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