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Who profits from unpaid pensions, asks new report probing wrongfully cancelled funds

Oct 23 2019 18:15
Carin Smith

A new investigative report released by advocacy group Open Secrets on Wednesday evening aims to put pressure on authorities to hold accountable those who wrongly deregistered a large number of pension funds, affecting thousands of people.

According to the report, entitled The Bottom Line, Who Profits From Unpaid Pensions?, by 2006, of the 13 132 pension funds registered with the then Financial Services Board (FSB) - since replaced by the Financial Sector Conduct Authority (FSCA) - only 3 500 were "active".

A project launched by the FSB, therefore, wanted to get rid of these so-called "orphan funds". Since 2007 over 6 000 pension funds had their registrations cancelled on the basis that they were no longer functioning.

Widespread problems

However, according to the report, some of these still held assets and liabilities to fund members and should not have been cancelled.

Whistle blowers who assisted in the investigation for the report are of the view that there were widespread problems in the cancellation of the pension funds and related unpaid benefits.

"(The trustees) were obliged to make sure that the funds were indeed empty of assets and liabilities and that members were paid before submitting them to be deregistered, but this was often not the case," states the report.

"The assets of cancelled and dormant funds were often moved into unclaimed benefits funds (UBFs) held by the fund administrator. Since 2008, the assets of these UBFs have increased from R450m to over R8bn. The corporations operating in this sector derive considerable income and profit from fees related to managing assets."

Scale of the problem

While admitting that the issue is "hugely complex", Michael Marchant, researcher: investigation and advocacy at Open Secrets, told Fin24 that the report shows multiple mistakes were made during the deregistration project, which led to "thousands of people not receiving their benefit pay-outs".

The report refers to a Constitutional Court judgment in September 2018, in which the majority of judges found that investigations by the FSB/FSCA had been sufficient.

However, the minority judgment pointed out the potential consequences for vulnerable fund members and the heightened vigilance that this required of administrators and regulators.

"Pension fund administrators have a duty to reinstate (wrongfully) cancelled funds and it is essential that the regulator and the authorities investigate how this happened and to hold those responsible (for wrongdoing) accountable," said Marchant. "We want the public to understand the scale of the problem in the industry."

He admits that there are multiple reasons for there being an estimated total of R42bn in benefits owed to more than 4 million pensioners and pension fund members, according to the Financial Services Board (FSB) 2018 Annual Report. Monies related to the deregistration project, which forms the scope of the report, is just a part of this larger total.  

Pensioners interviewed for the report include mineworkers and factory workers. They have been unsuccessfully trying to seek payment of their own benefits or that owed to a family member who has since died.

Collective failure

"There is no single simple explanation for this failure. The private fund administrators, the employers and the regulators have apparently failed collectively to build transparent and accountable structures for the management of pension funds. Instead, a system of perverse incentives flourishes," states the report.

Tiaan Kotze, executive: Liberty Corporate, one of several companies named in the report, told Fin24 that they will study the report once they receive it.  

"Liberty acknowledges that the matter of unclaimed benefits is a significant industry issue and we take it very seriously. The unclaimed benefits in funds administered by Liberty account for about R2bn of the R42bn of unclaimed benefits across the industry," he explained.

"We are fully committed to paying the benefits to members of these funds and are investing significant resources into enhancing our tracing and payment capabilities. Liberty supports ongoing industry and stakeholder collaboration to address this important issue."

Kotze explained that over the course of 2007 to 2013 the South African pension fund industry embarked on a widescale project to deregister dormant retirement funds.

"Following a review of systems and processes, Liberty identified approximately 130 funds that were deregistered in error over this period and periods prior. "Liberty has successfully re-instated 25 of these funds via the High Court and is working with the regulator and trustees to allow for benefits to be paid to members as soon as possible," says Kotze.

Two other companies contacted by Fin24 did not wish to comment on the report before studying its contents. Similarly, FSCA told Fin24 that it would be premature to comment on the report before having seen it.

UPDATE: Alexander Forbes, one of the other companies mentioned in the report, told Fin24 on Thursday that it has taken note of the report, which it will analyse.

"We wish to reiterate that where Alexander Forbes administers unclaimed benefits, we make every effort to determine if we have a benefit for a potential claimant. If we have a match, we ensure that the claims are processed once the claimants' details have been verified," the company said.

It also refers potential claimants to the FSCA to guide them on their relevant funds' respective administrators and and whether there is a potential benefit due to them.

liberty  |  pensions  |  retirement  |  financial services
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