Edition: Dec 2013 - Feb 2014
Editorials

FUND ADMINISTRATION

A nightmare situation reaches its peak

Adjudicator ruling to be challenged on who’s to pay for the reconstruction of funds’ databases. Trustees say that the R20m should not be from their pockets.

Still want to be a pension-fund trustee? Then read on.

There’s this longstanding saga of the defined-contribution IF umbrella pension and provident funds whose trustees are in a dispute with the Pension Funds Adjudicator. Predictably, it now goes to the High Court (TT Sept-Nov).

Gail le Grellier, Renier Botha, David Lepar and Carel Smith – all trustees when the decision was taken to rebuild the funds’ databases – are appealing against a determination by the Adjudicator that they personally pay the rebuild cost, put at R20m but perhaps considerably less. Now they’re the applicants for a court order to set aside the determination and to substitute it with an order dismissing the complaint of the funds’ participating employers.

There are certain legal points around ownership of fund assets. They go to the heart of the argument that the trustees had no right to debit the members’ credits for the rebuild. The trustees contend:

  • Under the Pension Funds Act, funds own assets in their individual names. This ownership is to the exclusion of fund members, trustee boards and participating employers;
  • Funds’ assets are monies contributed to the funds in accordance with fund rules. The monies are held in the funds, or invested in the funds’ names, for the ultimate benefit of fund members;
  • The exact rand amount held in the funds, for the benefit of a fund member at any given time, is known as the “fund credit”. A member’s fund credit is not an asset of a member or a claim by that member against the fund. The asset remains in the fund;
  • A member has no claim to any assets of the fund,or to his or her fund credit, while he or she remains a member. Only when the member exits, due to retirement or termination of employment, does a member become entitled to a share in the fund’s assets. That share is a member’s benefit, equivalent to his or her fund credit when he or she exits (less any tax or other deductions permissible in terms of the fund rules). 

In the IF complaint, there are two relevant periods. From January 2004 to January 2008, the funds were administered by Dynam-ique. Afterwards, they were administered by Aon.



Le Grellier . . . much at stake

Other significant dates are June 2010, when the four applicants decided on Aon’s advice to do the rebuild, and a few months later when they resigned as trustees. The rebuild went up to end-January 2008, exclusively covering the Dynam-ique administration period. Le Grellier and Botha had become trustees during this period. Lepar and Smith only became trustees during the Aon period yet are being held liable for what had happened earlier.

The complaint to the Adjudicator alleges that the applicants’ decision to rebuild was an improper exercise of their powers and duties as trustees, and that the complainants (a host of participating employers) may sustain prejudice through the funds’ maladministration. There was a supplementary complaint that the applicants had been reckless and grossly negligent in authorising the rebuild exercise.

Had the trustees acted improperly, recklessly and negligently? No, they vigorously respond; they did the opposite. In their application they point out, amongst other things:

  • The Pension Funds Act provides that a fund’s board of trustees has a duty to keep proper records and to ensure that appropriate control systems are employed “by or on behalf of” the board;
  • It would be impossible for a board to take every decision and to perform every act required. Boards commonly elect to delegate powers and duties to third-party administrators. Provided it’s permitted by fund rules, this is acceptable. The rules of the IF funds, registered by the regulator, permit such delegation;
  • The board is not entitled to abdicate its responsibilities so must supervise the administrator’s conduct of fund affairs.

When the applicants became concerned that the records held by the IF funds might not be accurate – that some fund credits could be overstated and others understated – they were not prepared to risk the funds’ continued operation on the basis of incorrect data. Having considered alternatives, they appointed accountancy firm Deloitte to reconstruct the funds’ records.

To have operated with inaccurate records would have been unlawful. The trustees would also have breached their duties under the Act to provide members with accurate benefit statements.

The rules, say the trustees, clearly authorised and permitted them to pay for the reconstruction costs in the manner that they did. In a previous appeal, the High Court had found against the Adjudicator’s first determination that the funds should not have deducted the costs from members’ fund credits and that these amounts be re-credited. (In this matter, the appeal by the funds – rather than the trustees – was upheld.)

They further say that they had used the assets of the fund to pay for necessary and legitimate fund expenses. There’s been no evidence to support allegations of maladministration or negligence by the applicants:

  • They were not responsible for having appointed Dynam-ique as the administrator. It had been appointed by the previous trustees;
  • When Le Grellier and Botha became trustees in 2006, there were already historic problems with the funds’ financial statements. These similarly fell within the domain of the previous trustees;
  • When the funds’ annual financials weren’t forthcoming, the applicants robustly interrogated Dynam-ique. They’d been given numerous undertakings that weren’t met;
  • In the circumstances, they’d acted reasonably by having engaged with Dynam-ique and given it an opportunity to rectify the problems. It would have been reckless for them abruptly to have dismissed Dynam-ique, especially at the early stage of their trusteeship when they didn’t know the nature and extent of the problems;
  • When Aon replaced Dynam-ique, they assisted Aon and acted as reasonably as could have been expected. 

It cannot seriously be disputed, they say, that under the circumstances the decision to carry out the reconstruction exercise was the only viable option. To pay a member a correct benefit, the funds must have proper records detailing the exact amount to which a member is entitled upon exit. To pay an incorrect benefit could never be in the interests of the funds or their members.

There’s no evidence to suggest that the work done by Deloitte, and the costs incurred for the rebuild, were unreasonable. And if it’s accepted that the rebuild was unavoidable – which, in light of the evidence, it must be – there’s no basis to believe that the costs would have been lower had the trustees appointed Deloitte earlier.

The outcome will be critical for all trustees, especially those having to make robust decisions when administrators fail their funds.

  • For the trustees, it’s a matter of how badly they emerge from their application to the South Gauteng High Court. If they lose, they’ll be jointly and severally liable for the cost of the rebuild plus the costs in going to court. If they win, even with a costs award in their favour, they’d still face hefty legal bills.
  • It also appears that the indemnity insurance cover held by the funds and their officers doesn’t assist the applicants. This is mainly because exclusions were introduced to the policies when the underwriters became aware of problems that had arisen during the Domin-ique period of administration.