COSATU Input on the “Bulking” of Retirement Funds Account by Fund Administrators

Submitted to the Portfolio Committee of Finance

20-21 June 2006





1.                         The Editor of Personal Finance reported about the “not lawful” secret profiteering by Alexander Forbes since March 2006. At the time when these activities were reported they were received with a total denial from those who were involved. What was also disturbing was attempts by Alexander Forbes to threaten and silence Personal Finance.


This was followed by public condemnation of this abuse of trust by many in the retirement industry, including ourselves and some honest service providers.


Subsequently the Deputy Registrar of Pension Funds issued a General Circular to Fund administrators on Secret Profits, dated 24 March 2006.


2.                         In that circular, the Deputy Registrar highlighted the following:


2.1                     Administrators consolidate or “bulk” credit balances of retirement fund bank accounts under its control and thereby procure a higher rate of interest from the banks. All interest yielded is not passed on to the retirement funds entitled thereto. Instead, the additional interest derived from the consolidated amount goes for the benefit of the administrator. This “secret profit” is also not disclosed to the boards of management of the pension funds.


2.2                     Another example mentioned deals with a situation where the administrator is part of a group of companies which includes a bank. In this case there is no negotiation to increase possible interest rates payable to the funds being administered, but the group as a whole benefits.


2.3                     The net results in each instance are that an improper benefit or perquisite is gained by the administrator at the expense of the funds under its management, and without full disclosure being made to the funds.


3.                         As a result of this conclusion, the Registrar required the Administrators to make full frank disclosure on this matter;


3.1                  practises and methods, such as that mentioned above, but  not necessarily confined thereto, whereby secret profits were made directly or indirectly by administrators or associated companies to the detriment of retirement funds whose money they controlled;


3.2                  the pension funds involved;


3.3                  the amounts of which individuals funds were deprived; and


3.4                  how it is proposed redress will be made to the funds.


4.                         It is against this background that the following submissions should be considered.  


5.                         Administrators are financial institutions in terms of the FSB Act, and as such fall to be supervised by the FSB and are in particular subject to the provisions of the FI Act and the FAIS Act.


6.                         The Registrar has confirmed that bulking itself is not unlawful for as long as it benefit funds and not administrators.





7.            The view of administrators varies:


7.1                     If they don’t do bulking – each fund receives the same  interest as an individual entity;


7.2               Another view is that a fund receives a higher rate of interest  through bulking but the administrator benefits, either through an agreed fee or not;


7.3               Where bulking takes place, each fund receives the full benefit of that.





8.            What is the content of “fiduciary duty”?


8.1                            Per Philips v Fieldstone Africa (Pty) Ltd 2004 (3) SA 465   (SCA) –


“There is no magic in the term “fiduciary duty”. The existence of such a duty and its nature and extent are questions of fact to be adduced from a thorough consideration of the substance of the relationship and any relevant circumstances which affect the operation of that relationship. While agency is not a necessary element of the existence of a fiduciary relationship, that agency exists will almost always provide an indication of such a relationship.”  


8.2               Also, per Philips v Fieldstone Africa (Pty) Ltd, supra –


It is the nature of the relationship, not the specific category of act involved that gives rise to the fiduciary duty. The categories of fiduciary, like those of negligence, should not be considered closed…(the) relationship in which a fiduciary obligation has been imposed are marked by 3 characters –


8.2.1                scope for the exercise of some discretion or  power;


8.2.2                that power or discretion can be used unilaterally so as to affect the beneficiary’s legal or practical interests; and


8.2.3                a peculiar vulnerability to the exercise of that discretion of power.”




9.                   In terms of  Robinson v Randfontein Estates 1921 AD 168 - 


“Where one man stands to another in a position of confidence involving a duty to protect the interest of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his interests conflict with his duty. The principle underlies an extensive field of legal relationship. A guardian to his ward, solicitor to his client, an agent to his principal afford examples of persons occupying such a position…the doctrine is to be found in the civil law, and must of necessity form part of every civilized system of jurisprudence. It prevents an agent from properly entering into any transaction which would cause his interests and his duty to clash. If he is employed to buy, he cannot sell his own property; if employed to sell, he cannot buy his own property; nor can he make any profit from his agency save the agreed remuneration; all such profits belongs not to him but to his principal. There is only one way by which such transactions can be validated, and that is by the free consent of the principal following upon a full disclosure by the agent.”   


10.                There is one rule only, that a fiduciary may not receive any benefit than the agreed remuneration, and only one exception to this: on the fully informed consent of the principal.


11.               In terms of Philips v Fieldstone, it is no defence by the agent (administrator) to say that  -


11.1                   the fund did not suffer a loss;


11.2                  the fund could not have made use of the opportunity, or       probably would not have done so;


11.3                  the fund, although it could not have used the opportunity,  has     refused it;


11.4                  there is no contractual relationship between the fund and the third party from whom the benefit was received, and the benefit would not have accrued to the fund anyway;


11.5                  the administrator was not obliged to obtain the benefit for the    fund.


11.6                  the administrator acted reasonably and honestly.




12.               What is the standard of care required of an administrator? This is relevant to the issue of whether bulking is lawful or not.


