Pension Funds: Don't let yours become a disappointment

We all know someone who feels let down by their pension fund. When it comes to surrender values, very often the figure is far less than anticipated – and in some instances, fees and penalties can be not only excessive, but unfair. There are even cases where, when a query is raised, pension funds are caught out making a ‘mistake’ in their favour. All of this points to poor transparency and potentially substandard audit and oversight.

That’s according to Etienne Retief, chairman of the tax committee at the South African Institute of Professional Accountants (SAIPA). He believes there should be greater oversight, greater transparency and greater personal responsibility from those entrusted with pension funds.

“As the steward of other people’s money, there is a grave and onerous duty on pension fund administrators to look after it. That extends beyond investing it wisely and further to fees and penalties – which are often not reasonable, nor easily understandable by the contributor,” says Retief.

He points to the fact that even though statements are sent every month, these tend to paint a rosy picture which is shattered when the contributor looks to surrender a policy. “The reality is that the value of the policy month by month is its surrender value. That rosy picture does not reflect what the policy is worth and is often therefore completely spurious. It would be refreshing, and honest, if a pension fund would indicate the surrender value, less penalty fees, on the date of each statement.”

Penalties for cancellation or early surrender are quite understandable, Retief says, since costs are incurred. However, while the law provides for these penalties it does not prescribe the percentage or amount. “Pension funds therefore tend to charge the maximum allowed under the law, rather than a fair and reasonable fee. These charges are rarely made clear to the policyholder before they sign up. When they are levied, fund administrators often simply say ‘it is mandatory’.”

More than that, he says sometimes a penalty is incurred for every step of a process, instead of just once. “For example, it may take three steps to move funds from one investment to another; the law allows for a fee to be charged, but not necessarily per step. Watch out for this.”

Anecdotally, Retief relates from his own experience how surrendered policies have fetched far below the estimated value. “On querying it, the response has been ‘speak to our actuaries’. Being an industry insider, however, I have identified the issue and had it corrected in my favour, while the fund administrator claims ‘finger trouble’.”

He contends that if this can happen with one policy, it can happen with many more; the concern is that lay persons will not have the expertise to identify or rectify the situation.

Retief believes more thorough audits improved oversight are necessary for all pension funds. “The bottom line is that if a policyholder is given a number, they should be able to trust that number. I’m not sure that is the case right now; it is an almost inescapable conclusion that the funds are getting away with it if these numbers are not accurate.”

Controls, he says, have to extend to demonstrations that those responsible for investing pension funds have done their homework thoroughly, assessed risks and placed monies as effectively as possible. “This doesn’t mean the investments have to be performers. Rather, it should be an indication of diligence that has resulted in an informed decision. There should be more checks and balances for trustees, to the extent that personal responsibility and liability should come into the picture.”

But Retief also believes the individual should take more care in choosing their fund – and should also stand up for their rights. “Fighting pension funds is very difficult as they have resources and recourse through the courts can be time consuming and prohibitively costly. The first port of call is the ombud, which will assess your issue and give a clear indication of whether or not it is worth pursuing,” he says.

By all means, Retief drives home the point that blind trust in pension funds should be dispensed with. “If you are not satisfied, raise and pursue the matter and hold your fund accountable. It could be worth a lot of money.”