funds Act, provided that:

Ø They do not have their own bank accounts.

Ø They do not own any assets other than long-term insurance policies.

Ø They do not have any liabilities other than the liabilities underwritten by the insurance policies.

Ø One insurer (in this case Liberty Life) must act as the administering insurer

Ø Contributions received from individual fund members or employers, are credited directly to bank accounts held in the name of the insurer.

Ø Any benefits paid are paid directly by the insurer.

Liberty Life has two different relationships with these funds:

Ø We act as administrator of the funds in terms of the Pension Funds Act. The relationship is governed by written administration agreements between Liberty Life and the funds. In our role as administrator for the funds, we administer only insurance policies, either policies issued by Liberty Life or by any other long-term insurer.

Ø We act as an insurer, in terms of the Long-term Insurance Act. The relationship is governed by the terms and conditions of the long-term insurance policies issued by Liberty Life to the funds. The funds are the policyholders. The policies can be either:

o “fund policies”, where a single policy is issued to the fund to underwrite the liabilities of the fund to all its members collectively, or

o “fund member policies”, where separate individual policies are issued to the fund to underwrite the liability it owes to each member.

Typically, retirement annuity and preservation funds only hold “fund member policies”, while funds with an employer – employee relationship hold “fund policies”.

The following diagram illustrates this structure:

Notes to this diagram

Ø The fund promises benefits to its members. Depending on the fund rules, these could be retirement, death, disability and / or other benefits.

Ø To provide these benefits, the fund invests in a Liberty Life policy (or policies) or policies with other insurers. The fund has no other assets besides policies. The nature of this contract is a policyholder / insurer relationship, where the fund is the policyholder.

Ø All fund contributions paid by employers (if applicable) or members, are paid directly to Liberty Life as contributions to the fund and simultaneously premiums under the insurance policy. They are credited directly to a Liberty Life bank account, because the fund may not have its own bank account.

Ø The benefits the fund promises its members are equal to the benefits Liberty Life owes the fund in terms of the Liberty Life policy.

Ø The benefits Liberty Life owes the fund (and all other policy terms, conditions, charges, etc.) are set out in the policy document.

Ø To provide the benefits under the policy, Liberty Life holds various assets (subject to prudential regulations under the Long-term Insurance Act). Liberty Life is the owner of these underlying assets.

Ø The fund will typically specify the type of investment mandate that it requires, effectively selecting one or more choices from a range of pooled investment portfolios that the insurer offers. Some funds, typically retirement annuity funds, will allow members to make their own investment choices from within a range that the trustees have deemed to be acceptable.

Ø The fund also enters into an administration agreement with Liberty Life.

Ø Although the assets underlying the insurance policies are part of the pool of assets owned by the insurer, the administrator keeps precise, separate records for each fund and for each member’s share in that fund. The administrator then allocates to such funds and fund members, the investment returns earned by the insurer on the underlying pool of assets.

6. Liberty Life’s duties as an administrator of underwritten funds

The practical duties of an administrator of an underwritten fund are different to those where the fund (and not the insurer) owns the underlying assets. In the latter case, the administrator actually holds and controls the underlying assets (for example cash in a fund bank account) on behalf of the fund. This does not apply to underwritten funds, where the only assets to be administered are insurance policies.

This is why the question of “bulking” does not arise with underwritten funds.

Despite this practical distinction, all pension fund administrators are legally required to act in good faith in dealing with whatever type of pension fund assets they control. Liberty Life is no different.

Liberty Life has a fiduciary duty to any fund it administers, to ensure that the fund’s assets are properly administered for the purpose of providing the benefits owing to members in terms of the fund rules – in other words, that the fund’s benefit promise is met.

For underwritten funds, the fund’s benefit promise is to provide its members with the benefits provided, in terms of the fund rules, by the insurance policy. Liberty Life therefore has a duty to the funds to ensure that the terms and conditions of the Liberty Life policy are adhered to. However, where Liberty Life is the administering insurer but the fund owns policies issued by other insurers, the other insurer would have the obligations in terms of the policy, while Liberty Life will retain the administrator’s obligations.

As we have advised the Registrar of Pension Funds, we believe that we comply with these duties.

7. Conclusion

We hope that this letter will assist the Committee in its deliberations, by explaining the role Liberty Life (and, we believe, other insurers who administer underwritten funds) plays in respect of the majority of the funds we administer.

As we have tried to show, the administration of underwritten funds has certain characteristics that differentiate it from other forms of retirement fund administration. We believe it is important that proper and informed debate on the duties of pension fund administrators generally, should take the position of underwritten funds into account.