| Concerning ethical administrative
practices
The Cape Argus
published two articles on 18 March 2006 about the ‘plundering
of pension funds’ by certain service providers, and, more
importantly, the question was raised ‘How many retirement
fund administration companies are indulging in, or have indulged
similar to those…in the past?’
Unfortunately this places a question mark on the
whole industry and service providers such as us. We have therefore
considered it necessary to state our position clearly and unequivocally
before you, your fellow trustees or we are placed in any awkward
position on the basis of inadequate background.
Following issues are raised in the articles as questionable
or even ