Johannesburg - The Financial Services Board has begun an investigation into the business practices of Alexander Forbes and NBC Holdings to ascertain whether the home loans subsidiaries of the country's two largest pension fund administrators made any secret profits.

The investigation, which was approved last week by FSB head Dube Tshidi, follows a damning article published by City Press Business on June 8. The article alleged that HomePlan, a division of Alexander Forbes, and NBC Future Guard, a unit of NBC Holdings, were raking in millions of rands in undisclosed profits from the loans they granted to the members of pension funds.

The administrators set up the home loans units through joint-ventures with banking group Absa. Absa provided the funding for the home loans while HomePlan and NBC Future Guard made the loans to members of the funds.

To access the loans, pension fund members put up their pension benefits as collateral. But the pension fund administrators, which also own a number of divisions that provide services ranging from risk management and investment advice to actuarial employee benefits, are said to have failed to disclose to the pension fund members and the trustees that they earned kickbacks and interest income from the joint ventures with Absa.

The administrators are also accused of not acting in the best interests of the pension fund members in charging interest rates that are unjustifiably high on what are essentially low-risk loans. The one-stop shop model, in which the administrator offers an array of services, will also come under scrutiny as it is seen as the root cause of poor disclosure and undisclosed profits and commissions.

Jurgen Boyd, the FSB's deputy executive of retirement funds and the man leading the investigation, said the regulator intended to wrap up its investigation as soon as possible. He would not reveal more details about the probe.

"We will look into the whole aspect of non-disclosure. We want to look into the conduct of the administrators and establish whether they earned secret income from their mortgage finance subsidiaries," Boyd said.

If the probe finds wrongdoing, the administrators could be ordered by the FSB to pay back the secret income to the pension funds. Another scenario is that the pension funds could institute legal action against the administrators to reclaim their monies. The worst case scenario is that the FSB could withdraw the licences of the administrators, if they are found to have violated the licence conditions stipulated by the Pension Funds Act.

Bulking scandal

It is barely three years since the pension fund sector was rocked by the bulking scandal. In 2006, Alexander Forbes was forced by the FSB to pay its clients R480m it secretly skimmed from its bulking activities. However, NBC Holdings refused FSB's order and has never refunded its clients.

Bulking is when pension fund administrators treat individual pension fund bank accounts as one large bank account in order to negotiate for a higher interest fee. But the extra interest earned is never disclosed to pension fund members. The lack of disclosure of this profit to clients, the rightful owners of the funds, is not allowed by the Pension Funds Act.

In the pension-backed home loans market, administrators use the assets of the pension fund members to secure cheap funding in the corporate bond market. The funds are then lent to fund members as home loans at inflated rates without proper disclosure. In some cases, members are offered the pension-backed loans at rates above the prime rate. Commercial banks like First National Bank offer the same loans at rates of 1% and 1.75% below prime.

Nomkhita Nqweni, the managing director of Alexander Forbes Financial Services, has denied any wrongdoing by her company.

"In discussions I have had with the Registrar (Boyd) and chief executive of the FSB (Tshidi) on this matter, I have welcomed the prospect of the FSB coming to our business and getting a better understanding and overview of how HomePlan operates.

"They have confirmed that they are not investigating HomePlan but are doing a review as part of their industry-wide statutory role," Nqweni said.

Balan Chetty, the financial director of NBC Holdings, declined to comment.

"I cannot comment as I have not heard anything about an FSB investigation," he said.

Industry commentators are waiting with bated breath to see if the FSB will show strong resolve in dealing with the matter.

Johannesburg-based actuarial consultant Donald Molema posed the question of whether the FSB will "prove that its bite is stronger than its bark and go for the big sharks that have for years been exploiting pension fund members".

- City Press