Issue: September-November 2011
Editorials

COVER STORY

The multi-sided saga of surplus stripping

As one door in the controversy closes, others open. Allegations and counter-allegations continue to fly. The rich history grows richer with each new scrap. Prominent reputations, and many millions of rand in pension funds' money, are at stake.

It's been six years since the first of seven pension funds, involved in the so-called ‘Ghavalas option', was placed under curatorship. Since then there've been myriad court applications and mountains of documents filed. There's more still to come.

Acres of media coverage have tended towards the emotive, sometimes oblivious to arguments presented by those at whom fingers have been pointed and often creating expectations on the part of members of the affected funds that cannot be fulfilled.

The tone of one-eyed reporting is encapsulated in the official FSB Bulletin. It uses terms such as "vigorously endeavoured" (to describe the efforts of curator Tony Mostert and his team), "deliberately delayed by spurious defences" (to describe the behaviour of participants in the "stripping" scheme), and "architect of the evil surplus-accessing methodology" (in reference to erstwhile merchant banker Peter Ghavalas).

No doubting who're the good guys and who're the bad. No grey areas or context here. No mention of defences raised or arguments countered. The outcomes of numerous criminal and civil trials, ongoing or awaited, must obviously be slam-dunk.

Under the heading "At last pensioners and former members can smile", this particular article goes on to say that, following various settlements and plea bargains, 15 500 stakeholders in some affected funds will be paid out a total of R730m "within the next six months", a further R118m to surviving members and pensioners of the Mitchell Cotts fund "shortly", and the rest "will follow as soon as the apportionment schemes, already lodged with the FSB, have been approved".

Amidst all their smiles, the little word "stakeholders" might evade the attention of the funds' pensioners and former members. They'll be disappointed if they infer that R848m is earmarked entirely for them:

  • These are all defined-benefit funds, being the only funds where surpluses can accrue. Employers remain to be considered as stakeholders who might benefit when the surpluses are apportioned;
  • By mid-July, when the Financial Services Board supplied TT with details of recoveries to date, the amount for the seven funds looks to have totalled a slightly lesser R825m (see table). According to FSB deputy executive officer Jurgen Boyd, the money is being held by the curators pending their submission of valuation reports that the FSB must approve. Once approved, the curators can embark on the surplus-distribution process in line with legislation;
  • From the R825m must be deducted the recovery costs, significantly the curators' fees and legal expenses. Rounded off, they amount to R160m in fees and R40m in legal expenses. With the surplus apportionment perhaps due to employers, the cumulative fees of R200m (approximately 25% of recoveries to date) must be further deducted from the R825m.

A bone of contention expressed by Cadac executive chairman Simon Nash, so far the only person to stand trial over the ‘Ghavalas option', is that the fees arrangement incentivises the curator unreasonably to threaten litigation and pursue recoveries. The allegations made by Nash are somewhat stronger.

In all seven of the funds, the curator is Mostert who uses his own law firm assisted by counsel. He thus derives curatorship fees and benefits from legal fees.

Against this, without the efforts of Mostert's team and the FSB it is improbable that much would have been recovered; if indeed anything would have been recovered at all. Implicit in the contingency arrangement is the reward for risk – no recoveries, no fees; big recoveries, big fees – that Mostert was prepared to accept.

Let's now attempt, in the hope of offering perspective, to address a variety of the trickier questions. Answers to some are unavoidably speculative.

Who suffered loss from the stripping?

Not the fund members. In this sense, the stripping was a victimless crime.

Only defined-benefit (DB) funds can accrue surpluses i.e. amounts in the fund after provision for payment of members' contractually-defined benefits. A surplus can arise from a fund's stronger-than-anticipated investment performance, fewer-than-anticipated death and disability claims, or higher-than-expected employee turnover.

On the other hand, if the financial circumstances of the fund are poorer than that expected when the valuator determined what contributions the employer must make, and the fund is a ‘balance of cost' fund, the employer must contribute more. This doesn't apply to defined-contribution funds because the employer is off the hook and members receive benefits that correlate directly with investment performance.

So long as members of DB funds receive the defined benefits that the employer had promised, being a percentage of final salary for which the employer is responsible, any surplus apportioned to them is a windfall. And when employers are allocated portions of a surplus, they are arguably getting back what they should not have been required to contribute in the first place.

