20 June 2006


Response to General Circular dated 24 March 2006


At the outset we would like to point out that this presentation does not amount to a full reproduction of the preliminary report that Glenrand MIB submitted to the Financial Services Board on 10 May 2006, in response to General Circular dated 24 March 2006. We have tried to consider all of our practices to identify and investigate areas of concern. Although we were requested to appear before this Committee to discuss bulking practices, we have therefore extended the presentation, as we did our report to the FSB, to refer to other practices that might be deemed as amounting to secret profit-taking. We are happy to discuss and investigate any aspect requested by the FSB or this Committee.


1.                 Internal Investigation


Following the General Circular dated 24 March 2006, Glenrand M.I.B commenced an investigation into its practices to establish and quantify any secret profits it might have earned.  The departure point of the investigation was the series of questions posed in the General Circular, being :-


1.       Practices and methods, such as bank bulking, that potentially may have resulted in secret profits made directly or indirectly by administrators or associated companies to the detriment of retirement funds they administer.

2.       A list of the pension funds involved.

3.       Amounts by which the individual funds were deprived.

4.       How the administrators propose redressing the situations with such funds. 



2.     Methodology


The investigation comprised a six phase process, namely to- 


1.     Identify potential areas of secret profit practices.

2.     Establish whether “profits” were indeed generated by such practices.

3.     If so, whether the “profits” were agreed with and disclosed to clients, failing which such profits would be “secret” and fall within the ambit of the General Circular.

4.     Obtain a senior counsel legal opinion on whether the practice constituted secret profits or were illegal or undesirable.

5.     Establish the number of funds affected by such secret profits, total quantum and quantum per fund.

6.     Submission of final list of practices deemed to be undesirable and or resulting in secret profits to Exco, for recommendation on steps to redress the situation, in turn to be submitted to the Glenrand MIB Board for decision.


As part of the investigation, letters were addressed to former directors and members of the Executive Committee of Glenrand MIB, requesting them to bring to our attention any business practices potentially helpful to the proper completion of the General Circular.


All retirement fund consultants were required to personally sign off the information provided that they provided to the internal investigating team, as a full and accurate reflection of business practices potentially falling within the ambit of the investigation.


It was further agreed that the methodology and findings of the investigation would be submitted to PricewaterhouseCoopers (PwC) for independent external review. Such report is being conducted on an agreed upon procedures basis. The PwC report would further be submitted to the Glenrand MIB Audit Risk Committee, more specifically its chairperson as independent director of the Glenrand MIB group, Mr Rick Cottrell.



3.     Legal Opinion obtained on Bulking


Glenrand MIB, with the assistance of Edward Nathan Corporate Law Advisors, briefed Advocate Malcolm Wallis, SC and requested his opinion on the application of the provisions of the Financial Advisory and Intermediary Services Act (FAIS) and the Financial Institutions (Protection of Funds) Act (FI Act) to the practice of bulking by retirement fund administrators, as well as his opinion on what constituted unlawful bulking practices. The opinion, in summary, sets out the following:


§         Retirement fund administrators registered in terms of section 13B of the Pension Funds Act, are in terms of section 45(1)(a)(iii) of FAIS exempt from the provisions of that act, to the extent that the rendering of financial services is regulated by or under the Pension Funds Act. As the rendering of services as a retirement fund administrator is regulated under the Pension Funds Act, and as bulking of retirement fund monies is a service that should typically be provided by a retirement fund administrator to its clients, the provisions of FAIS do not apply to the practice of bulking by such entities;


§         The provisions of the Financial Institutions (Protection of Funds) Act apply to individuals employed by financial institutions and not to such financial institutions in their capacity as service providers of other financial institutions;


§         The fiduciary duties of a retirement fund administrator towards its clients arise from the service level agreement entered into between the administrator and a client. The Glenrand MIB agreement constitutes an agency agreement as well as a service agreement or mandatum. Both such agreements impose fiduciary duties upon the agent or mandatory towards its principal.


