GLENRAND MIB
20 June 2006
Response to General Circular dated 24 March 2006
At the outset we would like to
point out that this presentation does not amount to a full reproduction of the
preliminary report that Glenrand MIB submitted to the Financial Services Board
on 10 May 2006, in response to General Circular dated 24 March 2006. We have
tried to consider all of our practices to identify and investigate areas of
concern. Although we were requested to appear before this Committee to discuss
bulking practices, we have therefore extended the presentation, as we did our
report to the FSB, to refer to other practices that might be deemed as
amounting to secret profit-taking. We are happy to discuss and investigate any
aspect requested by the FSB or this Committee.
1.
Internal
Investigation
Following the General Circular
dated 24 March 2006, Glenrand M.I.B commenced an investigation into its
practices to establish and quantify any secret profits it might have
earned. The departure point of the
investigation was the series of questions posed in the General Circular, being
:-
1.
Practices and methods, such as bank bulking, that
potentially may have resulted in secret profits made directly or indirectly by
administrators or associated companies to the detriment of retirement funds
they administer.
2.
A list of the pension funds involved.
3.
Amounts by which the individual funds were deprived.
4.
How the administrators propose redressing the situations
with such funds.
2.
Methodology
The investigation comprised a six
phase process, namely to-
1. Identify
potential areas of secret profit practices.
2. Establish
whether “profits” were indeed generated by such practices.
3. If so,
whether the “profits” were agreed with and disclosed to clients, failing which
such profits would be “secret” and fall within the ambit of the General
Circular.
4. Obtain a
senior counsel legal opinion on whether the practice constituted secret profits
or were illegal or undesirable.
5. Establish
the number of funds affected by such secret profits, total quantum and quantum
per fund.
6. Submission
of final list of practices deemed to be undesirable and or resulting in secret
profits to Exco, for recommendation on steps to redress the situation, in turn
to be submitted to the Glenrand MIB Board for decision.
As part of the investigation,
letters were addressed to former directors and members of the Executive
Committee of Glenrand MIB, requesting them to bring to our attention any
business practices potentially helpful to the proper completion of the General
Circular.
All retirement fund consultants
were required to personally sign off the information provided that they
provided to the internal investigating team, as a full and accurate reflection
of business practices potentially falling within the ambit of the investigation.
It was further agreed that the
methodology and findings of the investigation would be submitted to
PricewaterhouseCoopers (PwC) for independent external review. Such report is
being conducted on an agreed upon procedures basis. The PwC report would
further be submitted to the Glenrand MIB Audit Risk Committee, more
specifically its chairperson as independent director of the Glenrand MIB group,
Mr Rick Cottrell.
3.
Legal
Opinion obtained on Bulking
Glenrand
MIB, with the assistance of Edward Nathan Corporate Law Advisors, briefed
Advocate Malcolm Wallis, SC and
requested his opinion on the application of the provisions of the Financial
Advisory and Intermediary Services Act (FAIS) and the Financial Institutions
(Protection of Funds) Act (FI Act) to the practice of bulking by retirement
fund administrators, as well as his opinion on what constituted unlawful
bulking practices. The opinion, in summary, sets out the following:
§
Retirement fund administrators registered in terms of
section 13B of the Pension Funds Act, are in terms of section 45(1)(a)(iii) of
FAIS exempt from the provisions of that act, to the extent that the rendering
of financial services is regulated by or under the Pension Funds Act. As the
rendering of services as a retirement fund administrator is regulated under the
Pension Funds Act, and as bulking of retirement fund monies is a service that
should typically be provided by a retirement fund administrator to its clients,
the provisions of FAIS do not apply to the practice of bulking by such
entities;
§
The provisions of the Financial Institutions (Protection of
Funds) Act apply to individuals employed by financial institutions and not to
such financial institutions in their capacity as service providers of other
financial institutions;
§
The fiduciary duties of a retirement fund administrator
towards its clients arise from the service level agreement entered into between
the administrator and a client. The Glenrand MIB agreement constitutes an
agency agreement as well as a service agreement or mandatum. Both such agreements impose fiduciary duties upon the
agent or mandatory towards its principal.