An element of the ‘Ghavalas scheme' was to ensure that members and pensioners, once transferred from the principal employer's main fund, would continue to receive their defined benefits (often with inflation-linked increases built in). This was done by buying annuities for them from a life office. Using part of the surplus for the annuity purchases, pensioners stood to receive higher benefits than provided by rules of the fund from which they'd been transferred (TT March-May '08).

What was the ‘Ghavalas scheme'?

As Jan d'Oliveira SC, prosecuting in the Nash trial, described it: "The Ghavalas option was designed to appropriate the surplus of a fund under the cloak of an outwardly lawful transfer of business from one pension fund to another. The aim of the stratagem was to achieve in an indirect and convoluted manner that which could not lawfully be achieved directly, namely a direct release of surplus assets from the fund to the employer and to third parties."

Kieswetter and Van Zy

Kieswetter and Van Zyl . . . rid of the bother

Unclear is why Ghavalas needed to embark on such a convoluted scheme, unless it was to be a dividend or fee-earning third party, when apparently available to the funds was a cleaner option for repatriating surplus to the principal employer. The funds themselves could have achieved the repatriation by simple amendment to their rules.

This is illustrated by a 2001 decision of the Financial Services Appeal Board. It found in favour of the Reckitt & Colman retirement fund that the Registrar was not entitled to refuse registration of such a rule amendment as inconsistent with the Pension Funds Act. He was entitled to do so only if a proposed rule amendment was to the financial detriment of the fund.

"In the absence of a power in the rules authorising them to do so, the trustees would be acting unlawfully were they to pay any portion of a surplus in the fund to the employer," the Board held. "However, should the rules of the fund permit such a payment, there is nothing either in the Act or the common law to prevent the trustees from giving effect thereto."

Where was the fraud?

Arguably, for it as yet to be entirely resolved, it was in non-disclosure to the Registrar of all the information he required to approve applications for the merger of respective pension funds. Because he wasn't told of certain cession agreements by which surpluses in the main fund would be paid to selected executives of the employer, once other employees had been transferred from this fund, he wouldn't have known the true purpose of the merger.

What difference would it have made, it can be asked, if the cession agreements had been disclosed? The Registrar might then have refused to approve the transfers, saying that the fund rules did not allow surpluses to be used for the benefit of anyone other than the fund and its members.

But the fund could then have adopted a rule amendment allowing for payment of surplus amounts to the employer or anybody else that the fund wanted to pay instead. Under those circumstances, the Registrar would not have been entitled to refuse approval of the transfers on grounds that the rules did not provide for them.

THE CREAM IN CURATORSHIPS

TT asked the Financial Services Board for certain details of all retirement-fund curatorships instituted over the past
10 years. It is thanked for this comprehensive response.

The seven funds involved in the ‘Ghavalas option' were those of Mitchell Cotts, Datakor (two funds), Cortech, Picbel Groep, Lucas SA and Sable Industries.

