It is little wonder that the Financial Services Board (FSB) and the National Treasury have finally lost their patience with the blatant plundering of our retirement savings by the financial services industry.
From Finance Minister Trevor Manuel on down, warnings have been issued for years. This week the FSB suspended the licence of IME Actuaries and Consultants (Pty) Ltd to act as professional benefit administrators of pension funds.
This tough action comes after warning after warning, as well as the vir-tual R3 billion admission of guilt fine Manuel slapped on the life assurance industry last year for the confiscatory penalties the industry applies if we can no longer afford to pay the contributions to our retirement annuity (RA) funds and life assurance endowment policies.
Tough action seems to be the only language understood by the greedy, overpaid executives of financial
services companies who award themselves generous free shares and share options, and retire while relatively young in splendid luxury. This often comes at the cost of plundering our retirement savings.
Most of these executives simply refuse to accept that the government is deadly serious about putting a stop to the industry's malpractices.
This week the financial services industry strutted its arrogance yet again at the three-day hearing held by Parliament's portfolio committee on finance into the secret profits made by retirement fund administrators.
Some representatives chose to use legal niceties and verbal dexterity or simply to side-step the issues, instead of telling the committee, in simple language, what it had failed to do.
Also this week, Pension Funds Adjudicator Vuyani Ngalwana again spelt out how frustrated he is with an industry that, he says, is not meeting the requirements of the statement of intent it signed with the government over the confiscatory penalties it applies if we cannot afford to pay our RA contributions.
Irresponsible industry
My view - and I stated it in Parliament this week when I gave evidence to the committee about secret profits - is that the financial services industry continues to prove that it is not responsible enough to handle our retirement savings.
In my opinion, the better option would be for the government to set up statutory, fully funded defined contribution retirement funds for specific industrial sectors. Every employed person would be compelled to belong to one of these funds and to pay a contribution based on a percentage of his or her income.
The private sector could continue to manage how our savings are invested, but under the very firm hand of the trustees of each industrial sector fund. The private sector would also be allowed to offer schemes that would enable employees to top up their retirement savings, but only under very rigid controls.
There are two types of people in the financial services industry:
- Those who genuinely try to do what is in the best interests of you, the consumer; and
- Those who cynically proclaim they are doing what is in our best interests, but are merely ripping us off.
Unfortunately, this group of people predominates.
The tone of the parliamentary hearing was set by Richard Olfsen, a director of mCubed Employee Benefits, who firstly used the hearing as an advertising opportunity and then delivered the most absurd argument about why administrators should not have to repay any of the secret profits they made from fund members.
Olfsen argued that the costs of distributing the secret profits back to retirement fund members would be greater than the amounts returned for bulking, implying that members would have to meet these costs.
The costs, Mr Olfsen, will have to be met by the companies that perpetrated the secret profits, and these costs should include providing the funds concerned with independent actuarial assistance.
And then to top it off, Peter Moyo, the newly appointed chief executive of Alexander Forbes, again attempted to claim that the only problem with bulking was the lack of disclosure to retirement funds
According to Moyo, the funds had unknowingly done well out of the arrangement and, by implication, should be grateful.
He and Alexander Forbes seem unaware that the common law of agency requires an administrator to do the best possible for the retirement funds it administers.
Unanswered questions
The important issues Moyo did not address on this issue alone include:
- If Alexander Forbes is the retirement expert it claims to be, it should have known from the start, that for many years, making secret profits has been contrary to statutory, common and case law;
- Why Alexander Forbes did not stop making secret profits immediately after receiving legal opinion that the practice was "not lawful"; and
- Why, when Alexander Forbes reached settlements with the Barplats and Amplat retirement funds, which caught Alexander Forbes cheating, it did not take immediate steps to reveal this to all the funds it administers, instead of making secrecy a condition of the settlements.
