A first step towards justice for South African pensioners

The regulatory body that is meant to protect South Africans from unscrupulous financial service providers is the Financial Sector Conduct Authority (FSCA) — South Africa’s new market conduct regulator.

On 4 March 2019, the FSCA took an important first step in ensuring that thousands of pensioners and their dependents 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, which can be found here) to all pension fund administrators (companies such as Liberty and Alexander Forbes) to urgently reinstate pension funds.

Specifically, these corporations must go to court to undo the cancellation where a fund has been erroneously deregistered before 1 April 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. Yet 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 have funds reinstated urgently. This circular is an important step forward, but it is not enough.

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 that they saw as “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 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 said 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 such as 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 publicly 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 — obtained the deregistration of funds that it knew were still owed refunds from “secret profits” that 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 R26-million 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 fulfill 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 such as the elderly and orphans, 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 South Africa’s social security system, and the ability to access income in retirement is an essential part of ensuring that the elderly can live with dignity. Both access to social security and living with dignity are rights enshrined in South Africa’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 in relation to pension funds. This is also so because, as was argued by Rosemary Hunter at a recent Pension Lawyer’s 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 which 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 so that they can be properly wound up, and pensioners paid.

As we’ve already said, while we welcome the step taken by the FSCA in its circular, more needs to be done. It is clear that 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 fund administrators should not and cannot profit from their wrongful actions.

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

Michael Marchant is a researcher at Open Secrets.

See more at www.opensecrets.org.za/cancelled_pensions/. Follow us at: @OpenSecretsZA