§
According to the common law applicable to agency agreements,
an agent may not derive any profit from managing the assets of its principal,
except where such profits had been disclosed to and agreed to by the client. In
this regard, the words of Innes CJ in Robinson
v Randfontein Estates Gold Mining Company Limited[1]
is of significance:
“Where one man stands to another in a position of
confidence involving a duty to protect the interests of that other, he is not
allowed to make a secret profit at the other’s expense of place himself in a
position where his interests conflict with his duty…It prevents an agent from
properly entering into any transaction which would cause his interests and his
duties to clash…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…”
§
It is incorrect to state that profits agreed to with
retirement fund boards are unlawful.
On the
basis of the opinion received from Advocate Wallis, it is our view that only secret profits made by a
retirement fund administrator, should fall within the ambit of the General
Circular. We have therefore structured our report to the Financial Services
Board accordingly.
4. Bank
bulking
4.1
Background
In
order to increase the revenue of both retirement fund clients and Glenrand MIB,
bank bulking of our clients’ Standard Bank Accounts was implemented with effect
from 3 May 2005 and Nedbank Accounts on
14 December 2005.
It
was agreed with these banks that all Glenrand MIB client accounts would fall
within a portfolio earmarked for Glenrand MIB clients. Monies held in the fund
accounts allocated to the Glenrand MIB portfolio, would earn interest at a
higher rate of interest than they had previously and would have earned, had
they held their accounts on an individual basis. It should be noted that the
bank account of each client remained segregated at all times. The agreements
included a provision to the effect that of the enhanced interest earned under
these portfolios, Glenrand MIB would earn 50% under the Standard Bank agreement
and 33% under the Nedbank agreement.
As
an example, the effect of the agreement reached in respect of the Standard Bank
Glenrand MIB portfolio as at 26 April 2005 was as follows:
Amount |
Existing
Client Rate |
Enhancement
to Client |
New
Client Rate |
Glenrand
Gross Pooled Rate |
%
Interest to Glenrand |
Glenrand Fee as % of Gross Pooled Rate |
(R’s) |
% |
% |
% |
% |
% |
% |
0 - 499 999 |
1.500 |
2.250 |
3.750 |
6.000 |
2.250 |
37.51 |
500 000 – 999 999 |
4.500 |
0.750 |
5.250 |
6.000 |
0.750 |
12.5 |
1 000 000 – 9 999 999 |
5.000 |
0.500 |
5.500 |
6.000 |
0.500 |
8.31 |
Greater than 10 000 000 |
5.500 |
0.250 |
5.750 |
6.000 |
0.250 |
4.2 |
4.2
Disclosure
The
practice adopted by Glenrand MIB since the commencement of its bulking practice
has been that any splitting of interest earned by way of bulking should be
disclosed to clients and agreed in writing. In 2004, our service level agreements
were therefore amended in anticipation of the bank bulking exercise, to make
provision for the bulking of bank accounts and the division of enhanced
interest achieved between the funds and Glenrand MIB. The service level
agreements were amended to include the following provisions:
“3. ADMINISTRATIVE AND ACCOUNTING DUTIES
Glenrand
MIB’s duties as Administrator will be:-
…
(e)
opening
and operating a bank account with a major South African bank in the name of the
Fund, the parties acknowledging that such account and the monies deposited
therein, will be included in the Glenrand MIB cash management system where
Glenrand MIB groups client accounts for efficiency and preferential interest
rates, for the benefit of both the Fund and Glenrand MIB in terms of clause
4.2(e)”
“4.2 ADDITIONAL FEES
(e) The treasury cost to secure group
preferential rates detailed in 3.1(e) equal [to] 50% of all interest earned on
amounts deposited in the account referred to in clause 3.1(e) at rates which
exceed the selected Bank’s standard rates from time to time (“enhancement”).
The quantum of the enhancement will be made freely available and disclosed to
the Fund on request by the Trustees.”
The Rand
amount of the interest earned by the retirement fund and Glenrand respectively
is declared to the trustees annually in arrears. The trustees also receive cash
flow statements at quarterly trustee meetings, but would only be able to see
the total interest earned by the retirement fund because the interest earned
specifically through the bulking arrangement is not indicated separately.
The
exercise to submit the service level agreements to the various boards of
Trustees commenced in 2004.
The
internal investigation conducted by Glenrand MIB indicated that our processes
and best practices are in place and generally working. There were isolated
instances where these processes failed, but such failure was the result of
human error and not a deliberate policy of concealing the practice.
We have
established that of the funds currently administered by Glenrand MIB, 28 funds
have not as yet signed the amended SLA. It appears that, of these, there has
been non-disclosure on only 4 funds.
