SA’s twisted history of pension fund plunder

South Africa has a grimy history of companies raiding their pension funds, and the fear is that two recent court cases, which found in favour of the pension fund trustees, will do little to curb the practice.

The first case, involving two pensioners against the Tongaat Hulett Pension Fund, wound its way through the lower courts to the Supreme Court of Appeal (SCA), only to be defeated on what the vanquished pensioners regard as a poor understanding of the law by the judges. They were denied an opportunity for review at Constitutional Court (ConCourt).

Proceed to Source : MoneyWeb

The second case involved Rosemary Hunter, former deputy pension fund registrar at the Financial Services Board (now called the Financial Services Conduct Authority), against the FSB over its attempts to deregister funds that still had assets owing to former employees. She too lost her case in the ConCourt, principally on the basis that the court assumed the FSB had competent and responsible people running it, and had investigated a few funds (less than 20%) that had been deregistered as part of the FSB’s cancellations project.

Both cases ended up in defeat at the ConCourt, with no further avenues of legal redress available to the applicants. But the findings of the judges in favour of the pension fund trustees and regulator should be a cause for concern for employees, past and current, with claims to a share of actuarial surpluses or other assets sitting in pension funds of which they are members.

The Tongaat Hulett pensioners, in a recent missive to the 54 fellow pensioners that supported their legal fight, spell out several false or erroneous findings they believe were made by the judges who heard their case.

They claimed in their court papers that the trustees were able to deceive the courts by mislabelling R1.43 billion in contingency reserves as “excess assets”, a term not found in the Pension Funds Act. “Assets in contingency reserve accounts” – a term that is defined in the act – should be shared among the members when they are no longer needed to provide for contingent liabilities. It is at this point they become an actuarial surplus. The pensioners argued that by renaming these assets as something else, the trustees, who by law must balance the interests of employees and the company, were able to divert funds away from the members to the company.

The “excess assets” in the Tongaat case referred to the actuarial surplus plus reserves. The SCA was satisfied this was clear enough and “in order to ensure the continuing solvency of the fund, the employer had to carry the balance of the cost”. The decision to apportion these assets as it did was therefore reasonable, found the court. It was legal, said the court.

Letter of the law

But was it moral? Bruce Moor, one of the applicants in the case against the Tongaat Hulett Pension Fund, outlines what the loss of the case means in financial terms: of the R800 million “future actuarial surplus” in the fund at 2012 valuations, R107 million will go to the members and R693 million to the company. The pensioners had argued that a proper application of the intent of the law would probably have given them a 50:50 split, or R400 million. The actual fund rules allow for 80% of actuarial surpluses to go to members and 20% to the company, but by applying this to “excess assets”, the employer managed to grab three quarters of the actuarial surplus, says Moor.

The losers in this case must also pay legal costs of some R680 000 to the winners. The costs would have been about R500 000 higher had the pensioners’ lawyers not taken the last leg of the case on risk. In Rosemary Hunter’s case, she at least got off with no costs awarded against her, largely because she waged her fight in the public interest. However, she had to carry her own litigation costs, even though she did not stand to benefit financially from the court’s decision.

The prohibitive cost of fighting these cases against deep-pocketed adversaries will not be lost on others contemplating a similar legal challenge.

Before 2001, there was robust debate as to who owned surpluses accumulated in pension funds – the company or the beneficiaries. Many employers claimed these surpluses as their own, particularly in defined benefit or so-called balance of cost funds, since they could with some moral authority claim that they had carried all the risks. If the market went down, they still had to cover the fund’s liabilities. The law was sufficiently vague to encourage several employers to plunder their pension fund surplus assets without any legal sanction. Several billion rands worth of surpluses were snatched away from pensioners through this self-serving interpretation of the law.

Looting

In 2001 the law was changed to curb this looting by companies. The Pension Funds Act was amended to set rules for the allocation of surpluses. Where no fund rules on apportionment existed, it was up to the board to determine the split “taking into account the interests of all stakeholders in the funds”, with neither the employer nor the members having any right of veto on such decisions.

One way to get around this is to load the board with docile members, which is precisely what the Tongaat Hulett pensioners claim happened in their case, though this was refuted by the company (the SCA agreed, and found no proof of bias on the part of the pension fund board).

Another way to get around the law is to transfer members out of the fund at the lowest possible cost and then wind up the fund, grabbing whatever surpluses remain. This is also a way to circumvent the Pension Fund Act’s surplus allocation rules. This is what the Tongaat Hulett pensioners argued in their case. In Hunter’s case, the ‘grabbers’ were the fund administrators, who exploited the fact that the funds did not have trustees. The FSB was willing to give the administrators the power to decide what to do with the remaining assets, even if this was not necessarily in the interests of the members or beneficiaries.

