A licence to print money
Has your pension fund administrator facilitated your home loan? If you answer “yes” to this question then it’s possible that your pension fund administrator is benefiting at your expense. That’s according to allegations carried in City Press recently. Early indications are that ‘secret profits’ made by pension fund administrators through the provision of home loans to pension fund members could dwarf those earned in the recent ‘bulking scandal’ (for which Alexander Forbes gained notoriety). But before we run out and lynch the perpetrators we need to find out if the money made from this business activity can really be tarred with the same brush.
At the moment details of the alleged inappropriate practice are sketchy. But with the information at hand (and without mentioning specific companies for the time being) we can provide a basic outline of how the system works and pose some initial questions.
How to profit using arbitrage...
What we know thus far is the following: The pension fund administrator would raise finance on the debt market using member assets as collateral. Because of the size of the transaction these funds could be secured at 0.25% or 0.5% above the Johannesburg Inter-Bank Agreed Lending rate (Jibar) which is around 2% below prime. The pension fund administrator would then go about the business of granting home loans to pension fund members at between 1% below and 2% above prime. This activity would be conducted through a joint venture company (usually with a bank or other financial services company) as partner.
The joint venture would then earn money from the difference in interest rates: the Jibar on the borrowed capital and the agreed rate on the mortgage loan. The joint venture operated as a bond originator and as such could also charge the borrower an initiation fee and a monthly administration fee as permitted by the National Credit Act. Based on the facts at hand the joint venture companies were registered and conducted business with fund members in a legitimate fashion. All necessary disclosures were made except for one…
The fund member would not have been aware that he was ‘borrowing’ money from the pension fund administrator. Fund members would not know that the pension fund administrator had any beneficial interest in the mortgage loan. And that seems the crux of any possible complaint.
Is this really a ‘secret’ profit?
What has to be established is whether this practice impinges the pension fund member’s rights. Are the profits earned by pension fund administrators through entering the mortgage origination business unfair? On the face of it the pension fund administrator, through the joint venture, is offering its members a shot at qualifying for a home loan. So provided this home loan is at (or better than) the best loan its member could secure on the open market there shouldn’t be a problem. The only charge could be of conflict of interest; something which is rife in the financial services industry.
Pension fund administrators are in business to make money. They’re not non-profit or charity organisations tasked with managing your money for some form of ethical or moral gratification. They must seek ways to maximise the return from their activities and reward their shareholders – and that means expanding their profit offerings.
We doubt it will be easy to prove that individual fund members who took mortgages with a joint venture company (part owned by the pension fund administrator) have suffered a financial loss. And the only way the profit can be condemned is if it were deemed excessive.
Editor’s thoughts:
It always seems as if the next financial services industry scandal is just around the corner. No sooner is one scandal put to bed – and the perpetrators reprimanded – than the next surfaces. Ironically as clever as each successive profit maximising technique is the growing transparency around fees and other financial services costs will eventually expose the transgression. Is there a call for pension and retirement fund administration to become non-profit organisations? Add your comment below, or send it to [email protected]
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