(We currently administer in excess of 250 retirement funds.)
4.3
Historical
Practices
As stated
above, the investigation also involved a request to former executives to
identify any past practices that might have amounted to bulking as well as
other potential sources of secret profits. We have thus far been informed of
one such bulking / imprest account, namely the CBC account.
CBC was
acquired through a process of acquisition.
Previously CBC was acquired by MIB and subsequently MIB merged with
Glenrand to become Glenrand MIB.
According
to the information provided to us, by the former CEO of this business,
individual retirement funds would monthly deposit two cheques, representing the
total amount of all benefits, that were due and to be paid to beneficiaries in
the following month, into two central CBC accounts – one being for pension
payments, and the other for all other benefit payments excluding pensions. Cheques, representing benefit payments,
would be drawn from these accounts on behalf of all the CBC clients. Any
unclaimed benefit amounts would be transferred back to the accounts of the
relevant funds. These CBC accounts did
earn interest, the interest was neither taken to profit and loss of CBC nor of
Glenrand MIB. The interest was apportioned and repaid to funds on a pro rata basis in proportion to the
amount each fund had paid in. It is therefore our preliminary view that the CBC
account did not involve the taking of any secret profits relating to interest
earned.
The
account is still, however under investigation and the information will be
verified by PwC when conducting its audit of our practices.
The income
generated by Glenrand MIB from its bulking practice over the past 18 months
amounts to on average R1, 041 per fund per month. The total amount earned by
Glenrand MIB amounts to R2, 3 million.
5. Proposal
regarding Redress
We will discuss and agree with the
FSB the appropriateness or otherwise of the manner in which we shared bulking
revenue. For the purpose of being prudent, the total amount of R2, 3 million,
plus interest, has been set aside by Glenrand MIB in order to redress bulking
practices that might be deemed to have been improper or unlawful. The proposals
detailed below are for discussion with the FSB. We hope to reach agreement on our proposed approach, however for
prudence we have provided in our financials for the entire amount. The proposals for redress are as follows:
6. Glenrand
MIB Risk Umbrella
Glenrand MIB has operated a risk
umbrella. This arrangement allows
clients (both retirement funds and employers) to obtain group risk rates for
life insurance as well as disability income replacement insurance on a pooled
basis provided by an insurer to Glenrand MIB.
This product offering has benefited many of our clients. The rate
provided on this risk umbrella was generally cheaper than the rate available by
going directly to an insurer in the market. Some clients decided to utilize the
risk umbrella rather than going directly to an insurer. In all instances where
funds utilized this arrangement competitive quotes from the market were
obtained and the decision to utilize this umbrella was as a result of the
cheaper rate available on the risk umbrella.
The insurer provided a net premium
rate to Glenrand MIB. The insurer did
not do administration on these policies.
All administration under the risk umbrella was attended to by Glenrand
MIB, which levies an administration fee for those services. For a traditional group insurance scheme,
the administration would be done by the insurer. The rate charged to the client was an all-inclusive rate
incorporating both commission and the administration charge that Glenrand MIB
levied. It was this all inclusive rate
that was compared to competitive rates in the market.
We have provided full details of
this scheme to the FSB. In our opinion,
although clients were aware of and approved the total rate – prior to March
2005, clients did not in every instance know the split between Glenrand MIB’s
admin fee and the risk premium. Where proper disclosure of such administration
fees had not been made and where proper agreement has not been reached with the
client on the administration fee levied, Glenrand MIB will enter into
discussions with the client to ensure for the period, is agreed.
This also forms part of the PwC
audit. Again, in the interests of being prudent (and despite evidence of
disclosure in many instances), we have adopted a conservative accounting
methodology, and provided for a potentially full refund of such administration
fees, until such discussions with the FSB have been concluded.
7. Other
potential areas of “secret profit”
·
Glenrand MIB does not utilize imprest accounts for the
payment of benefits. (This is with the
exception of the one CBC account discussed above that may be considered an
imprest account.)
·
Glenrand MIB no longer charges commission on the outsourcing
of annuities and has not done so for several years. The last outsourcing we did was over two years ago and we have
confirmed that commission was disclosed to our client at this time. A potential
outsource exercise that we have been busy with for the past 6 months has always
been on a no-commission basis.