13.               The standard of care is that of a reasonable competent administrator. This is a specialised task which is regulated (by the FSB) and to which the courts would require to involve a high level of skill and care. Van Wyk v Lewis 1924 AD 438. Durr v ABSA Bank 1997 (3) SA 448 (SCA)




14.               Bulking is not unlawful in the sense that it is prohibited by law or contrary to legal obligations. Sackville West v Nourse 1925 AD 156. Estate Richards v Nichol 1999 (1) SA 551 (SCA)


15.               A competent administrator, having the requisite high level of skill and care, and operating within a financial services environment, should be aware of the benefits of bulking and should endeavour to obtain it. 




16.               The bank treats all the flagged fund bank accounts as one for the purpose of determining the interest rate applicable to each, and all that interest is then credited to each bank account by the bank. The bank administrator may then debit an additional fee from the bank account; or the bank may make payment of a rebate, which would otherwise have accrued to each fund bank account as interest, direct to the administrator so that it does not appear in the bank account of the fund.  


17.               A sweeping arrangement occurs, whereby all the interest attributable to each account of all the funds administered by the administrator are paid into a single bank account in the name of the administrator, and then allocated from there by the administrator amongst the bank accounts of each fund after deduction of the fee by the administrator.




18.               The problem is where the administrator includes its own funds to the pool of monies of the funds in order to receive the high rate of interest that the funds receive.


19.               Where the bulking arrangement requires a minimum total amount and the administrator adds its own funds to ensure that this limit is obtained; but also benefits from this.


20.               Where the bank concerned is an associated entity of the administrator


21.               Where the fee is a proportion of the interest, and the amount of the benefit for the administrator may not bear any relationship to the cost of the service.


22.               Where the fund administrator circumvent the Act by creating or establishing a company where all funds contributions will be deposited into, an improper benefit or perquisite is gained by the administrator at the expense of the funds under its management, and without full disclosure being made to the funds.




23.               An administrator should disclose to the fund –


23.1      that the fund bank account will form part of a portfolio of   accounts to be bulked for the purpose of negotiating interest rates with the bank; for the benefit of members


23.2      the extent of the enhancement in interest rates through indication of the extent of the potential benefit (in Rands);


23.3      if it is retaining a proportion of the enhanced benefit for itself to compensate for the additional costs involved in putting the arrangement in place additional costing;


23.4      Script lending;


23.5      Rebates;


23.6      Soft commissions.




24.               Trustees themselves owe fiduciary duty and must therefore be very careful about agreeing to, or ratifying, any additional benefit which a service provider may seek. In this matter it would unacceptable for trustees to party to arrangements where the administrators are allowed with these improper benefit from bulking


25.               With the current bulking issue, trustees should ask their service providers whether they have received any benefit in respect of their services to the fund other than the agreed remuneration.  “Any benefit” should be interpreted broadly.


26.               As with every aspect of the remuneration due to service providers, any benefit which the service provider receives should bear some relation to the services rendered to the fund; and should also be competitive.


27.               As a general principle, every contract between a fund and its service provider should include a warranty by the service provider that it will not accept any benefit from any source in respect of its service to or administration of the fund, other than what is set out in the contract, without the agreement of the fund.      




28.               The Congress of South African Trade Unions (COSATU) rejects suggestions that if an administrator has paid a few million rands to the Financial Services Board for trustee training, it can escape the might of the law.


28(a)     A conducive climate for the working poor to save for their retirement should be sustained and any one who secretly profits from workers’ savings should face the full rigour of the law.


29(a)     COSATU is very concerned that a signal from the industry is that you can steal from the poor as much as you can and when you are caught, pay back what you have stolen and the matter is closed. We reject this. We reject suggestions that it is a costly exercise to bring criminals to book in the retirement fund industry. We reject the idea that big institutions can do as they like since the law will not catch up with them.


29(b)     That some administrators created investment companies to circumvent sec 13 A and B the Pension Funds Act of 1956 as amended so that they take secret profits from retirement funds against their own internal and outside legal advice, shows what we deal with here. Directors of administrators who creatively benefit improperly from retirement funds should face the might of the law.   


29(c)     COSATU continues to supports the Registrar of Pension Funds for all initiatives taken to protect the interest of poor workers who sacrifice lots for their families to save for their retirement, only to find they have instead made huge secret profits for administrators.


30         On the basis of all the available evidence and after careful consideration of the various suggestions, it is the considered view of Cosatu that a Commission of Enquiry needs to be established by the Minister of Finance to investigate all other irregular practices in the Financial Services Industry in general and Retirement Funds in particular[J1] [J2]  in relation to the administration of retirement funds. The terms of reference of such of commission of enquiry should include an investigation of the history and background of bulking or "improper" benefit practices of the Life and Private Sector Fund Administration companies.


31         This investigation should also relate to the regulation and enforcement relating to the monitoring and control of Life and Private Sector Fund Administration companies in respect of conflict of interests in the industry, a conducive environment for development of bad practices such as bulking. In addition, the investigation should aim to reveal pattern of governments and/or commission and omission which allowed the problem to develop.


32         COSATU will embark on a national wide campaign to name and shame those administrators who are secretly profiting from bulking and we might also ask all our members instruct their fund trustees to move their funds to administrators who are not and were never involved in such shameful activities.  



19 JUNE 2006




011- 339 49110 or 021- 461 3835