§         According to the common law applicable to agency agreements, an agent may not derive any profit from managing the assets of its principal, except where such profits had been disclosed to and agreed to by the client. In this regard, the words of Innes CJ in Robinson v Randfontein Estates Gold Mining Company Limited[1] is of significance:


“Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense of place himself in a position where his interests conflict with his duty…It prevents an agent from properly entering into any transaction which would cause his interests and his duties to clash…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…”


§         It is incorrect to state that profits agreed to with retirement fund boards are unlawful.


On the basis of the opinion received from Advocate Wallis, it is our view that only secret profits made by a retirement fund administrator, should fall within the ambit of the General Circular. We have therefore structured our report to the Financial Services Board accordingly.



4.   Bank bulking


4.1   Background


In order to increase the revenue of both retirement fund clients and Glenrand MIB, bank bulking of our clients’ Standard Bank Accounts was implemented with effect from  3 May 2005 and Nedbank Accounts on 14 December 2005. 


It was agreed with these banks that all Glenrand MIB client accounts would fall within a portfolio earmarked for Glenrand MIB clients. Monies held in the fund accounts allocated to the Glenrand MIB portfolio, would earn interest at a higher rate of interest than they had previously and would have earned, had they held their accounts on an individual basis. It should be noted that the bank account of each client remained segregated at all times. The agreements included a provision to the effect that of the enhanced interest earned under these portfolios, Glenrand MIB would earn 50% under the Standard Bank agreement and 33% under the Nedbank agreement.


As an example, the effect of the agreement reached in respect of the Standard Bank Glenrand MIB portfolio as at 26 April 2005 was as follows:



Existing Client Rate

Enhancement to Client

New Client Rate

Glenrand Gross Pooled Rate

% Interest to Glenrand

Glenrand Fee as % of Gross Pooled Rate








0 - 499 999







500 000 – 999 999







1 000 000 – 9 999 999







Greater than 10 000 000








4.2   Disclosure


The practice adopted by Glenrand MIB since the commencement of its bulking practice has been that any splitting of interest earned by way of bulking should be disclosed to clients and agreed in writing. In 2004, our service level agreements were therefore amended in anticipation of the bank bulking exercise, to make provision for the bulking of bank accounts and the division of enhanced interest achieved between the funds and Glenrand MIB. The service level agreements were amended to include the following provisions:




      Glenrand MIB’s duties as Administrator will be:-



(e)    opening and operating a bank account with a major South African bank in the name of the Fund, the parties acknowledging that such account and the monies deposited therein, will be included in the Glenrand MIB cash management system where Glenrand MIB groups client accounts for efficiency and preferential interest rates, for the benefit of both the Fund and Glenrand MIB in terms of clause 4.2(e)”




(e)        The treasury cost to secure group preferential rates detailed in 3.1(e) equal [to] 50% of all interest earned on amounts deposited in the account referred to in clause 3.1(e) at rates which exceed the selected Bank’s standard rates from time to time (“enhancement”). The quantum of the enhancement will be made freely available and disclosed to the Fund on request by the Trustees.”


The Rand amount of the interest earned by the retirement fund and Glenrand respectively is declared to the trustees annually in arrears. The trustees also receive cash flow statements at quarterly trustee meetings, but would only be able to see the total interest earned by the retirement fund because the interest earned specifically through the bulking arrangement is not indicated separately.


The exercise to submit the service level agreements to the various boards of Trustees commenced in 2004. 


The internal investigation conducted by Glenrand MIB indicated that our processes and best practices are in place and generally working. There were isolated instances where these processes failed, but such failure was the result of human error and not a deliberate policy of concealing the practice.


We have established that of the funds currently administered by Glenrand MIB, 28 funds have not as yet signed the amended SLA. It appears that, of these, there has been non-disclosure on only 4 funds.  (We currently administer in excess of 250 retirement funds.)


4.3   Historical Practices


As stated above, the investigation also involved a request to former executives to identify any past practices that might have amounted to bulking as well as other potential sources of secret profits. We have thus far been informed of one such bulking / imprest account, namely the CBC account.