·
Glenrand MIB does not conduct securities lending of client
assets. This statement also applies to
Ten50Six Life, a relatively recent acquisition on which some of our client
assets are housed in investment portfolios.
·
Ten50Six Life, a wholly owned subsidiary of Glenrand MIB, is
a long-term insurer registered in terms of the Long-term Insurance Act.
Ten50Six Life has been issued a limited life license, namely to issue linked
fund policies only. This means that Ten50Six Life may only issue policies to
retirement funds and that the policy benefits are determined solely by
reference to the value of the assets specified in the policy, i.e. Ten50Six
Life issues investment policies to retirement funds, the value of which is not
guaranteed, but linked to the investment market. A number of arguments have
been raised that assets held by a long-term insurer constitute the property of
the insurer. This argument arises from normal insurance law principles, as such
assets are indeed held in the name of the insurer and the insurer is liable to
pay tax on such assets. This principle has also been confirmed by the FSB in
its Directive 132. In terms of the policies issued by Ten50Six Life, monies
paid to the insurer may be invested within 6 business days. In practice,
Ten50Six Life invests assets within 24 to 48 hours. Ten50Six Life does earn
interest on such monies during the 24 to 48 hours that the monies are held in
the Ten50Six Life bank account.
·
Ten50Six Life did earn some rebates on assets held in
respect of two umbrella funds administered by Ten50Six Funds Administrators, a
retirement fund administrator acquired by Glenrand MIB in 2004. The intention
behind such rebates has, however, always been that the rebates would be earned
as repayment for the umbrella fund expenses that had been sponsored by the
sponsoring administrator. Where any discrepancies are found between the rebates
earned and the expenses sponsored, such difference will be refunded to the
umbrella funds concerned.
·
Consultants’ Commission: No commissions are paid to
consultants in the services of Glenrand MIB for business place with any of the
various services provided by other divisions, such as trusts or housing loan
administration. No additional administration fees are levied where home loan
administration is placed with other service providers in the industry.
·
No commission is paid to consultant in respect of asset
consulting. This practice was terminated in 2005. Prior to that, consultants
earned 6% of the total asset consulting fee paid to Ten50Six Life, i.e. a
maximum of 6% x 0.25% = 6.615% of asset transfer. The fee was taken from the
total fee paid by the client and not levied as an additional fee.
·
Glenrand MIB does have an asset consulting division. Asset
consulting fees are on a sliding scale, the range of fees is between 0.12% and
0.25% per annum. The maximum fee earned is 0,25% per annum.
o
Fees are explicitly disclosed to clients.
o
Glenrand MIB does not take any further revenue other than
the asset consulting fee earned on assets held on the Ten50Six Life balance
sheet.
o
The exact cost from the underlying asset managers is passed
on to the retirement fund client. This is confirmed to the client in the
application form that is signed prior to investment.
o
Glenrand MIB earns no additional fees from the asset
managers, nor does it pay any fees to asset managers.
8. Future
Practices
Glenrand MIB has, ahead of this
FSB investigation, commenced with a revision to our client servicing and
costing model. This includes a move
towards earning income strictly by way of explicit fees agreed with clients and
doing away with other forms of remuneration such as commission. It is the
intention of Glenrand MIB to continue with the bulking of retirement fund
monies. However, Glenrand MIB will with effect from 1 July 2006 cease to share
in any of the additional bulking income.
Fees charged in terms of our SLA will be inclusive of this service to
clients.
9. Conclusion
Glenrand MIB has submitted to the
FSB as a preliminary report as the first phase in complying with the General
Circular issued on 24 March 2006. The following steps need to be completed in
order to produce a final report to the Financial Services Board:
§
Final verification of calculations produced by Standard Bank
and Nedbank in respect of bulking of fund bank accounts by clients;
§
Independent review of these findings by PwC;
§
Discussion of PwC report with the FSB;
§
Agreement with the FSB of any process of redress that they
believe is necessary;
§
Discussions with the relevant management boards regarding
possible measures in which to make redress to such funds, where necessary.
Glenrand MIB welcomes the
opportunity to engage formally in meetings with the FSB on the findings
contained in this report.
GREG
MORRIS DALENE WILLEMSE
CHIEF
EXECUTIVE OFFICER LEGAL MANAGER
[1] 1921 AD 168 at 177 – 178, recently reaffirmed in Phillips v Fieldstone Africa (Pty) Limited and Another 2004 (3) SA 465 (SCA)