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Returning R500 million to pension funds

08 March 2007 Gareth Stokes

It took ten years for South Africa's pension fund administrators to generate R500 million rand in 'secret' profits. The most prominent culprit in the 'bulking' scandal was Alexander Forbes, which agreed last year to repay some R368 million to pension funds under its administration. They have also set aside an additional R100 million for any further claims arising from the practice which started in 1996 and continued until October 2004.

There is nothing new about the bulking scandal, which made headlines in the first half of 2006. However, some of the penalties imposed were debated in the portfolio committee on finance meeting in parliament on Tuesday.

A number of the pension fund administrators guilty of making 'secret' profits from bulking activities agreed to pay additional penalties to the Financial Services Board (FSB). These penalties were in addition to the requirement that the benefits accruing to the companies from bulking be repaid to the respective pension funds.

The FSB's consumer education trust received some R15.25 million, with Alexander Forbes contributing a full R12 million. Ian Davidson of the Democratic Alliance raised concerns that these huge 'penalties' could be seen as attempts to avoid prosecution. This suggestion was flatly denied by the FSB.

FSB executive officer Rob Barrow said, "there was no kickback to me or any of my executives in any form." He further stated that "prosecution is very much on the cards in any event."
 
How the bulking racket worked

Large pension fund administrators often handle hundreds of pension funds. Alexander Forbes administered 1,700 pension funds during the period when the transgressions took place.

The company consolidated the cash balances in all the funds under its administration to secure better interest rates with the banks. The process is known as bulking - and is not illegal. Industry experts state that the fund administrator would be doing its clients a disservice if it did not practice bulking.

What is illegal is the act of withholding some (or all) of the additional interest earned through the bulking process from the individual pensions funds. Alexander Forbes had clear mandate regarding the administration fees it could charge for its services as pension fund administrator and was operating outside that mandate by holding extra profits for itself.

Staggering scale of the problem

The FSB recently sent a circular to 200 of the country's fund administrators with a request that they voluntarily disclose 'secret' profits made through their fund administration activities. It emerged that 66 of these companies had complied with the request.

FSB deputy chief executive officer, Jurgen Boyd, was confident the remainder of the fund administrators were responsible for single funds, meaning they were not able to make profits from bulking.

36 of these administrators stated that they had made no 'secret' profits from bulking. Another 11 said all such profits were passed back to the clients, or that prior permission had been obtained for them to retain the benefits.

The FSB was alarmed by the attempts of some administrators to retrospectively obtain permission from their clients to retain the profits from bulking. The FSB states: "As already indicated the FSB is of the opinion that an agent should obtain its principal's consent before receiving or sharing in any benefit or profit, or else make full restitution."

Editor's thoughts:
More than six months have passed since Alexander Forbes agreed to repay R368 million in 'secret' profits. The FSB warns that prosecutions may still follow, and that the R12 million penalty paid by Alexander Forbes is unconditional. In our view, if prosecutions were intended, some action should already have been taken. Send your comments to
gareth@fanews.co.za.

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