CBC was acquired through a process of acquisition.  Previously CBC was acquired by MIB and subsequently MIB merged with Glenrand to become Glenrand MIB. 


According to the information provided to us, by the former CEO of this business, individual retirement funds would monthly deposit two cheques, representing the total amount of all benefits, that were due and to be paid to beneficiaries in the following month, into two central CBC accounts – one being for pension payments, and the other for all other benefit payments excluding pensions.  Cheques, representing benefit payments, would be drawn from these accounts on behalf of all the CBC clients. Any unclaimed benefit amounts would be transferred back to the accounts of the relevant funds.  These CBC accounts did earn interest, the interest was neither taken to profit and loss of CBC nor of Glenrand MIB. The interest was apportioned and repaid to funds on a pro rata basis in proportion to the amount each fund had paid in. It is therefore our preliminary view that the CBC account did not involve the taking of any secret profits relating to interest earned.


The account is still, however under investigation and the information will be verified by PwC when conducting its audit of our practices.


The income generated by Glenrand MIB from its bulking practice over the past 18 months amounts to on average R1, 041 per fund per month. The total amount earned by Glenrand MIB amounts to R2, 3 million. 


5.   Proposal regarding Redress


We will discuss and agree with the FSB the appropriateness or otherwise of the manner in which we shared bulking revenue. For the purpose of being prudent, the total amount of R2, 3 million, plus interest, has been set aside by Glenrand MIB in order to redress bulking practices that might be deemed to have been improper or unlawful. The proposals detailed below are for discussion with the FSB.  We hope to reach agreement on our proposed approach, however for prudence we have provided in our financials for the entire amount.  The proposals for redress are as follows:







6.   Glenrand MIB Risk Umbrella


Glenrand MIB has operated a risk umbrella.  This arrangement allows clients (both retirement funds and employers) to obtain group risk rates for life insurance as well as disability income replacement insurance on a pooled basis provided by an insurer to Glenrand MIB.  This product offering has benefited many of our clients. The rate provided on this risk umbrella was generally cheaper than the rate available by going directly to an insurer in the market. Some clients decided to utilize the risk umbrella rather than going directly to an insurer. In all instances where funds utilized this arrangement competitive quotes from the market were obtained and the decision to utilize this umbrella was as a result of the cheaper rate available on the risk umbrella.


The insurer provided a net premium rate to Glenrand MIB.  The insurer did not do administration on these policies.  All administration under the risk umbrella was attended to by Glenrand MIB, which levies an administration fee for those services.  For a traditional group insurance scheme, the administration would be done by the insurer.  The rate charged to the client was an all-inclusive rate incorporating both commission and the administration charge that Glenrand MIB levied.  It was this all inclusive rate that was compared to competitive rates in the market.


We have provided full details of this scheme to the FSB.  In our opinion, although clients were aware of and approved the total rate – prior to March 2005, clients did not in every instance know the split between Glenrand MIB’s admin fee and the risk premium. Where proper disclosure of such administration fees had not been made and where proper agreement has not been reached with the client on the administration fee levied, Glenrand MIB will enter into discussions with the client to ensure for the period, is agreed.


This also forms part of the PwC audit. Again, in the interests of being prudent (and despite evidence of disclosure in many instances), we have adopted a conservative accounting methodology, and provided for a potentially full refund of such administration fees, until such discussions with the FSB have been concluded.


7.   Other potential areas of “secret profit”


·         Glenrand MIB does not utilize imprest accounts for the payment of benefits.  (This is with the exception of the one CBC account discussed above that may be considered an imprest account.)


·         Glenrand MIB no longer charges commission on the outsourcing of annuities and has not done so for several years.  The last outsourcing we did was over two years ago and we have confirmed that commission was disclosed to our client at this time. A potential outsource exercise that we have been busy with for the past 6 months has always been on a no-commission basis.


·         Glenrand MIB does not conduct securities lending of client assets.  This statement also applies to Ten50Six Life, a relatively recent acquisition on which some of our client assets are housed in investment portfolios.