Name of Institutions Date of curatorship Curator(s) appointed Progress Fees paid to curator/ iquidator Legal fees and disbursements Bases for remuneration Monies recovered
SACCAWU 10 Sep 02 AL Mostert Ongoing R10 098 874 R11 910 597 Norms of legal profession R250 million was recovered from the realisation of various companies that had been acquired by SACCAWU's investment company (SIH) with the monies of the Fund
Mitchell Cotts Pension Fund 15 Mar 05 Al Mostert In liquidation R23 768 487 R8 823 377 Norms of legal profession until liquidation, after liquidation ito s28A(1)PFA (10% of assets recovered) R152 705 668
Datakor Pension Fund 21 Apr 05 AL Mostert
DJ Wandrag
SS Mphahlele
Ongoing R59 187 055 R8 318 544 Norms of legal profession – agreed with FSB on contingency fee arrangement of 25% of recovered funds – sanctioned by court order on 13/9/06. From 16/10/08: 25% limited to recoveries up to R140m, thereafter 16.66% curators/liquidators fee R261 565 049
Datakor Retirement Fund 21 Apr 05 AL Motert
DJ Wandrag
SS Mphahlele
Ongoing R6 141 947 R1 049 880 Norms of legal profession – agreed with FSB on contingency fee arrangement of 25% of recovered funds – sanctioned by court order on 13/9/06. From 16/10/08: 25% limited to recoveries up to R140m, thereafter 16.66% curators/liquidators fee R27 174 361
Cortech Pension Fund 21 Apr 05 AL Mostert
DJ Wandrag
SS Mphahlele
Ongoing R15 902 896 R2 068 815 Norms of legal profession – agreed with FSB on contingency fee arrangment of 25% of recovered funds – sanctioned by court order on 13/9/06. From 16/10/08: 25% limited to recoveries up to R140m, thereafter 16.66% curators/liquidators fee R70 161 919
Jacaranda Pension Fund 1 Jun 05 K Biggs Ongoing SAS approved, payments to members who could be traced, will apply for deregistration ±R60 000 None Norms of auditors profession N/A
Picbel Groep Voorsorgfonds 17 Oct 05 AL Mostert In liquidation R12 770 398 R6 985 701 Norms of legal profession – until liquidation, after liquidation ito s28A(1) PFA (10% of assets recovered) R97 008 640
Lucas SA Pension Fund 14 Feb 06 AL Mostert In liquidation R19 257 902 R6 459 690 Norms of profession – Norms of profession – liquidation ito s28A(1) PFA (10% of assets recovered) Escalated ito Oct 08 agreements to 16.6% R94 226 673
Prestolite Pension Fund 14 Feb 06 AL Mostert In liquidation R3 974 108 R20 986 Norms of legal profession until liquidation, after liquidation ito s28A(1) PFA (10% of assets recovered) Escalated ito Oct 08 agreements to 16.6% R13 979 907
Powerpack Pension Fund 4 Oct 06 AL Mostert In liquidation R23 895 371 R4 676 638 Norms of legal profession until liquidation, after liquidation ito s28A(1) PFA (10% of assets recovered) Escalated ito Oct 08 agreements to 16.6% R106 886 022
Sable Industries Pension Fund 20 Apr 06 AL Mostert Ongoing R23 651 656 R7 215 244 Norms of legal profession until liquidation, after liquidation ito s28A(1) PFA (10% of assets recovered) Informal arrangement of 33.3% in Aug 06, but this was replaced by Oct 08 agreement to 16.6% of recoveries even though Fund has not been liquidated R122 010 365
Command Pension Fund 10 May 07 S Padayachee Ongoing O/s contributions – No funds for litigation   None Norms of auditors profession N/A N/A
Cadac Pension Fund 22 Dec 11 AL Mostert Provisional Curator Extended until 6/7 Nov 11 Norms of legal profession Hourly rate @ R2 000 per hour, capped at R320 000 per month

Source: Financial Services Board

For all funds in the ‘Ghavalas scheme', the Registrar has always insisted that his approvals had been fraudulently obtained. Yet the certificates that he issued to authorise the transfers remain in force. They haven't been voided or set aside for illegality.

Retha Stander, senior legal manager at the FSB, explains: "Seven applications to review and set aside the relevant transfers, that had been authorised under s14 of the Pension Funds Act, were launched by the FSB during August 2009. These applications were opposed by Alexander Forbes in all instances and other parties in some instances.

"Following finalisation of the settlement negotiations between the curator/liquidator of the funds on the one hand, and (fund administrators) Alexander Forbes and Sanlam on the other, and the allocation of the settlement monies to the various funds during 2010, the withdrawal of opposition by Alexander Forbes to these applications was formalised."

Instructions were then issued to the FSB attorneys, she adds, to proceed with the review applications. They're due to be heard in the South Gauteng High Court on 20 September.

Why were settlements effected?

By far the largest settlements were with Alexander Forbes and Sanlam (TT July-Sept '10). Both had variously acted as administrators, Forbes of the Lifecare fund which was central to the ‘Ghavalas scheme' and Sanlam which had administered various affected funds. Over the years, both vigorously denied impropriety and illegality.

At the end of the day, however, the game was no longer worth the candle. A powerful influence in their decisions could have been a threat by the Registrar to use s13B of the Pension Funds Act against them. This section empowers the Registrar to withdraw or suspend the licences of fund administrators. It also allows him publicly to ‘name and shame' them.

Neither was an enticing prospect: financially, because fund administration is an important part of their business; reputationally, because it would have reflected adversely on their whole organisations that rely on public trust. To have ultimately settled, rather than confront the Registrar's wrath, was cheap at the price.

On becoming chief executive of Forbes, Edward Kieswetter explained that his most important motivation in settling was "to ensure what is right for the pensioners of the funds affected by surplus stripping".

In the 2010 Sanlam annual report, chief executive Johan van Zyl stated: "Fair settlements are usually only reached through protracted processes, often involving legal procedures and the involvement of independent outside experts." He emphasised the "moral duty to ensure that our staff, clients, shareholders and other stakeholders are treated fairly".

