Issue: Dec 2013 - Feb 2014
What the trustees’ and members’ eyes don’t see, the wrong pockets can gain.
Next time they sit down for coffee, here’s another agenda item for new pensions registrar Rosemary Hunter and National Treasury retirement-reform driver Dave McCarthy. It’s about the fees of asset managers being deducted from funds’ investment returns prior to the returns being added to members’ accounts daily or monthly, as the case may be.
The upshot is that, when this happens, members see the net return only after investment returns have been deducted. For example, the asset manager charges 70 basis points a year. It’s deducted from the net return as shown in the members’ accounts.
But, out of the 70bps, the manager could agree with the broker, administrator or consultant to pay say 15bps as commission for directing the business in his direction. In some cases, there’s an additional 10bps paid to the administrator or broker as a fee. This then goes to the Profit & Loss account of the administrator or broker.
Theoretically, the effect is a real investment fee of 45bps inflated to 70bps (45+15+10). Sometimes it’s not only in theory, observes a seasoned industry practitioner whose identity can be revealed with his consent to Hunter and McCarthy:
“I am aware of umbrella funds, where the asset manager and administrator are different divisions of the same company, not passing on to members the full bulk discount but retaining it for their own accounts. The bulk discount arises as the asset amount grows with the asset manager. The whole idea of an umbrella is to pass economies of scale down to the member level. This is not always apparent either.”
The additional 10bps leg could apply to any fund, not only umbrellas. For the full arrangement to be effected, he suggests, there must be some sort of collusive agreement between the asset manager and the service provider of which trustees aren’t necessarily aware. Certainly, in the case of umbrellas, the sponsor-appointed trustees should make a point of finding out the specifics of any such agreements that might be in place.
There is a blunt solution. It’s for asset managers uniformly to disclose to trustees the breakdown of their fees.
More evidence of South Africans drowning in debt comes from the FinMark Trust. The situation is getting worse. According to the trust’s latest survey, fewer people than previously are able to save and five million are over-indebted. This is almost 14% of the population older than 16.
Secured loans grew substantially, but were overshadowed by a doubling in the number of people with unsecured loans.
Match this with other institutional research showing that the great majority of people, on leaving a retirement fund, take as much cash as they can. When they’d have to leave R15 000 in the fund, the minimum required for preservation, the amount is less than the social old-age grant. It indicates that, amongst lower-paid employees, only about 20% will be affected by the reform proposals. This will take the heat off political resistance. It won’t enhance preservation or reduce the state’s burden.
In the small print
Especially before a general election, government doesn’t need the 1,5 million members and pensioners in the Government Employees Pension Fund to realise how the imbroglio over the suspension of GEPF principal executive officer John Oliphant can affect them. This is how:
The GEPF is a defined-benefit fund. It means that government, as the employer, must make good any shortfall in the pension promise to its members. This shortfall would arise in the event that GEPF investment performance falls short of its liabilities. So the make-good promise is therefore guaranteed.
But government’s obligation applies only to the minimum benefit. There’s also a discretion, exercised by the GEPF trustees, on annual inflation-adjusted benefit increases. So sub-standard investment performance – arising, for example, from the GEPF making investments likely to earn sub-standard returns in line with government interventions – would cause immediate deprivation to fund members and pensioners in the size of their annual benefit increases.
It opens a broader issue on whether the GEPF should continue as a defined-benefit fund, operating under its own law and outside the Pension Funds Act.
In the 1980s, largely under pressure from organised labour, there was a huge switch from defined-benefit to defined-contribution pension funds. Today, the overwhelming majority of funds are definedcontribution. They fall under the Pension Funds Act and are regulated by the Financial Services Board.
There’s no obvious reason that the GEPF should be any different.
Muvhango Lukhaimane and her team at the Office of the Pension Funds Adjudicator have done exceptionally well to slash the backlog in addressing complaints. But the latest annual report of the OPFA, for the year to end-March 2013, also discusses a worrying feature.
It’s that complaints lodged against a single fund, the Private Security Sector Provident Fund, comprised almost 60% of total complaints at the beginning of the reporting period. By the end, it was at about a third of the total.
“This situation is clearly untenable,” says Lukhaimane. “The OPFA is sustained by levies from members of all pension funds that are registered under the Act, and it is therefore unacceptable that a regulatory and compliance failure by the fund and its administrator is preventing the OFPA from engaging in other valueadding activities for the benefit of the pension funds industry, its members and beneficiaries as a whole.”
During the reporting period, 4 127 determinations were handed down. Slightly more than half granted relief to the complainant. There were 23 appeals lodged against determinations.
The purpose of the OPFA is to deal with complaints cheaply and quickly. When appeals go to the High Court, as sometimes they do, the purpose is undermined. Is there a way to deal with it so that aggrieved parties, be they funds or individuals or administrators, don’t have to choose between abandonment or expense and delay?
Diamonds in the dust
The annual report of JSE-listed Cullinan refers to legal action instituted against it and other defendants for R42m plus interest “in relation to the alleged unlawful withdrawal of pension funds surpluses...in respect of the pension fund established by the Company”. The pension fund is Powerpack, in liquidation, that had participated in the “Ghavalas option”.
Whatever the merits of the curator’s claim, the fund has so far received R108m in “settlement payments” that curator Tony Mostert had allocated to it. Since the fund now has no members and no pensioners, it would seem to have no beneficiaries for distribution of the monies.
If the fund has already been fully compensated by the “settlement payments” for any alleged loss, then it could only be former members possibly in line for an additional windfall.