In my presentation to the portfolio committee, I concentrated on the Alexander Forbes "business model", which seems to have been based on making secret profits at the expense of retirement fund members at every turn. This "business model" was
driven by its fund consultants, who are given incentives to herd naive trustees into the products offered by the Alexander Forbes stable.
This pushed the profits of Alexander Forbes to unrealistic levels. And the result is that a handful of senior executives profited handsomely to the tune of hundreds of millions of rands from free shares and share options at the expense of impoverishing retirement fund members.
When challenged by the committee about why he did not address all the issues I raised, Moyo simply
dismissed what I had said as "outrageous" and claimed that the parliamentary committee had asked him to speak only about bulking.
This is similar to the way Moyo tried to dismiss Personal Finance's original exposé of the secret profits made from bulking retirement funds' bank accounts ... and for which Alexander Forbes has now been forced by the FSB to pay back R380 million, with another R100 million, by its account, in the offing for other, yet unnamed, misdeeds.
What is outrageous, Mr Moyo, is that Alexander Forbes continues to duck nearly every question we ask; that it continues to claim that its only sin was not to tell retirement fund trustees that it was making secret profits from bulking their bank accounts; and that Alexander Forbes continues to maintain that it is and was an ethical institution serving the best interests of fund members. I ask: is R480 million ethical?
Restore credibility
If you want retirement fund members and trustees to believe you, Mr Moyo, you (and this applies to all the other offending retirement fund administrators) must:
- Make an unequivocal public statement about every practice that has resulted in unfair profits being made at the expense of retirement fund members, and repay the money, with interest, at the mora rate of 15.5 percent compounded;
- Where appropriate, take civil and criminal action against the people who made these decisions and profited at the expense of retirement fund members as a result; and
- Remove all the conflicts of interest that are to the disadvantage of retirement fund members. This applies particularly to Alexander Forbes's retirement fund consultants, who have a fiduciary duty to provide funds with the best advice, and who must not be paid to steer the funds into Alexander Forbes's products, particularly those from which secret profits have been, and are being, made. Then, and only then, can fund trustees start to accept that Alexander Forbes has reformed its ways.
Of one thing you can be sure, Mr Moyo, is that I and others will not stop asking the questions that need to be answered.
Alexander Forbes and other retirement fund administrators should take careful note of the views of the country's two biggest labour federations, the Congress of South African Trade Unions (Cosatu) and the Federation of Unions of South Africa, as well as the Financial Sector Campaign Coalition (a body representing 52 civil society organisations). They did not mince their words at this week's hearing.
Isaac Ramputa, of the Financial Sector Campaign Coalition, said: "If poor people were caught 'taking away benefits' it would be called theft.
"Alexander Forbes admits 'taking away' benefits of R368 million. This is equivalent to stealing 75 million loaves of bread or 75 000 cellphones. Poor people are jailed for stealing one load of bread or one cellphone."
Both Ramputa and Jan Mhlangu, Cosatu's retirement fund co-ordinator, correctly asked the committee: "Is there one law for the rich and another for the poor?''
Threat of further action
Dube Tshidi, the deputy chief executive of the FSB, made it clear that the repayment of the secret profits by Alexander Forbes is not "a get-out-of-jail-free" card.
The FSB could still take further action, Tshidi says, and this will not preclude aggrieved Alexander Forbes clients from taking their own action against the company.
Tshidi angrily made it clear at the hearing that the FSB and the National Treasury will not accept the retirement industry's view of what constitutes disclosure.
Disclosure has to be explicit and approved by fund trustees. He says it would also not be acceptable for administrators to get trustees to agree post-facto to any administrator retaining secret profits.
Jonathan Dixon, the chief director at the National Treasury, emphasised that retirement fund administrators would lose their licences if they did not come clean.
I hope the players in the financial services industry now realise that their fancy little games, backed up by lawyers overeager to please their masters, are no longer acceptable.
It is a matter of urgency that public trust in this industry is restored, and this can happen only when the unacceptable ways of this powerful industry are eradicated.