Edition: August/october 2018
Editorials

CURRENTS

Harsh action

Defaulting employers, be warned. Asset-seizure precedent in UK offers inspiration for tough measures in SA.

Jurisdictions abroad face many of the same enforcement problems as in SA with employers who don’t honour their retirementfund obligations; for instance, promptly to pay contributions to retirement funds. It’s on a similar principle that the Financial Sector Conduct Authority will doubtless look closely at a draconian UK move to seize the assets of employers who don’t pay their workplace pension fines.

In the UK the Pensions Regulator issues fines to companies that fail to meet their auto-enrolment duties and can obtain court orders when the debts aren’t paid. Now the Regulator will also appoint ‘High Court Enforcement Officers’ to enforce court orders on employers that have refused or failed to comply.

If an employer does not pay its debt, FT Adviser reports, the officers can visit the employer’s business premises. The officers, empowered to force entry into locked premises, can remove items to the amount owed. Items could include the employer’s vehicles.

Further, the watchdog will consider whether to prosecute employers that remain non-compliant despite court orders. Every three months it already publishes the names of employers that it has taken to court for non-payment of escalating penalty notices.

The regulator starts by issuing a fixed-penalty notice of £400 to an employer for failure to comply with a statutory notice or some specific employer duty. An escalating-penalty notice – which varies between £50 and £10 000 a day depending on the company’s size – is issued after the employer still hasn’t complied.

Handing the matter to enforcement officers then becomes the last resort.

In SA it’s understood that the FSCA has been looking at the possibility of fining the employer and routing the fine to the fund in compensation for arrear contributions. But because of legal constraints – in particular, the Registrar cannot penalise or act against the employer company as it is not a registered financial services provider – this option is not presently available.

Which doesn’t necessarily mean that it won’t be in the future. A little tweaking of the legislation, say to deem the employer company a financial services provider for purposes of fund contributions, could do the trick.

Changes in the air

For over a quarter of its 100-year history, Sanlam has produced its annual benchmark survey.

Long may it continue. A product of exhaustive and expensive research, this and its accompanying symposia offer a wealth of insight into the SA retirement-fund industry.

This year’s effort followed gazetting of the Financial Sector Code. Relevant to it, revealed by the survey, is that gender representation on trustee boards is split overwhelmingly in favour of males and often only one female holds a senior management position. To comply with the FSC, points out Sanlam Employee Benefits chief executive Dawie de Villiers, the industry “has a long way to go to create an equal distribution of talent across all demographic profiles”.

De Villiers
De Villiers . . . FSC in focus
 

At least one aspect of the research has enabled Sanlam to steal a march. Recognising that millennials – people born between 1981 and 1996, now representing more than 40% of the total SA workforce – it has decided to offer free retirementbenefits counselling. This accords with the finding that it “presents an incredible opportunity to engage millennials proactively”.

This conclusion comes about after analysis of millennials’ characteristics. They cannot relate to the concept of retirement, are overconfident in their own abilities, distrust financial services, have low levels of financial literacy (despite being better educated than previous generations), and are generally not receiving advice on withdrawal from a fund.

“A key issue for millennials is whether their purchase aligns with their values,” the survey finds. “Approximately 75% of them want to know that their investment is doing social good (and) do not want to invest in companies doing social or environmental harm.”

This speaks directly to the application of CRISA and ESG principles in investment decision-making (see Cover Story), says the survey: “It speaks even more directly to the need to engage millennials so they understand and appreciate that their institutional investments are being directed towards assets that have a positive impact on society. Currently there is a vacuum as millennials do not know how their money is being used to help develop our nation. And it’s not their fault. It’s ours.”

Indeed it is. Critically, found out why. Best suggestion is to download the entire survey for this and a wealth of other challenging information besides.

VBS muck

De Villiers

Amongst the numerous twists revealed by curator Anoosh Roopal in the repulsive saga of VBS mutual bank was the purchase, using fake money, by controlling shareholder Vele of four companies. One of these companies was Mvunonala (TT May-July). Another turns out to have been Fairsure.

This brings into the picture the deeply-troubled SA Local Authorities Pension Fund (TT Feb-April). Not only is the SALA fund administered by Fairsure, according the list of ‘active funds’ on the FSCA website, but a few years back the SALA fund had attempted to buy the Fairsure Administration subsidiary.

This was subject to the transaction being approved by the then Financial Services Board. Jurgen Boyd, deputy registrar at the time, declined the approval.

But now, if Fairsure has indeed been bought by Vele as Roopal found, then who was the seller? Could it nonetheless have been the SALA fund, to control its own administrator? Further, did the Registrar ever approve the control change – with or without conditions – for Vele or anybody else?

The mystery deepens, not least for 20 000 members of the SALA fund whose trustee board the Registrar had replaced. Should Vele indeed have control of Fairsure, members might have cause to worry about their benefits. So too might members of the other 14 funds that a Vele-owned Fairsure administers.

Outrageous

A the annual conference of the Association of Black Securities & Investment Professionals, held in July, a panellist proposed that there be legislation to contain maximum executive remuneration in the same way that there was legislation to provide for a national minimum wage. It was met with applause.

