FEDUSA Submission to The Portfolio Committee on Finance Cape
Town
Presented by: Gretchen Humphries FEDUSA
21 June 2006
BULKING OF RETIREMENT FUNDS
1.
INTRODUCTION
FEDUSA believes that
Retirement funds are deferred remuneration for work performed by workers. In
most instances retirement funds are the workers' only form of savings.
Retirement funds are currently subject to numerous costs, fees and taxation
that substantially deplete a members' life savings that is due on retirement.
Life savings are currently also subject to a double taxation.
FEDUSA furthermore believes that every effort has to be made to protect
and grow a member's retirement benefit. It is important to increase the
country's level of savings. Drawing a decent pension post retirement will
enhance a person’s quality of life and place a lesser burden on the state.
Every member is entitled to a reasonable pension benefit, where adequate
contributions over time have been made.
2.
BULKING
It has emerged that administrators were making
undisclosed profits from bulking the funds under their administration and then
negotiating a higher rate of interest to be paid on the funds, but taking some
of this benefit for themselves without approval from the pension funds under
administration. This is tantamount to taking away benefits from pension fund
members without their knowledge or approval.
FEDUSA will tolerate no less than the highest
standards of accountability. Financial sector service providers are placed in a
position of trust towards retirement funds and as such are under a legal duty
to act in the best interest of their clients at all times. Receiving secret
profits or undisclosed compensation from other parties is not acceptable
practice.
The general circular issued by the Registrar of
Pension Funds on the 29th of March 2006 directed to all persons and
institutions (administrators) that have granted approval in terms of section
13B of the Pension Funds Act, No. 24 of 1956, to administer the investments of
pension funds as defined in the Act.
Administrators who are registered under the Act, are
financial institutions in terms of the Financial Services Board Act, No 97 of
1990, and as such fall to be supervised by the Financial Services Board and are
in particular subject to the provisions of the Financial Services Board and the
provisions of the Financial Institutions (Protection of Funds) Act, No 28 of
2001 and the Financial Advisory and Intermediary Services Act, No 37 of 2002
(the FAIS Act).
When dealing with pension fund monies under their control, institutions like
administrators and trustees are required by the law to observe the utmost good
faith, to exercise proper care and diligence, to refrain from gaining directly
or indirectly improper advantage for themselves to the prejudice of their
principals (the pension funds concerned) and to avoid conflicts of interest.
In terms of article 4 of the general circular of the 29th of March
2006, the following practice would be unlawful: an administrator consolidates
or "bulks" credit balances of pension fund bank accounts under its
control and thereby procures a higher rate of interest from the bank. All
interest yielded is not passed on proportionally to the pension funds entitled
thereto and 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.
FEDUSA affirms the Financial Services Boards’ (FSB) stance that all
administrators are to make full and frank disclosure to the FSB of:
a) Practices
and methods, whereby secret profits were made directly or indirectly by
administrators or associated companies to the detriment of pension funds whose
money the controlled;
b) The
pension funds involved;
c) The
amounts of which individual funds were deprived;
d) How it is
proposed redress will be made to the funds.
3.
NON – DISCLOSURE OF PROFITS
There may be other permutations of
this practice, the net result in each instance being an improper benefit or
perquisite gained by the administrator at the expense of the funds under its
management, and without full disclosure being made to the funds.
Bulking was not illegal per se and
was a good way to enhance returns. Administrators who did not do this were
failing in their duties. The justification that disclosure had been made to the
trustees was also no defence against this breach of a fiduciary relationship.
FEDUSA would welcome the FSB
directive to pension fund trustees, setting out the minimum requirements for
the disclosure of bulking for it to be illegal. Trustees would need to be told
upfront by administrators whether bulking of a particular fund would occur ;
how much extra interest would be earned ; what the respective shares of the
fund and the administrator would be ; and why the activity would add to
administration costs.
4.
FIDUCIARY DUTIES OF PENSION FUND TRUSTEES
Trustees should demand that when “bulking” practices
have taken place unlawfully, they should remain vigilant, in that the money is
due to their members and former members. If trustees accept a reduction in
fees, they may deprive former members of their due.
Trustees could also limit their options if they want
to change service providers, as this may result in trustees not acting in the
best interest of their funds.
Retirement fund trustees must not
allow themselves to be rushed into signing quick settlements with bulking
defaulters. They will place themselves at risk if they do so. What trustees
should ask themselves is: "Will I be able to justify my actions to the
Pension Funds Adjudicator, knowing the adjudicator's firm stance on the fiduciary
duty of trustees?"
Trustees must demand that bulking defaulters provide them with free actuarial
assistance so they can make sure that every current and former fund member
receives the correct compensation, including interest, for bulking.
There are some very pertinent questions that trustees
need to get from pension fund administrators regarding its bulking practices.
These include:
Ø
Making secret profits from bulking activities was a
contravention of the Pension Funds Act and the Financial Institutions
(Protection of Funds) Act, as well as common law.
Ø
In the interests of their own retirement, fund members must
insist that their trustees account for what they have done to ensure everything
that is due to the fund.
4.1
Training of Trustees
Trustee training is probably the fundamental issue
underlying many of the problems being exposed in the retirement industry today.
If your retirement fund trustees are not trained properly, it is questionable
whether they will be able to ask the right questions and to spot things that
might go wrong before it is too late.
This problem is compounded by the
fact that many trustees are trained by the very companies that provide their
funds with products and services.
Properly trained trustees would
also have known that they should have demanded that an administrator, such as
Alexander Forbes, bulk their funds' assets to get the best interest rates or
discount, and that the administrator should have passed these beneficial rates
and discounts on to their funds so they could provide better benefits for their
members.
The good governance of their
retirement funds is the basic building block of training trustees. The
foundation stone for all trustee training is that trustees have a proper
understanding of what constitutes good fund governance.
This means that trustees must
understand their fiduciary duty. In a nutshell, fiduciary duty means your
trustees bear the ultimate responsibility for your retirement savings and must
behave and take decisions that are in the best interests of the fund they
manage.
It is entirely appropriate that statutory law (for example, the Pension Funds
Act), previous court rulings and common law place a fiduciary duty on trustees,
because, for most of us, saving for our retirement is the single biggest
investment we will make.
A key issue in the good governance
of a retirement fund is the ability of trustees to ask the right questions. If
your trustees do not know what questions to ask, they are immediately
exposed.
5.
UMBRELLA FUNDS
FEDUSA believes that the
burning issue pertaining to bulking would be prevalent in the funds
administered as Umbrella Funds.