The settlements were accepted without admissions of liability. In total, Forbes paid slightly over R330m and Sanlam almost R340m inclusive of R56m in forfeited benefits under a policy ceded to it during the Datakor/ Cortech transactions. These amounts are way below those originally claimed by the curator, amid huge fanfare, and are doubtless cushioned by professional indemnity insurances.

Smaller settlements were reached with Ghavalas (R18,6m), the Baileys of Mitchell Cotts (R20m), Jan Pickard Jr of Picbel (R31m), the former Lifecare company (R60m) and the Lifecare group pension fund (R26,2m). There've also been a number of indemnities from prosecution that have been granted in terms of plea bargains.

One is with Ghavalas, initiator of the schemes. Having all along claimed that he wasn't guilty of a crime, he's now committed to explain why he was. He hasn't yet been called to give evidence in a criminal trial. Living in Australia, the amount he's paid in settlement is a fraction of the amount he'd made from the transactions.

What about defences?

One could be that there had been compliance with the letter of the law as it then stood, or at least as professionally-recognised advisors purported to understand it. They'd given the Registrar information they considered relevant for his approval of the s14 transfers, by implication the disclosure of supplementary information being considered irrelevant.

There has yet to be a judgment on whether fraud against the Registrar had been perpetrated by commission or omission. If there was fraud, by withholding material information from the Registrar, other defences fall away irrespective of the historic timelines.

All transactions under the ‘Ghavalas scheme' took place during the 1990s. Surplus-apportionment legislation was introduced only in 2001. Until then, ownership of surpluses was uncertain. Stakeholders had to negotiate their apportionments and no party had a right to them.

The scales weighed heavily in favour of employers, who controlled the funds, against members who had little understanding and would get nothing in the event of a fund's liquidation. The 2001 legislation introduced the concept of "improper utilisations" as well as the right of employers and employees to share fairly in a surplus.

In a 2006 test case, Justice Mynhardt held in the North Gauteng High Court that only "improper utilisations" subsequent to December 2001 (when the legislation was gazetted) should be taken into account for surplus-apportionment schemes. The Registrar lodged an appeal, later abandoned.

By an amendment in 2007, the legislation was made retrospective to January 1980. The retrospective nature of this amendment has yet to be tested for its constitutional validity.

In 2008 Justice Joffe declared in the South Gauteng High Court: "Prior to some substantial amendments brought about to the Pension Funds Act on 7 December 2001, it was not believed by anyone that pensioners had a right to any actuarial surplus . . . That amendment declared for the first time in our law that all actuarial surplus in the fund belongs to the fund."

This was consistent with a 1999 judgment in the Supreme Court of Appeal.

What's with the Registrar?

Correctly, FSB executive officer Dube Tshidi has taken a keen interest in the surplus-apportionment exercises; no less in the Ghavalas schemes. He's been free of any impropriety inferences until the Nash criminal trial when, under cross-examination, he refused to answer a question because "I do not want to incriminate myself as the Registrar" (TT March-May '11).

The line of questioning, by Willem de Bruyn SC for Nash, related to Tshidi's support for the appointment of Mostert as curator of the Cadac fund in the face of an apparent interests conflict. Mostert is curator of the Sable fund which has a claim against the Cadac fund.

Tshidi said that he'd prefer to answer on the return date when the High Court hears an application for the Cadac fund's curatorship to be made final. This will be in November when the FSB's nomination of Mostert as curator stands to be challenged.

Tshidi was also cross-examined on his founding affidavit for curatorship of the Cadac fund:

De Bruyn: Who drafted this affidavit for you? Was it your legal team or was it Mr Mostert?
Tshidi: My legal team.
De Bruyn: Your legal team drafted it?
Tshidi: Yes.
De Bruyn: Did Mr Mostert ever play a role in the drafting?
Tshidi: I talked to my legal team. I did not talk to Mr Mostert.
De Bruyn: That is not the question. Did Mr Mostert have a role in the drafting?
Tshidi: I do not know. I spoke to my legal team.

This cross-examination took place on January 28. The Cadac fund had been placed under curatorship a month previously, on December 22, the day after Tshidi had deposed to his affidavit. In TT's possession are transcripts of extensive conversations that took place during the preceding week, on December 15 and 16, between various members of the Mostert and FSB legal teams as well as attorney June Marks who had previously acted for the Cadac fund.

IN PRAISE OF MOSTERT

In his founding affidavit for curatorship on the Cadac fund, FSB executive officer Dube Tshidi stated: Mr Mostert was appointed by the Honourable Court as curator in all the similar matters and has to date been extremely successful in managing the affairs of those funds and retrieving the assets of which they have been deprived.