The ConCourt’s decision to dismiss the appeal of the pensioners is disquieting in many respects. Cora Hoexter, a law professor at Wits University, writing in the Constitutional Court Review about Mark Shuttleworth’s attempts to challenge the R250 million in ‘fees’ deducted by the National Revenue Fund for transferring R2.5 billion of his wealth abroad, notes that only the wealthy are likely to lose sleep over the ConCourt’s decision to support this outrageous exit charge.

The Shuttleworth case was about the merits of exchange controls. In Shuttleworth’s case, the ConCourt “tolerated constitutional breaches that it had not hesitated to strike down in other contexts”, writes Hoexter. A billionaire emigrant was not the sort of applicant likely to elicit empathy from the court.

Pensioners and fund beneficiaries in these two cases may feel the same lack of love from the courts.

Fund managers and their fees

The growing international popularity of tracker funds helps to explain why SA investors are paying more.

The SA fund management industry is sophisticated, professional, internationally adept … and expensive. The question is whether this expense is justified and if not, are the costs of investing the hard-earned cents of retirees coming down?

In some ways, the second part of the question is the easiest to answer; costs are coming down and respectably fast. Part of the reason is that the SA industry is tightly bound to trends in the international industry, and the megatrend internationally has been a drop in the cost of investing.

Proceed to Source : BusinessLive

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Rot is killing jobs

The Financial Planning Institute will shed staff through a retrenchment process following the shutdown of its exam unit, which is being investigated because of suspected corruption.

The institution, which is being probed by the Financial Sector Conduct Authority (FSCA), has told its staff that it will be undergoing a retrenchment process.

The institute did not know how many people would lose their jobs. But, it said, the exam section would be closed.

Proceed to Source : Fin24

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Why Novare blew the whistle on the Municipal Councillors’ Pension Fund

Financial service providers have a legal and moral obligation to act in the best interests of the members of a fund.

Successful whistle-blowing efforts are vital in the financial services industry, and all role-players have a responsibility to act should an entity fail to effectively implement regulations and damage the integrity of the industry.

Financial service providers (FSPs), fund advisors, investment consultants and boards of trustees should each act in the best interests of the members of a fund. Pension funds are especially critical to ensuring the financial prosperity and support of many South Africans. It is therefore unacceptable to abuse this asset in any way, mismanage it and not do everything in one’s power to protect other people’s hard-earned money.

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Municipal pension funds looted

Johannesburg – Shocking widespread corruption, fraud, theft and mismanagement of hundreds of millions of rand at the Municipal Councillors’ Pension Fund (MCPF) has been referred to the Hawks by its curators. It has also emerged that the Financial Sector Conduct Authority (FSCA) blocked the SA Local Authority (Sala) from investing some of its R16billion assets in four companies, after it discovered that proper risk assessments were not conducted. Sala has about 20000 members, who are municipal workers.

Among the dodgy and highly irregular transactions MCPF curators Juanito Damons and Thabang Kekana have reported to the Hawks are the purchase of 11 vacant stands in Klerksdorp, North West, from Isago@N12 Development for R120m, and MCPF’s strange decision to pay about R17m in VAT for the deal, despite the properties being registered in the fund’s name.

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Plans to stop financial advisers ‘double-dipping’

Relationships between investment managers, advisers and platforms leave you open to being given conflicted advice and paying fees that do not match the services you enjoy.

They have also left the new financial services regulator scratching its head over how to define and regulate investment managers and investment advisers, to determine if they are independent and if they are charging for a service that adds value to your investment.

A dense Retail Distribution Review discussion document released recently by the Financial Sector Conduct Authority (formerly the Financial Services Board) gives an eye-glazing summary of the issues that bedevil the investment industry.

Proceed to Source : BusinessLive

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Voluntary retrenchment plan for public sector workers – Test for Default Pension Fund Regulations

Legalbrief Today recently commented as follows on a Business Day article:

Thousands of public sector workers over the age of 60 will be offered voluntary retrenchment as part of an effort by the government to cut its salary bill. A Business Day report says the decision to offer voluntary severance packages – the first such offer in 20 years – follows the conclusion of a new three-year wage agreement last week that bust the budget by about R30bn.

Proceed to Source : Insurance Gateway

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Financial sector regulator zeroes in on credit life insurance

The Financial Sector Conduct Authority (FSCA), newly endowed with powers of resolution, has trained its sights on credit-life insurance.

In a first for SA, the FSCA may direct financial services providers to reimburse consumers premiums paid for products that have been wrongly sold to them or have delivered little value.

Proceed to Source : Business Live

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Amcu targets R7bn pension fund at Amplats

A R7bn pension fund is at the heart of a legal challenge by the Association of Mineworkers and Construction Union (Amcu) against the world’s largest platinum miner, Anglo American Platinum (Amplats).

Not for the first time, Amcu — a relatively new union and one which has grown quickly on platinum and gold mines — has demanded the transfer of pension and provident funds established by companies in these sectors into the Igula Umbrella Provident Fund, which it set up.

Proceed to Source : Business Day

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