So far, no evidence that members lost billions in pension fund closures
Sensational headlines and juicy quotes flow freely in the court papers filed in the case brought by the deputy registrar of pension funds in an attempt to force the board of the Financial Services Board (FSB), or the Minister of Finance, to investigate the closure of thousands of dormant retirement funds between 2007 and 2013.
A recent media report focused on the allegation that beneficiaries of the more than 4 600 funds that were closed could have been deprived of assets of more than R22.5 billion. How can R22.5 billion just go missing, you may ask.
And if the assets did go missing, who should be held accountable: the regulator or the retirement funds that transferred the assets? Should we still trust the retirement-funding industry with our money?
As more court papers are filed, more details emerge, and it becomes more difficult to grasp the issues quickly. However, a key message from the latest papers is that an inspection of a small sample of the funds that were closed has found that the values estimated in initial investigations and previous court papers to be potentially due to funds, do not exist.
In the application filed in the Gauteng North High Court in January, Rosemary Hunter, the deputy registrar of pension funds at the FSB, alleges that her boss, Dube Tshidi, the registrar and chief executive of the FSB, abused public funds to frustrate her attempts to investigate what she regards as the “unlawful” closure of thousands of “orphan” or dormant retirement funds (see explanations below) between 2007 and 2013. She alleges this abuse extended to offering her a golden handshake to persuade her to quit her job.
In his replying affidavit, Tshidi describes Hunter as an “angry, distrustful and even vengeful woman” whose application “bristles with conspiracy theories” with “unbridled accusations, intemperate language and wholly unsubstantiated conclusions”.
The latest papers filed by the board that oversees the FSB include another attack on Hunter. Abel Sithole, the chairman of the board, says “she quarrels with everyone, she always believes she is right and everyone else is wrong, she demonstrated her inability to accept good-faith differences in the course of the FSB discharging its functions as regulator, and she made herself guilty of insubordination by constantly challenging the authority and probity of her immediate superior”.
CONFIDENCE UNDERMINED
The public airing of the FSB’s dirty laundry is, alas, likely to knock public confidence in the institution that regulates the funds in which we invest for a future income. It has also annoyed those working tirelessly to improve the retirement fund industry’s image in an attempt to encourage us to save more.
The court case will apparently be heard much later this year. Hunter is asking the court to compel the FSB, or, alternatively, Finance Minister Pravin Gordhan, to investigate her grievance about how Tshidi and other FSB officials failed to comply with the relevant laws and codes of conduct, and how Tshidi sought to undermine her investigation of the cancellation project (as the closure of the dormant funds was dubbed).
In his response, Gordhan has said it is unnecessary for him to intervene, because the FSB’s board has taken extensive steps to investigate the issues raised by Hunter.
In court papers, Tshidi and the board have outlined the steps they took to investigate Hunter’s claims.
The latest papers filed by the FSB reveal that an inspection of some of the closed funds was carried out in terms of the Inspection of Financial Institutions Act to determine whether the funds should not have been closed, because they were, indeed, owed money.
The court will apply its mind to the issue of what the FSB did, and we shouldn’t expect the court to get to the bottom of whether members were prejudiced or whether money has gone missing.
It is encouraging that the board appointed highly respected Cape Town-based pension lawyer Jonathan Mort to conduct the investigation. Mort is a past president of the Pension Lawyers’ Association and has served three terms on the steering committee of the International Pension and Employee Benefits Lawyers’ Association.
Mort submitted an initial report on June 7 detailing his findings in respect of a small but significant sample of the funds that were closed. He found that none of the funds was owed money, and members’ interests were not prejudiced by the closures. The origins of the dispute between Hunter and the FSB can be traced to two major shifts that have taken place in the South African retirement-funding landscape: one from defined-benefit retirement funds (which provide a set pension based on final salary at retirement) to defined-contribution funds (which provide a pot of savings at retirement), and the other from standalone employer-sponsored funds to umbrella funds sponsored by financial services companies. Both moves were driven by employers wanting to free themselves from financial or administrative burdens.
The legal process was followed to transfer retirement savings from one type of fund to another, and each transfer had to be approved by the registrar of pension funds.
Often, after the assets had been transferred, a fund had no trustees, but it was not closed. Such a fund is known as an orphan fund, and the FSB found there were thousands of them, creating a regulatory headache. If a pension fund has no assets or liabilities, it is known as a dormant fund.
Questions have arisen over whether the orphan funds that were closed still held unclaimed benefits owed to members who could not be traced, or were owed money as a result of, for example, a refund from Alexander Forbes after its practice of bulking funds’ accounts was exposed. Questions have also been asked about the process that was followed to close the funds.
After Hunter was appointed deputy registrar, she obtained a legal opinion indicating that the process followed was unlawful. She took the matter to the FSB’s board.
The FSB’s board appointed retired Constitutional Court Judge Catherine O’Regan to investigate the cancellation project.
Judge O’Regan concluded that Tshidi may have exceeded his powers when closing some of the funds – as Sithole puts it in the board’s latest papers, “the legal underpinning may have been lacking”.
But she concluded that unlawfulness was an issue only if members suffered material prejudice. She recommended that the board appoint forensic auditors to investigate the circumstances in which the funds’ registrations were cancelled.
The board appointed auditing firm KPMG, which came out with a report in July last year suggesting that Tshidi had not had enough information to satisfy himself that members’ rights were protected when the funds were closed. It is this report that suggests that the members of the 510 funds that KPMG investigated might have been prejudiced to the tune of an “indicative potential amount” of R2.47 billion.
Hunter, in her court papers, extrapolated this amount to more than 4 650 funds to come up with a figure of R22.5 billion. Neither Tshidi nor the FSB’s board was happy with KPMG’s report, Tshidi’s and Sithole’s affidavits reveal.
In the latest papers filed by the board, Sithole says the board was of the view that KPMG’s investigation did not address the recommendations made by Judge O’Regan. Hence, the appointment of Mort. As Mort’s report points out, “KPMG did not state categorically that there was actual financial prejudice”, and he was tasked with finding out if this was the case.
His report, which forms part of the latest papers filed by Sithole on behalf of the FSB’s board, reveals that he has so far examined nine of the 510 funds that KPMG investigated, representing 46 percent of the R2.47 billion of the potential value that KPMG identified.
His conclusion, in all nine cases, is that no member’s interests have been prejudiced.
Many questions remain, and the case highlights a variety of issues that the FSB needs to address, not least of which is why so many trustees and administrators were allowed to transfer assets out of funds and then abandon the orphan funds registered on the FSB’s books.