Issue: December 08/February 09


Bulk complaints

They seem never to go away. Two Adjudicator determinations are two steps nearer finality.

As everybody knows, or certainly should by now, it’s unlawful for fund administrators to take for themselves profits secretly accrued from bulking the cash deposits of retirement funds. In unrelated complaints on the subject, the brouhaha moves closer to clarity:

Dollman v Irvin & Johnson Retirement Fund/NBC
A former member of the I&J fund complained that NBC, the fund’s administrator, had unlawfully made a secret profit through bulking. The fund’s trustees had ratified this NBC profit. Dollman, who had retired, contended that the trustees were not entitled to have ratified it and that the entire profit should accrue to the fund.

When the bulking controversy hit the headlines, NBC advised the fund that it had retained a portion of the interest earned on the fund’s cash as a fee for its cash-management service. In discussion with the fund, NBC indicated that it would repay the fee should the trustees wish. The fund agreed that it had benefited from this service, although it was unhappy about the lack of disclosure, and proceeded to ratify NBC’s conduct.

The trustees believed they had authority to do this. It was a commercial decision. Without the cash-management service, no higher interest would have accrued to the fund. Also, in relation to the fund’s overall financial position, that portion of profit would not constitute a material payment to all members.

Adjudicator Mamodupi Mohlala rejected this line of argument. NBC had to obtain the best interest rate for the fund. Its retention of some 10% of the interest on the cash account, without the fund’s consent, was wrongful.

Analysing trustees’ fiduciary duties in detail, she held that they would need exceptional reasons for refusing to enforce an acknowledged debt. There was a dichotomy in the fund’s response where it had tried to argue that NBC deserved to earn the fees, but was not entitled to retain the monies.

She was not convinced the trustees acted in the interests of the fund or its members and found they had exercised their discretion improperly. The trustees’ decision to release NBC from its obligation to pay the undisclosed profit was set aside and the money had to be paid to the fund at 15,5% annual interest.

Milton v Bidcorp Group Pension Fund
Essentially, Milton was trying to establish whether he might have been prejudiced as a member of the fund by the bulking previously practised at Alexander Forbes. This was notwithstanding the R364m paid back by Forbes to affected funds and the R2,4m accepted in settlement by the Bidcorp fund.

The trustees explained that they had taken all reasonable steps to ensure satisfactory banking arrangements were secured for the fund by Forbes. The fund argued there had been no wrongdoing on their part and, when they became aware of the secret profit, they acted to recover it. The fund could decide whether and how to distribute the settlement amount.

The Adjudicator stated that it was difficult for a member to complain against an administrator, as it is almost impossible to prove actual financial loss. Complaint should rather be against the fund, alleging either that it had failed to recover secret profits due to it or that utilisation of the settlement amount was unreasonable.

It was held that Milton had not shown the trustees to have recovered less than what was owed by Forbes, or that they had failed to take reasonable steps adequately to protect the fund and members’ interests.

There were difficulties for funds in deciding how to distribute settlement amounts, she noted, but inaction by the trustees could amount to maladministration. She ordered the fund to exercise its discretion on the distribution within eight weeks.

She also advised complainants to avoid unrealistic expectations on the effect of the settlement amounts on individual members’ investments.