·         Ten50Six Life, a wholly owned subsidiary of Glenrand MIB, is a long-term insurer registered in terms of the Long-term Insurance Act. Ten50Six Life has been issued a limited life license, namely to issue linked fund policies only. This means that Ten50Six Life may only issue policies to retirement funds and that the policy benefits are determined solely by reference to the value of the assets specified in the policy, i.e. Ten50Six Life issues investment policies to retirement funds, the value of which is not guaranteed, but linked to the investment market. A number of arguments have been raised that assets held by a long-term insurer constitute the property of the insurer. This argument arises from normal insurance law principles, as such assets are indeed held in the name of the insurer and the insurer is liable to pay tax on such assets. This principle has also been confirmed by the FSB in its Directive 132. In terms of the policies issued by Ten50Six Life, monies paid to the insurer may be invested within 6 business days. In practice, Ten50Six Life invests assets within 24 to 48 hours. Ten50Six Life does earn interest on such monies during the 24 to 48 hours that the monies are held in the Ten50Six Life bank account.


·         Ten50Six Life did earn some rebates on assets held in respect of two umbrella funds administered by Ten50Six Funds Administrators, a retirement fund administrator acquired by Glenrand MIB in 2004. The intention behind such rebates has, however, always been that the rebates would be earned as repayment for the umbrella fund expenses that had been sponsored by the sponsoring administrator. Where any discrepancies are found between the rebates earned and the expenses sponsored, such difference will be refunded to the umbrella funds concerned.


·         Consultants’ Commission: No commissions are paid to consultants in the services of Glenrand MIB for business place with any of the various services provided by other divisions, such as trusts or housing loan administration. No additional administration fees are levied where home loan administration is placed with other service providers in the industry.


·         No commission is paid to consultant in respect of asset consulting. This practice was terminated in 2005. Prior to that, consultants earned 6% of the total asset consulting fee paid to Ten50Six Life, i.e. a maximum of 6% x 0.25% = 6.615% of asset transfer. The fee was taken from the total fee paid by the client and not levied as an additional fee.


·         Glenrand MIB does have an asset consulting division. Asset consulting fees are on a sliding scale, the range of fees is between 0.12% and 0.25% per annum. The maximum fee earned is 0,25% per annum.


o        Fees are explicitly disclosed to clients.

o        Glenrand MIB does not take any further revenue other than the asset consulting fee earned on assets held on the Ten50Six Life balance sheet.

o        The exact cost from the underlying asset managers is passed on to the retirement fund client. This is confirmed to the client in the application form that is signed prior to investment.

o        Glenrand MIB earns no additional fees from the asset managers, nor does it pay any fees to asset managers.


8.   Future Practices


Glenrand MIB has, ahead of this FSB investigation, commenced with a revision to our client servicing and costing model.  This includes a move towards earning income strictly by way of explicit fees agreed with clients and doing away with other forms of remuneration such as commission. It is the intention of Glenrand MIB to continue with the bulking of retirement fund monies. However, Glenrand MIB will with effect from 1 July 2006 cease to share in any of the additional bulking income.  Fees charged in terms of our SLA will be inclusive of this service to clients.


9.   Conclusion


Glenrand MIB has submitted to the FSB as a preliminary report as the first phase in complying with the General Circular issued on 24 March 2006. The following steps need to be completed in order to produce a final report to the Financial Services Board:


§         Final verification of calculations produced by Standard Bank and Nedbank in respect of bulking of fund bank accounts by clients;

§         Independent review of these findings by PwC;

§         Discussion of PwC report with the FSB;

§         Agreement with the FSB of any process of redress that they believe is necessary;

§         Discussions with the relevant management boards regarding possible measures in which to make redress to such funds, where necessary.


Glenrand MIB welcomes the opportunity to engage formally in meetings with the FSB on the findings contained in this report.





GREG MORRIS                                                             DALENE WILLEMSE

CHIEF EXECUTIVE OFFICER                                              LEGAL MANAGER





[1] 1921 AD 168 at 177 – 178, recently reaffirmed in Phillips v Fieldstone Africa (Pty) Limited and Another 2004 (3) SA 465 (SCA)