'Secret" profits and their consequences have continued to rear their ugly head ever since Personal Finance exposed how retirement fund administrator Alexander Forbes took retirement funds for a R500-million ride.
The story is still far from over.
- There are ongoing battles between the stung retirement funds and Alexander Forbes over the way it is planning to limit refunds to the funds by using formulas that will curtail proper compensation.
- Old Mutual has been making secret profits at the expense of members of medical schemes.
- Retirement fund administrator NBC is trying, in the face of opposition from the Financial Services Board (FSB), to ex post facto obtain an agreement from the affected retirement funds for the secret profits it made. We also provide more details about a R132-million-plus-interest award made in favour of two Johannesburg municipal retirement funds against NBC.
Since reporting last week on the fact that NBC had lost an appeal earlier this month to a private adjudication tribunal against a determination made in a private adjudication last year, Personal Finance has come into possession of the most recent determination.
The parties agreed that the adjudication and the determination itself should remain secret.
But as with most things secret, they seldom stay secret for long. In this case, it is a very good thing as this determination should be read by all those in the financial services industry who rip off an unsuspecting public.
A private adjudication of this nature does not, unfortunately, set a precedent in law.
This despite the fact that the tribunal is made up of three senior, respected, retired judges namely, Gerald Friedman, John Smalberger and Johan Kriegler.
However, I would suggest that if these three good judges can reach their conclusion confirming in the main the determination made by the original retired judge, then much the same decision would be reached in a court of law.
On this basis I would suggest that there are and could be major implications for the financial services industry in a number of sectors:
1. For the perversely structured and opaque commission and cost structures used by the life assurance industry to encourage what has been massive mis-selling of their products over many years, where, in effect, the commissions and costs have not been properly disclosed by their agents or in policy documents.
Nor have policyholders, in most cases, been told that they can negotiate the commissions or that better and cheaper products are available to them.
Aggrieved retirement annuity fund members and life assurance endowment fund members who have been hit by the life assurance industry's confiscatory penalties when they can no longer afford to pay their contributions/premiums, especially if you were not informed of the actual commissions and the fact that they can be negotiated.
2. For those retirement fund administrators (Alexander Forbes, Momentum, Lekana and NMG) that took commissions and fees from the Living Hands Umbrella Trust, which was plundered in the Fidentia scandal, leaving 47 000 widows and orphans out of pocket.
In terms of this determination, the curators of Fidentia would do well to look to these retirement fund administrators that channelled money to make good on any shortfalls that will surely occur when they have finished realising the assets that Fidentia bought with some of the plundered funds.
It is not merely a matter of paying back the commissions/fees received, as some are planning to do. It is a matter of making good on the total losses, particularly as it appears none of those who received the fees and commissions did any real due diligence in assessing that the monies would be properly and prudently invested.
3. For those retirement fund administrators that are still quibbling about paying back secret profits or are quibbling about the size of the paybacks. The FSB has pointed out that retirement fund trustees have a fiduciary duty to get every last cent plus interest back into their coffers.
Fund trustees can take heart from this determination.
4. For those retirement funds that have outsourced the payment of pensions to their pensioners to various life assurance companies without being informed of commissions, the fact that commissions can be negotiated or that outsourcing may not be in the best interests of their pensioners.
The tribunal determination was divided into two parts:
- The first part deals with a "secret" R30 million commission that NBC received from now-imploded Fedsure; and
- The second part deals with NBC giving incorrect advice to the City of Johannesburg Municipal Pension fund and the City of Johannesburg Pension Fund to outsource the payment of pensions to Fedsure. The advice was driven by the commission being received by NBC.
In dealing with the commission, the judges cited a quotation we have used many times in Personal Finance over the past few years. It is from a judgment in the case of Robinson v Randfontein Estates in 1921, where Chief Justice CJ Innes said: "Where one man stands to another in a position of confidence involving the duty to protect the interests of the other, he is not allowed to make a secret profit at the other's expense or place himself in a position where his interests conflict with another There is only one way by which transactions can be validated, and that is by free consent of the principal following upon full disclosure by the agent."
This, the tribunal judges pointed out, was confirmed by the Supreme Court of Appeal as recently as 2004 when it ruled: "The defences open to a Fiduciary who breaches his trust are very limited; only the free consent of the principal after full disclosure will suffice."
After repeatedly being told by the trustees of the retirement funds that they were not prepared to approve the commission, NBC attempted to deceitfully slip approval by the trustees on a number of occasions by, among other things, referring to "commission in accordance with the Life Offices' Association (LOA) scales when pensioner liabilities are outsourced".
The judges not only criticised the way the NBC took the commission but also the fact that it never disclosed that LOA commission scales defined the maximum commission that could and can be negotiated down to lower amounts.
The tribunal found that NBC rushed through the R1.63 billion transaction without fully disclosing the commission or doing a proper assessment on the purchasing of the annuities (pensions).
The funds consequently had to cancel the transaction when they discovered that the outsourced pensions were not in the best interest of pensioners. As a result Investec, which by that time had taken over much of Fedsure when it imploded, insisted on deducting costs of R122.6 million from the funds.
The tribunal found that NBC was responsible for R92 million of this amount and that the poor advice from NBC had resulted in the funds incurring unnecessary costs.
And, once again, we find a member of the actuarial profession behind some unacceptable practices. Just when, I must ask, will the Actuarial Society of South Africa take action against those in the profession who misbehave?
- Note:
The full determination is available online. Type the following url: www.persfin.co.za/ site/28/media/nbc.pdf