Issue: December 08/February 09
A few hundred billion here and there
Investec might yet rue the day it bought the Fedsure business to help save it. ROB ROSE reports on the largest action ever brought by pension funds to the courts.
What, if anything, could or should the Financial Services Board (FSB) be doing proactively to protect members and pensioners of the 13 trade union-associated retirement funds that have launched a R3,9bn claim against Investec Employee Benefits?
Their concern is that, should they ultimately win the award, there won’t be sufficient monies in IEB to pay it. According to financials for the year to end-March, IEB has a net asset value of R3,4bn. This is R500m less than the present amount of the claim. The amount is likely to rocket at compound interest by the time the matter is resolved, perhaps not much before 2013.
Dennis Fine SC, for IEB, argued that the company was factually solvent to the tune of R3,4bn: “It is not necessary to include any contingent liability in the measure of factual solvency.” Having made a R740m profit in the past year, IEB paid Investec R1,3bn in dividends, which the funds have described as “stripping”.
The preliminary skirmish, before Justice Joffe in the Johannesburg High Court during November was an attempt by nine of the 13 funds to prevent the transfer (under s37 of the Pension Funds Act) from IEB to Capital Alliance of their R13,8bn in assets. The funds contend that the transfer from IEB will thwart execution of a judgment in their favour.
Now owned by Liberty Life, Capital has been administering the assets for the past seven years. The R3,9bn in the curtain raiser balloons to R13,8bn in the test match through a labyrinth of actuarial calculations.
The main dispute arises from returns that were “guaranteed” when the funds’ monies were invested with Fedsure. The troubled insurer, with other investments such as Saambou failing, had not declared bonuses on the “guaranteed” products in 2000 and 2001.
Take the Electrical Industries Pension Fund of KZN, which had a policy for 22 000 members with Fedsure since 1977. Although the fund was paid R88,8m after cancelling its policy in 2003, it calculates that it would have received R134,7m if Fedsure had “properly managed its investment duties”. So it alone is claiming R45m.
Other funds have a similar story. What especially galls them is that, despite the zero bonus to policyholders in 2000, Fedsure nevertheless declared a dividend to its shareholders.
IEB has been sucked in because Investec bought the ailing Fedsure in 2001. The funds want the FSB sucked in too.
Gary Rademeyer, attorney for the funds, wrote a 22-page letter to the FSB in September. He bemoaned the FSB’s hands-off approach: “We consider that non-payment of any judgment in favour of the funds (by virtue of insufficient assets remaining in IEB) may be publicly perceived to be as a result of insufficient protective steps having been taken by the FSB.”
Rademeyer said he was “surprised” that the FSB didn’t file any affidavits. It created “the inference” that the FSB supported Investec. He pleaded for the FSB to “urgently advise the funds what the FSB intends to do to protect the funds’ members and IEB’s remaining policyholders”.
FSB deputy executive officer for insurance Jonathan Dixon responded. He said that, while the FSB was “monitoring” the litigation, the funds’ position would not be undermined if the transfer of assets to Capital Alliance went ahead as there would be no effect on IEB’s capital.
Dixon believed that the present application was “extraneous to the main litigation”. These were matters for the court, not the FSB, to adjudicate.In an interview, Dixon added: “It’s not as if we’re hands-off. We’ve been actively engaging with IEB and will continue to monitor closely the ability of Investec to meet the claims in the event that the funds succeed in their action. We’ve been provided with certain assurances. They have given us comfort.”
In October, Dixon had met IEB chief executive Ciaran Whelan to discuss this issue. IEB then issued a statement that seemed to suggest the FSB would be happy for the s37 transfer to proceed.
Clearly angered, FSB chief executive Dube Tshidi wrote to the funds. He assured them that the FSB had “informed Investec of our extreme displeasure that they chose to issue a statement on these discussions in which they presume to speak on behalf of the FSB”. His letter noted that the IEB statement “is not a completely accurate reflection” of what was said.
Pointed out Dixon: “We didn’t say we were happy. We only said that we’d get back to them”.
Two days later, the FSB informed IEB and the funds that it wouldn’t be intervening. This was because the FSB didn’t think the s37 transfer of assets to Capital Alliance would have any effect on the claim for recovery.
Justice Joffe indicated that he’d decide within a matter of weeks on the transfer application. Meanwhile, the wheels of justice grind slowly. If fund members and pensioners are found to have lost money as far back as 2000, they’ll have to wait years to see it.
May they all still be alive to enjoy their retirements, more comfortable or less uncomfortable.
Meanwhile, the wheels of justice grind slowly. If fund members and pensioners are found to have lost money as far back as 2000, they’ll have to wait years to see it.