PFA Rulings: Two rulings concerning secret profits from bulking

TWO SIGNIFICANT RULINGS FROM THE ADJUDICATOR CONCERNING SECRET PROFITS FROM BULKING

The Pension Funds Adjudicator has released two determinations dealing with the obligation of trustees to recover secret profits retained by fund administrators, and the necessity for them to take a decision as to the application of such recovered monies.

In both cases the decisions of the board of trustees in relation to secret profits from bulking were set aside. In Dollman the Adjudicator refused to uphold the trustees’ decision to allow the administrator (NBC) to retain the secret profits made over a 6 year period. In Milton, where the secret profits had already been repaid by the fund administrator (Alexander Forbes), but where the trustees could not decide how to allocate the funds, the Adjudicator directed the trustees to take a proper decision as to their utilization.

The determinations contain important guidelines on the construction to be placed on such complaints. Of particular importance are the remarks concerning the obligations imposed on trustees in relation to the recovery of such profits, as well as the cautionary note sounded to members to temper their expectations of a direct entitlement to share in such recoveries.

The facts were briefly the following:

Dollman

The complainant was a former member of the fund. He claimed that the fund administrator made secret and unlawful profits through its practice of bulking the bank accounts of funds. (These current accounts are used for the day to day running of funds, for instance for the acceptance of contributions and the payment of benefits as they become due.) It was not disputed by the fund or NBC that it had failed to disclose to the fund that it was receiving financial incentives from the banks in the form of a percentage of the additional interest payable to the funds involved. This practice had persisted for a period of 6 years, from April 2000 to March 2006. The additional undisclosed profits in respect of the I&J Fund amounted to R369 109. However, the trustees of the fund decided to allow NBC to retain the profits, despite its offer to reimburse the fund.

It was against this decision that the complaint was directed. The Adjudicator agreed with the complainant that the decision of the fund to ratify the unlawful conduct of NBC could not possibly be in the interests of the fund, its members, or former members. She therefore directed the fund to recover the profits and to formulate a plan as to the allocation of the recovered monies.

Milton

Here the fund had already recovered the undisclosed profits from its administrator. The bulk of the settlement had occurred in 2002 when an amount of over R2 000 000 was paid to the fund. However, the trustees at that time simply allocated it to a general reserve, without a definite decision being taken about its application. Five years later when the second settlement amount was finalized, the trustees took a decision to postpone indefinitely any allocation or distribution of the recovered proceeds pending rulings from this office relating to bulking complaints.

The Adjudicator directed the trustees to decide on the application of the funds within a prescribed time frame.

Important findings in the rulings

The following interpretations placed on the bulking issues by the Adjudicator offer guidelines to trustees grappling with similar issues in their own funds and in addition, what complainants need to know about what constitutes a complaint in this content.

· Fund administrators are not allowed to make undisclosed profits, from bulking practices. This flows from the legal principles relating to agency, and in such situations administrators are legally bound to repay the profits to the funds concerned.

· Trustees of funds, in turn, have a duty to ensure that all profits due to the fund are recovered where practicable, for the benefit of the fund and its members.

· If a complainant can show that the trustees have failed to recover such profits where due (as in Dolman’s case) or that the whole amount was not recovered where it was possible, the trustees may be compelled to recover the profits.

· A member or former member may also complain about the failure to allocate such profits once recovered. Complainants in this position are entitled to a decision by the trustees, although this may not necessarily be in their favour.

· The member’s complaint lies against the fund or its trustees. It is most unlikely that a complaint could successfully be brought by a member directly against an administrator.

Following the above principles, the Adjudicator directed the trustees to recover the profits in Dollman, and in Milton she directed the trustees to take a decision within two months with regard to how the proceeds would be applied.

The full determination can be read here - Dollman  & Milton