The closure of thousands of retirement funds within rules agreed to and approved by the Financial Services Board (FSB) over the past four years apparently did not meet the requirements of the law. This may have left some fund members or former members or their dependants deprived of benefits.
This is the view of Rosemary Hunter, the newly appointed FSB deputy executive in charge of pension funds.
However, the closure procedure has been defended by FSB chief executive Dube Tshidi, in a statement issued on Thursday (see “No complaints on closures – Tshidi”, below).
Hunter dropped the bombshell at the annual conference of the Pension Lawyers Association (PLA) in Cape Town this week. It came against the background of the insistence by National Treasury that the number of occupational retirement funds must be reduced in the interest of cost-effectiveness.
When the legislation governing the apportionment of surpluses in retirement funds was implemented in 2006, it was established that, of the more than 13 000 registered retirement funds, only about 3 500 were “active” funds.
Most of the funds that have been deregistered have been dormant funds with no boards of trustees and no contributing members. Some had no assets and liabilities. Others had assets and liabilities for unclaimed benefits.
Hunter says that her view has been backed by independent legal opinion obtained by her office.
Her review of the legality of the fund closures is driven by a concern that, if any assets and liabilities have not been fully accounted for, some members, former members or their dependants may have lost out. She is also concerned that insufficient effort may have been put into locating the beneficiaries of the unclaimed benefits before these benefits were transferred to unclaimed benefits funds.
Her department is now investigating whether defects in the ways in which dormant funds were closed in the past may have resulted in substantial prejudice to any of the funds or their members and former members. If it appears that there may have been substantial prejudice in the case of some funds, the FSB will ask the funds’ former administrators to work with it to fix the problem.
She hopes that this review will enable the FSB to help collect information so that it can help connect beneficiaries with their benefits.
revision nightmare
Fund administrators are worried that they may now have to go back and revise all closed funds at considerable additional cost, which cannot be recovered.
John Anderson of the country’s largest retirement fund administrator, Alexander Forbes, says that the company has funded the closure of a great many of the dormant funds, at a cost of between R10 and R15 million rand a year.
He says if Alexander Forbes had not incurred these costs, it would not have been possible to close the funds, many of which had no assets. It would have been difficult to get the sponsoring companies of the dormant funds to pay the closure costs. An alternative would have been to significantly reduce any assets owing to members of those funds that did have remaining assets.
Anderson says the closure of the dormant retirement funds has followed strict internal operating procedures, which have been documented and checked with the FSB. All fund closure applications to the FSB have been made in line with these procedures.
Anderson says the big problem is tracing beneficiaries who are entitled to unclaimed benefits, as there is often a paucity of beneficiary data.
closure process
In a statement issued on Thursday, Hunter says the FSB will re-open only those funds where it has reason to believe that the cancellation process may have resulted in substantial prejudice.
“If the rights of members and beneficiaries were properly protected in the course of the closure of a fund, the costs incurred in closing it will not have been wasted,” Hunter says.
She says that approval by the FSB of the closure of the dormant funds was based on the legal view held by the FSB at the time. She points out that, in formulating the processes reflected in his notices, the registrar was rightly concerned about minimising costs for the funds. The administrators were not obliged to follow the processes suggested by the FSB and, if they did, this must have meant that their own legal advisers agreed with the FSB’s interpretation of the Pension Funds Act.
The problem came to her attention when, soon after her appointment, she was asked to cancel the registrations of funds. She considered the legal basis on which she could do so and identified some possible problems in the way the registrations of some dormant funds had been cancelled in the past.
Hunter told the PLA conference that the closures were done in terms of guidance notes and directives issued by the Registrar of Pension Funds, which allowed retirement fund administrators to apply to the registrar for the appointment of an authorised representative or a trustee of the fund. The registrar would then approve these appointments explicitly.
Once appointed, the appointee was mandated to amend rules, determine investment strategies, prepare surplus distribution schemes or declare nil surpluses and transfer the fund’s remaining assets and liabilities, if any, to other funds before applying to cancel the fund’s registration.
Hunter says the registrar did not have the power to do this and it was also probably not very wise to appoint only people nominated by the funds’ administrators (normally their own employees) because they alone would then decide on, among other things, the terms of agreement with the administrator, the tracing and payment of unclaimed benefits due to beneficiaries, and the selection of unclaimed benefit funds, into which remaining unclaimed benefits would eventually be transferred.
Hunter says the legal advice she has received is that the correct procedure to be followed in the future is that the registrar should apply to the High Court for the appointment of curators of the funds intended for closure.
No complaints on closures – Tshidi
No complaints have been received following the closure of dormant (or “orphan”) retirement funds, says Dube Tshidi, the Registrar of Pension Funds and the chief executive of the Financial Services Board (FSB).
In a statement, Tshidi says the legal advice obtained by FSB deputy executive in charge of retirement funds Rosemary Hunter from senior counsel that some of the methodology employed by the FSB may technically have no legal support, is being “taken seriously”.
He says future retirement fund closures may have to be adapted to bring them in line with the law; or else suitable amendments to the law will have to be explored.
But he says there is no question of the FSB revising each and every closure of orphan funds over a period of almost 20 years, unless in circumstances where prejudice has been shown to exist.
“In fact, this would be in line with counsel’s advice that only those cases need to be reviewed where material prejudice has been shown to have been caused to stakeholders.
“Counsel advised that the public interest is not harmed where no material prejudice arises from a legal-technical problem with the process leading to the cancellation of a fund which has ceased to exist,” Tshidi says.
He says the process adopted by the FSB was transparent, undertaken in close and continuous cooperation with industry bodies and was, beyond doubt, well-intended by all involved in order to rid the pension fund industry of a nagging problem which has developed literally over decades.
On December 31, 2006, 13 143 funds were still registered, of which the majority were no |longer active.
Between January 1, 2007 to February 13, 2014 a total of 8 298 funds were cancelled or liquidated. These consisted of 1 494 voluntary dissolutions and 6 804 cancellations of registration “on proof, to the registrar’s satisfaction, that the fund had ceased to exist”.
The majority of the latter cancellations followed a process under the Pension Funds Act where, at the initiative of the registrar, an independent board of trustees was appointed to represent the interests of the subject fund, which had no trustees.
Tshidi says that the process, which was open, resulted in full-member transfers being approved in the case of 1 208 of these funds and 2 105 funds being closed. Another 1 204 retirement funds were in the process of deregistration, but were not yet cancelled.