Clearly, many delegates who carry influence did not find the proposal outrageous. Had it been made after the revelation that Naspers chief executive Bob van Dyk would this year be paid R1,6bn, in salary and share awards, the applause would probably have been louder. Naspers can single-handedly alter the paradigms of SA capitalism.

At issue is not the procedure, following an improved group remuneration structure duly reported, but the quantum. On any reasonable measure, in this wildly unequal society and given that Van Dyk neither initiated nor can influence the performance of the Chinese investment on which the Naspers share price relies, R1,6bn is extreme in its egregiousness.

There are ways to justify it in terms of the technical structure, but they’re eclipsed by the heat that headlines generate. Nobody, surely, deserves that much; the more so when Naspers media are starved of resource.

Now for the Naspers annual general meeting where asset managers will be expected to respond. It will be a whole lot easier if trustees mandate them on how to vote, as they’re supposed to do, rather than complain later.

Two final points: first, whether asset managers can collaborate in exercising proxies; second, whether the time has arrived for votes on directors’ remuneration to be made binding.

When a company’s behaviour offends society, pension funds and their stewards are the vehicles to smack it.

Pensioners defeated

Years have passed since two former trustees began appeals over the allocation of the total R363,2m surplus to the sponsoring employer in the Tongaat-Hulett Defined Benefit Pension Fund (TT April-June ’16). They lost in their complaint to the Pension Funds Adjudicator, then later in the Kwa-Zulu Natal High Court and now they’ve lost again in the Supreme Court of Appeal.

The SCA decision leaves the former trustees and fund members, Bruce Moor and Willem Hazewindus, bitterly disappointed. It also leaves them with hefty legal bills but at least, as they say in a letter to the several dozen fellow pensioners who’d supported them, “with clear consciences in that we did not simply walk away from what we believe is an injustice”.

They remain hopeful that, provided the present trustees agree, members could still receive some payout. This is because, in pursuing their case, the former trustees had learned of a R130m “safety net” that had been retained as “excess assets” after the conversion from one fund to another and a change in fund rules. Members could be entitled to 80% of the R130m, equivalent to a quarter of what they’d claimed originally.

The central issue before the SCA was whether the fund had contravened s15C of the Pension Funds Act (see footnote) when it allocated the R363,2m to the surplus account of employer Tongaat-Hulett. The allocation was lawful, the court held.

The crux of the dispute was whether the description “excess assets”, found in the fund rules, as opposed to “actuarial surplus” in s15C read with the definition of the “employer surplus account” (ESA). The fund had slightly over R1,8bn in “excess assets” of which 80% had been allocated to former members, current members and pensioners with the 20% balance (R363,2m) allocated to the ESA.

Moor and Hazewindus
Moor and Hazewindus . . . big bills but clear consciences

To be answered was whether this 20% allocation constituted an apportionment of actuarial surplus under s15C. On the facts, held the court, it was actuarial surplus. The court was concerned only with whether the apportionment had been made lawfully in terms of the Act.

Moor and Hazewindus had contended that the relevant fund rule refers not to “actuarial surplus” but to “excess assets”. But the court considered their view to be a “strictly technical, narrow interpretation” that would “completely undermine the purpose of the legislation and would make no business sense”.

Neither a proper interpretation of the section nor the facts, it continued, preclude the apportionment of actuarial surplus which is part of an apportionment of excess assets: “To uphold the appellants’ contentions regarding the rule...would be to impermissibly elevate form above substance.”

  • The Pension Funds Act says at s15C that, if the rules of a fund are silent on the apportionment of actuarial surplus arising after the surplus-apportionment date, any apportionment shall be determined by the board taking into account the interests of all stakeholders... provided that...neither the employer nor the members can veto such apportionment.

Litigation caution

Also worth noting from the Tongaat-Hulett matter is the finding of the Supreme Court of Appeal on costs.

This case concerned a dispute between a pension fund and its members, the SCA noted. It emanated from a private relationship, regulated by a contract (the fund rules) between the parties and had no public-interest implications. Participation in the fund and its benefits were open only to Hulett-Tongaat employees.

There was no basis to extend the costs principle that applies only in constitutional litigation and public interest cases. If this principle were extended, said the court, it would open the floodgates to “result in the general membership of pension funds having in effect to fund litigation costs whenever members challenge decisions of the boards of trustees”.

Horrible

Problems at the Private Sector Security Provident Fund, whose members comprise low-paid security guards, are even uglier than previously outlined (TT May-July). Now the Financial Sector Conduct Authority has revealed that two of its trustees, appointed by the Registrar under s26 of the Pension Funds Act, were being paid over R500 000 a month.

For all 12 trustees, remuneration exceeded R25m a year. This implies that the average remuneration for each of the other 10 trustees was over R1,3m a year. It’s more than double the amount that a trustee of a large and well-run umbrella fund might expect.

The FSCA has also put the fund’s total administration expenses for the year at R353,8m. This represents 5,6% of the fund’s R6,23bn in total assets.

The fund administrator is a company called SALT.