Issue: November/December 2005
ILL WIND FOR INSTITUTIONS
Ngalwana blows hot on the sore spots. In an address to unions, he pinpointed changes into which he believed the retirement-fund industry should be pressured. More power to trustees and less to service providers was his message. They'll have to take heed because, with government backing, there's a certain inevitability.
One hurricane follows another, the second more awesome than the first. For all the force of waves so far caused to the life-assurance industry by Pension Funds Adjudicator Vuyani Ngalwana, they might be less threatening than the waves still to come.
The first waves have been in the flow of determinations against life offices that administer retirement-annuity funds. The second, if and when they come, can smash the established dominance by one-stop service providers of the retirement-fund industry as a whole. The gamut of overlapping sales, administration, insurance, actuarial and asset-management packages will be in their wake.
To arise from the debris will be a stronger role for trustees and, to be hoped, better benefits for fund members. Theoretically, promise of blue sky is in the potential for lower costs by breaking the incestuous relationships that tempt fee abuse. Realistically, there is the undertone of a power struggle over ultimate control of some R1 trillion in retirement-fund assets.
Indications of the second storm are ubiquitous, and none more so than by comments of Ngalwana to an October conference of the Cosatu, Nactu and Fedusa trades union federations. Perhaps fortified by the public support from Finance Minister Trevor Manuel, in response to an intemperately-worded attack on him by the Life Offices Association (LOA), Ngalwana is seen to be stepping from his narrow function as an ombud to the much broader leadership of debate on retirement-fund reform.
In this flare-up with the LOA (see box), Ngalwana enjoys the backing of Manuel and the trades union movement. He also has wide popular, if not populist, consumer support. The life offices have been made to look reactive and defensive of business models too slow to adapt. Keeping their heads below the parapet are empowerment partners introduced by respective life offices and multi-service operations to add sustainable value; people such as Gloria Serobe at Old Mutual (who also chairs the LOA), Patrice Motsepe at Sanlam and Cyril Ramaphosa at Alexander Forbes.
In his address to the unions, Ngalwana began gently enough. Many member-elected fund trustees, he told them, had either no capacity or no space to render the services of a trustee. At the same time, under the "one-stop" approach, many funds were administered by life companies that presented themselves as experts. As a consequence, taking these features in combination, trustees were inclined to defer to the experts.
"This is cause for serious concern because it gives these life companies blank cheques to run the funds as they see fit," he argued. "As the companies must make money for their shareholders, they'll do just that."
Accordingly, their impartiality was questionable and they faced a "serious conflict of interest" in that "the experts must make good returns for shareholders on which their own bonuses depend". Worse, trustees of all retirement-annuity and umbrella funds were not even nominally independent but employees of the administrators.
Then Ngalwana really got into his stride. It was not legally possible for trustees to delegate their fiduciary duties, no matter how expert the administrator. The reason South Africans retired with insufficient savings, he said, was that trustees didn't properly exercise their fiduciary duties. Instead, they rushed to expensive experts. This would continue happening "unless trustees are held liable in civil suits for members' losses".
His advice? "All the money spent on life companies should rather be spent on trustee training. There is merit in having professional trustees, but one size doesn't fit all. The trustees on each board must be trained on the intricacies of its rules. This will be expensive, but it's important to do things right."
In his experience, from the numbers of people walking into the Adjudicator's office only because they wanted somebody with whom they could talk, trustees and administrators employed by them did not communicate effectively with members. "The arrogance of administrators, particularly the life companies, does not help. They believe they're right and to hell with everybody else."
That "a staggering 67 percent" of complaints resolved by the Adjudicator in a year related to general fund administration, showed that there was poor communication on how benefits were calculated and in administering them.
"If so many complaints involve issues contracted out to life companies, what's the value in paying for them?" His recent determinations in Davel v Old Mutual and Walters v Momentum (see box), taken with his comments to the conference, push the envelope of related recommendations in the first draft of National Treasury's discussion paper that:
The first of these recommendations falls short of addressing the issue, raised by Ngalwana in the Davel case, that the Adjudicator lacks jurisdiction to investigate complaints concerning endowment policies. The common thread of complaints on retirement annuities and endowments related to the "unconscionable" issue of paid-up values, yet there was no tribunal with powers similar to the Adjudicator's that could address complaints on endowment policies.
"It is indeed a pity that (the Adjudicator's) tribunal cannot come to (Davel's) assistance," held Ngalwana. "All the more pity that the reach of the Long-Term Ombud's powers should be circumscribed in such manner that there is virtually no recourse for persons in (Davel's) position other than the courts. This, in my view, is reason enough for the legislature to set up an office, similar to this, with wide powers in terms of the Long-Term Insurance Act."
The second recommendation opens a can of worms. It highlights kickbacks, usually undisclosed to trustees, which administrators receive for "bulking" services at wholesale rates. There is justification in that smaller funds could not individually obtain lower rates. But there is no justification for the administrator to pocket the difference as a secret profit.