I respectfully suggest that expediency justifies his appointment in this case as well, as the same scheme was employed and the same principal architect (Ghavalas) of the scheme involved, in all these cases.

Mr Mostert was also appointed...as curator to the business of a number of other pension funds which more or less suffered the same fate. Remarkable success has been achieved by him in all instances....(He) has extensive prior knowledge and experience of matters relating to the history of these transactions. I have no hesitation in recommending...that Mr Mostert is eminently suitable for appointment in this case to the office of curator.

In an email to TT, Jean Polson of Mostert Attorneys stated: The hallmark of the ‘defence' of those involved in the Sable and Cadac pension fund matters is dissemination of false and defamatory information through the press in an attempt to intimidate the curator, the FSB and the National Prosecuting Authority.

It was with surprise to read in your June-Aug '11 publication the clear reference to the Sable fund, the curator and this law firm, perpetuating a known falsity that there is a 33,33% fee in Sable, when indeed it is of record in court proceedings and elsewhere such as the memorandum of understanding, that although the FSB had originally agreed to a total of 33,33%, this was never enforced by the curator and he and this firm had ultimately suggested a 50% reduction which equated to a mere 6,66% premium for the risk factor over and above the statutory 10%. This is a fact, which Mr Nash well knows, but exploits the situation by circulating the original letter reflecting the FSB's agreement.

Instead of the curator being commended for the success and despite a valid agreement reducing the fee while still taking the risk, he is vilified. This is most unfortunate and perpetuates a process of giving credit to persons accused of raiding pension funds, while misrepresenting the important role played by the FSB and the curators appointed by it.

[Editor's note: Curators are appointed under s5 of the Financial Institutions (Protection of Funds) Act. It says that the court "may make an order with regard to...the remuneration of a curator". There is no reference to a "statutory fee".]


JUDGES' RESERVATIONS

In several Ghavalas-related matters, applications for curatorships were brought ex parte (with other parties not being informed and thus being unable to put up defences) and in camera (not in open court). This happened with the Cadac fund.

In not all matters, which have been defended, has the curator come out on top. When Mostert applied in 2008 on behalf of six pension funds for Ghavalas' private company to be liquidated, Justice Joffe ruled against him because "it is manifest that winding-up proceedings are not appropriate for resolution of the dispute between the parties".

The judge had noted that the affidavits, particularly those filed by Mostert, "are replete with argumentative, hearsay and repetitive matter (which) obfuscated the true issue....The argumentative matter overshadows the evidential matter. It is repeated so frequently as to eventually assume the nature of evidence. It remains, however, what it is – argumentative matter with no evidential value at all."

Also in 2008, when Ghavalas applied for a provisional sequestration order (granted in his absence against him) to be reconsidered, Justice Satchwell said that she agreed with Ghavalas' counsel that "Mostert's founding affidavit is replete with unsupported hearsay, the admissibility of which he barely attempts at all to justify".

She regretted that the Mitchell Cotts pension fund, under curatorship, "will have to bear the costs of Mostert's precipitate action and outpourings".

The transcripts indicate the presence at these meetings of Mostert and Tshidi themselves, which TT invited Mostert to confirm. Jean Polson of Mostert Attorneys replied that, on an initial perusal of the transcripts, they appeared to be inaccurate in a number of respects.

"Insofar as the transcripts are a reflection of discussions, alleged to have taken place on 15 and 16 December 2010, disclosure of any portion thereof is subject to court ordered confidentiality and will be a breach of the court order made in respect of the Sable curatorship," he added. "In any event, and in addition, there should not be publication of matter not specifically referred to us for comment, if indeed publication is permitted."

Retha Stander of the FSB replied for Tshidi:
"Mr Tshidi believes that there is no discrepancy between what occurred on 15 and 16 December 2010 and his evidence during the criminal trial regarding the drafting of the founding affidavit in the application for curatorship in the Cadac Fund. Note, however, that in January 2011 the inspection of the Cadac Fund had not been completed and there was, at that stage, no final inspection report in the Cadac Pension Fund matter that he could have testified on.

"Mr Tshidi would like to put some of the matters that emerged from the tapes you refer to into perspective but is precluded by the sub judice principle from doing so. The criminal trial is ongoing and at the same time similar issues have been raised in the counter application in the curatorship application, which as you know is set down for hearing on 7 November 2011.

"Mr Tshidi will fully respond to any allegations, if necessary, in the relevant legal fora."