FEDUSA Submission to The Portfolio Committee on Finance Cape Town


Presented by: Gretchen Humphries FEDUSA

21 June 2006







FEDUSA believes that Retirement funds are deferred remuneration for work performed by workers. In most instances retirement funds are the workers' only form of savings. Retirement funds are currently subject to numerous costs, fees and taxation that substantially deplete a members' life savings that is due on retirement. Life savings are currently also subject to a double taxation.


FEDUSA furthermore believes that every effort has to be made to protect and grow a member's retirement benefit. It is important to increase the country's level of savings. Drawing a decent pension post retirement will enhance a person’s quality of life and place a lesser burden on the state. Every member is entitled to a reasonable pension benefit, where adequate contributions over time have been made.


2.         BULKING


It has emerged that administrators were making undisclosed profits from bulking the funds under their administration and then negotiating a higher rate of interest to be paid on the funds, but taking some of this benefit for themselves without approval from the pension funds under administration. This is tantamount to taking away benefits from pension fund members without their knowledge or approval.


FEDUSA will tolerate no less than the highest standards of accountability. Financial sector service providers are placed in a position of trust towards retirement funds and as such are under a legal duty to act in the best interest of their clients at all times. Receiving secret profits or undisclosed compensation from other parties is not acceptable practice.


The general circular issued by the Registrar of Pension Funds on the 29th of March 2006 directed to all persons and institutions (administrators) that have granted approval in terms of section 13B of the Pension Funds Act, No. 24 of 1956, to administer the investments of pension funds as defined in the Act.


Administrators who are registered under the Act, are financial institutions in terms of the Financial Services Board Act, No 97 of 1990, and as such fall to be supervised by the Financial Services Board and are in particular subject to the provisions of the Financial Services Board and the provisions of the Financial Institutions (Protection of Funds) Act, No 28 of 2001 and the Financial Advisory and Intermediary Services Act, No 37 of 2002 (the FAIS Act).

When dealing with pension fund monies under their control, institutions like administrators and trustees are required by the law to observe the utmost good faith, to exercise proper care and diligence, to refrain from gaining directly or indirectly improper advantage for themselves to the prejudice of their principals (the pension funds concerned) and to avoid conflicts of interest.

In terms of article 4 of the general circular of the 29th of March 2006, the following practice would be unlawful: an administrator consolidates or "bulks" credit balances of pension fund bank accounts under its control and thereby procures a higher rate of interest from the bank. All interest yielded is not passed on proportionally to the pension funds entitled thereto and 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.

FEDUSA affirms the Financial Services Boards’ (FSB) stance that all administrators are to make full and frank disclosure to the FSB of:


a)       Practices and methods, whereby secret profits were made directly or indirectly by administrators or associated companies to the detriment of pension funds whose money the controlled;

b)       The pension funds involved;

c)       The amounts of which individual funds were deprived;

d)       How it is proposed redress will be made to the funds.



There may be other permutations of this practice, the net result in each instance being an improper benefit or perquisite gained by the administrator at the expense of the funds under its management, and without full disclosure being made to the funds.


Bulking was not illegal per se and was a good way to enhance returns. Administrators who did not do this were failing in their duties. The justification that disclosure had been made to the trustees was also no defence against this breach of a fiduciary relationship.


FEDUSA would welcome the FSB directive to pension fund trustees, setting out the minimum requirements for the disclosure of bulking for it to be illegal. Trustees would need to be told upfront by administrators whether bulking of a particular fund would occur ; how much extra interest would be earned ; what the respective shares of the fund and the administrator would be ; and why the activity would add to administration costs.  




Trustees should demand that when “bulking” practices have taken place unlawfully, they should remain vigilant, in that the money is due to their members and former members. If trustees accept a reduction in fees, they may deprive former members of their due.


Trustees could also limit their options if they want to change service providers, as this may result in trustees not acting in the best interest of their funds.


Retirement fund trustees must not allow themselves to be rushed into signing quick settlements with bulking defaulters. They will place themselves at risk if they do so. What trustees should ask themselves is: "Will I be able to justify my actions to the Pension Funds Adjudicator, knowing the adjudicator's firm stance on the fiduciary duty of trustees?"

Trustees must demand that bulking defaulters provide them with free actuarial assistance so they can make sure that every current and former fund member receives the correct compensation, including interest, for bulking.  


There are some very pertinent questions that trustees need to get from pension fund administrators regarding its bulking practices. These include:

Ø          Making secret profits from bulking activities was a contravention of the Pension Funds Act and the Financial Institutions (Protection of Funds) Act, as well as common law.


Ø          In the interests of their own retirement, fund members must insist that their trustees account for what they have done to ensure everything that is due to the fund.


4.1     Training of Trustees


Trustee training is probably the fundamental issue underlying many of the problems being exposed in the retirement industry today. If your retirement fund trustees are not trained properly, it is questionable whether they will be able to ask the right questions and to spot things that might go wrong before it is too late.


This problem is compounded by the fact that many trustees are trained by the very companies that provide their funds with products and services.


Properly trained trustees would also have known that they should have demanded that an administrator, such as Alexander Forbes, bulk their funds' assets to get the best interest rates or discount, and that the administrator should have passed these beneficial rates and discounts on to their funds so they could provide better benefits for their members.


The good governance of their retirement funds is the basic building block of training trustees. The foundation stone for all trustee training is that trustees have a proper understanding of what constitutes good fund governance.


This means that trustees must understand their fiduciary duty. In a nutshell, fiduciary duty means your trustees bear the ultimate responsibility for your retirement savings and must behave and take decisions that are in the best interests of the fund they manage.

It is entirely appropriate that statutory law (for example, the Pension Funds Act), previous court rulings and common law place a fiduciary duty on trustees, because, for most of us, saving for our retirement is the single biggest investment we will make.


A key issue in the good governance of a retirement fund is the ability of trustees to ask the right questions. If your trustees do not know what questions to ask, they are immediately exposed.   




FEDUSA believes that the burning issue pertaining to bulking would be prevalent in the funds administered as Umbrella Funds.