As attorney Jonathan Mort argues: "It is legally permissible for an administrator to receive the rebate for its own account provided this is with the permission of the trustees of a retirement fund. As such a rebate belongs in law to the retirement fund, there must be a basis for the trustees to give permission. It can only be properly given if the rebate serves to reduce the amount the fund would otherwise be obliged to pay the administrator for the charges agreed. The administrator must disclose to trustees the precise amount of the rebate because that rebate belongs to the retirement fund or because it serves to reduce the charges to the administrator."
In a paper to the Pension Lawyers Association earlier this year, Rosemary Hunter focused on some other areas of abuse. Among them were the widespread practice of consultants playing the dual role of salespeople. It became difficult for them honestly to say that the product, service and price were necessarily in a fund's best interests when at the same time the consultants were "often instructed to maximise the profits of their multi-service employer by selling their employer's products or services".
The third recommendation starts breaking the incestuous relationship of services by one-stop providers and a mechanism used to control retirement funds. Were trustees properly to exercise their fiduciary duties, it is they and not service providers who should have control – whether of umbrella funds or any other.
Take it that Ngalwana isn't simply shooting the breeze. Sailing with the wind of public sentiment and policy, which the legislature can always accommodate, he's calling the next hurricane to hit institutions' supposed Chinese walls. Retirement-fund service providers can batten down the hatches. Or they can abandon what previously passed, usually unnoticed, as acceptable industry practice. Either way, they'll be pressed to make as much hay as when the sun shone.
BULL SHOWN RED RAG
RARELY is there a tense situation that can't be inflamed. The "demand" by the Life Offices Association (LOA) that the Pension Funds Adjudicator (PFA) retract statements about R2,1 million a year being "lost" by policyholders to life companies being unable to maintain premiums, provoked an equally fiery response from Finance Minister Trevor Manuel.
The result is a stand-off between institutions entrusted with the nation's savings and authorities responsible for overseeing them. There has been no retraction, for which the LOA called. Neither has there been a break in LOA ranks, for which the Minister called.
In drawing battle lines, the LOA comes off second best. It's a battle it cannot win because government makes the laws. The LOA has put its stake into the ground on the PFA, and Manuel has left no doubt as to where government stands on the PFA against the LOA. It hardly enhances an environment conducive to amicable negotiation over retirement-fund reform where both are the key players.
Manuel's endorsement also strengthens the role of the PFA from a strictly confined judicial tribunal to a body "tasked with the protection of consumers", as he now defines it. He's on the side of "equity and fairness" with which the LOA, he contends, has given the impression of not being concerned.
With little sense of diplomacy, the LOA's frustrations came to the fore. Executive director Gerhard Joubert found it "incredible that the PFA feels he can pass judgment on an aspect of our industry over which, even he concedes, his office has no jurisdiction. And then he gets it wrong on top of that."
Unfortunately for the LOA, which needs to win hearts and minds, the coldness of its facts is eclipsed by the heat of its arguments. It's true that the PFA did not have jurisdiction to rule on endowment policies, which is precisely why he had to dismiss the complaint of M C Duval against Old Mutual and passed his recommendations up the regulatory chain of command. Watch this space, following Manuel's response, on how out of place these recommendations will be viewed.
It's also true that, because he had no jurisdiction, his comments about the "lost" R2,1 billion went unchallenged in the tribunal. After the event, the LOA produced a compelling argument as to why the PFA was wrong in his assertion – for example, that the surrendered policies included policies for risk products, meaning that those who surrendered were no longer insured for risk, not that they had "lost" their premiums; and that the R2,1 billion was not a gain for insurers but a reduction in annualised premiums as a result of the surrenders.
Joubert states: "To imply that these premiums have been lost to the insurance companies is simply ludicrous and displays a fundamental misunderstanding of how the long-term insurance industry operates." Putting in the boot with intemperate language is unlikely to win the LOA too many friends in high places, or low for that matter. In the public mind, as untested claims and counter-claims fly, there can only be confusion.
Another blow to insurers was in the PFA's determination for Brent Walters against Momentum. It raised an issue where, according to the PFA, "for the first time an insurer admits to rendering banking services to members of a retirement-annuity fund by granting unsolicited loans for purposes of repayment of commissions paid by the insurer in advance as remuneration to brokers who managed to prevail upon the member to join the retirement fund administered by the member".
Put simply, within two years the insurer recoups the broker's commission from an interest-bearing loan for which the client pays but doesn't know about. "This practice appears to be widespread among retirement-annuity funds administered by life insurance companies that pay commissions in advance and capitalise other future costs," says the PFA, who again reported it up the regulatory command chain.
Momentum disputes his comments. It says these costs have to be spread over the term of the product: "In the event of early termination, the recovery of outstanding costs is accelerated." Through the current imbroglio, there are several common threads. Glaring is the self-inflicted limitation of the LOA, and it members, to communicate in terms that will intelligibly and dispassionately inform. Surely, surely, this is sufficiently easy to correct.