Financial services regulator finally helps those hit by cancelled pensions

Some of SA’s largest administrators instructed to reinstate certain funds 10 years after erroneous closures

Between 2007 and 2013 more than 6,000 pension funds were cancelled in a process littered with errors and oversights. Open Secrets has now written to five of SA’s largest pension fund administrators to demand action to reinstate those that have been incorrectly cancelled.

This is the first of many necessary steps to ensure accountability for a shameful decade in pension fund administration that has harmed many vulnerable people.

The regulatory body that is meant to protect South Africans from unscrupulous financial service providers is the Financial Sector Conduct Authority (FSCA), SA’s new market conduct regulator. On March 4 the FSCA took an important first step in ensuring that thousands of pensioners and their dependants will be paid what is owed to them.

While it comes 10 years after errors were first identified, the FSCA has now issued directives in the form of a circular to all pension fund administrators (such as Liberty and Alexander Forbes) instructing them to urgently reinstate certain pension funds. These corporations must go to court to undo the cancellation where a fund was erroneously deregistered before April 1 2018. Legally, only courts can reinstate these incorrectly cancelled funds.

The circular also demands that corporations explain to the FSCA why these mistakes were made. This circular is an important step forward, but it is not enough. It comes late in the day, and only after various activists and organisations such as Open Secrets and the Unpaid Benefits Campaign protested and wrote to the FSCA to ask why it was not compelling companies to approach the courts to get funds reinstated urgently.

The urgency stemmed from the nature and magnitude of the problem. In what was called the “cancellation project”, the Financial Services Board (FSB), which was replaced by the FSCA, and large pension fund administrators cancelled more than 6,000 funds they considered “regulatory dead wood”. They did so as fast as possible, by deregistering “dormant” pension funds that had seemingly ceased to operate.

While the legal duty on both the fund administrators and the FSB was to take the utmost care in finding out whether the funds still had any

beneficiaries, assets or liabilities before cancelling them, the approach was characterised by cutting corners and cancelling funds as quickly as possible, often through unlawful means.

As a result, subsequent investigations have found that in 98% of the cancellations reviewed, the registrar of pension funds cancelled funds without having the information needed to be satisfied that the fund in question genuinely had no more assets or beneficiaries to pay. This is not surprising when you consider that the most common approach to cancelling funds was to choose an employee at a fund administrator like Liberty, make them the sole trustee for up to a thousand funds, and then ask them to submit funds for cancellation as soon as possible. The companies, who were able to charge fees in relation to these funds, never raised an objection.

But there were objections, most notably from pensions lawyer and subsequent whistle-blower Rosemary Hunter, who joined the FSB as deputy registrar of pension funds in 2013 and stopped the cancellation project. Unfortunately, by that time more than 6,000 funds had already been cancelled. As would emerge later, funds numbering at least in the hundreds, but probably many more, had been cancelled in error while still having assets and members to pay.

Fund administrators such as Liberty have since announced that they made at least 130 errors and have “discovered” funds that still had assets and members when they told the FSB the funds did not, resulting in their cancellation. Another prominent administrator, Alexander Forbes, achieved the deregistration of funds it knew were still owed refunds from “secret profits” the FSB had ordered Forbes to repay in 2006.

To illustrate the nature and extent of the problem, take a fund identified in a subsequent investigation by pensions lawyer Jonathan Mort, which was cancelled by Liberty when as much as R26m had not been accounted for. Mort argued that but for his investigation (and by inference, Hunter’s whistle-blowing) the assets “might not have been unearthed” at all.

To be clear, when a pension fund is deregistered it still exists in law but cannot carry out any of its activities or fulfil its objectives, such as paying beneficiaries. Consequently, the incorrect and unlawful cancellation of a fund has a potentially significant human cost as it may delay payment to vulnerable beneficiaries, or even make payment impossible. This human element is what is missing from much of the analysis of the story of the cancellations project.

Pensions form a vital part of SA’s social security system, and the ability to access income in retirement is an essential part of ensuring the elderly can live with dignity. Both access to social security and living with dignity are rights enshrined in SA’s constitution.

As a result, private companies that administer these funds should be held to a high standard of transparency and accountability in their conduct. This is also so because, as was argued by Hunter at a recent Pension Lawyers Association meeting, pension fund administrators are in many ways fulfilling a crucial public function of the state when they administer pension funds (which are state subsidised through tax breaks for contributions).

This is even more urgent when we consider that administrators profit handsomely from fees that are often linked to the assets they have under their control. It remains a crucial question as to how fund administrators may have profited from assets linked to cancelled funds over the many years in which the funds have been cancelled in error. With this in mind, our letters to the fund administrators demand that they urgently establish measures to identify which of their funds were cancelled in error, and to indicate publicly how soon they will approach the courts to have the funds reinstated.

As we’ve already said, while we welcome the step taken by the FSCA, more needs to be done. It is clear this is an issue of public importance and, as it stands, the FSCA cannot confidently say how many funds have been identified as being incorrectly deregistered, nor the magnitude of the assets involved or the human cost.

It should also be demanding a full investigation and accounting by fund administrators of how assets of incorrectly cancelled funds were treated in the interim and the extent to which they profited from this process. All of these profits should be repaid and directed where possible to beneficiaries, failing which they can be used to strengthen new systems of regulation of the financial sector.

The FSCA has promised to clamp down on abusive practices in the pensions industry and broader financial sector. Taking strong action against wrongful fund cancellations will be an essential test of their commitment in this regard. Open Secrets will continue to apply pressure to ensure there is accountability for these corporations, and justice for pensioners.