Edition: June - August 2015
A storm breaks
Up to a billion rand could be spotlighted for possible distribution to members of numerous “dormant” pension funds. It depends on the outcome of an FSB investigation into whether registration of these funds had been improperly cancelled and, if so, into the extent that particular members have suffered “substantial prejudice”.
At last year’s annual conference of the Pension Lawyers Association, Financial Services Board deputy pensions registrar Rosemary Hunter caused a storm by presenting her views on why the closure of thousands of funds might have contravened the Pension Funds Act. But a storm in a teacup?
Perhaps yes; in so far as division was perceived at the time between Hunter and her boss, FSB executive officer Dube Tshidi who also serves as the registrar. Such perception might be laid to rest by the draft circular recently put out by the FSB on the way forward.
But perhaps no; in so far as administrators of the affected funds might take unkindly to the prospect of closures being reversed. At the time of last year’s PLA conference, Personal Finance reported: “Fund administrators are worried that they may now have to go back and revise all closed funds at considerable additional cost which cannot be recovered....Alexander Forbes says that the company had funded the closure of a great many of the dormant funds at a cost of between R10m and R15m a year.”
On the one hand, there was the deputy registrar (then newly appointed) saying that her office was investigating whether these funds’ members and former members had been caused “substantial prejudice” by the closures. If they were, she’d ask fund administrators to “fix the problem”.
On the other hand, in a media statement immediately afterwards, Tshidi appeared to defend the methodology for the closures. He said that there was “no question of the FSB revising each and every closure of orphan funds over a period of almost 20 years unless in circumstances where (material) prejudice was shown to exist”.
Nevertheless, he “took seriously” the opinion from senior counsel on which Hunter had based her remarks. He also spoke of the need to consider whether legislative amendments were required. However, he didn’t explain what he meant. Some had taken it to infer that, assuming senior counsel was correct, he’d prefer retrospective changes in the law to legitimise the FSB-approved closures.
Hunter . . . rebel with a cause
During the year that followed, uncertainties mounted. Now the draft circular – issued under Hunter’s designation -- provides the platform for the controversy to be thoroughly argued. It sets out the approaches of the registrar to the governance, the disposals of assets and liabilities, and the registration cancellations of funds “for which it is impossible to establish a board properly in terms of the rules of the fund and the applicable provisions of the Pension Funds Act”.
The practical nitty-gritty is formidable because of the sheer volumes. In recent years, thousands of fund registrations have been cancelled. The monies involved amount to rands topping tens of millions, possibly hundreds of millions, transferred by administrators to their unclaimed benefit funds. There they’ve sat, unallocated to beneficiaries but nonetheless drawing fees for administration and asset management.
How to establish which funds have been properly closed and which haven’t? Or precisely which members and former members might have suffered “material prejudice” by the closures? Or whether all “reasonable steps” have been taken to trace beneficiaries?
What if they haven’t? And if they can’t be traced, how long a time period should elapse before the outstanding balances are put to better use? Like where? And at what point does prescription kick in on claims from members and former members?
Setting out the circumstances in which numerous funds became dormant or shell, the circular points out that over the past 20 years there’s been a significant reduction in the number of active funds. Many had shifted from standalone to umbrella arrangements: “Unfortunately, in many cases, after the assets and liabilities in respect of in-service members of these funds have been transferred to other funds, such as umbrella funds, their old funds have been left without boards of management.”
This meant that there were no people able to act as the “directing minds and wills” of the funds in making such decisions as the apportionment of actuarial surpluses, remuneration of service providers and repayments by service providers of ‘secret profits’.
Numerous other recommendations are put forward to ensure that boards are properly constituted. But where a properly-constituted board can’t be established for a dormant fund, to give it “directing mind and will”, it’s proposed that the Registrar applies to court for the appointment of a curator. To save on costs, “bulk curatorships” are envisaged where a single curator can be appointed for several funds.
Finally, all this is conditional on “substantial prejudice” being found to exist. Once found, either in the course of the registrar’s investigation or when brought to his attention, there should be steps to remedy or mitigate it. It’s proposed that the registrar may then:
The implication is that the registrar will be prepared to conduct the necessary investigations. There’s no saying how many hundreds or thousands of funds will need to be investigated. This will obviously take time, and come at a cost (to whom isn’t clear), but it goes to the heart of the FSB’s public protection function.
The 42-page circular is comprehensive, inclusive of answers to anticipated questions. Nevertheless, affected administrators have the opportunity to punch holes in it. Challenges to the senior counsel opinion, which sparked the furore in the first place, cannot be ruled out.
The most sanguine scenario will be one in which all parties, including the FSB, are seen to place foremost the interests of fund members and former members.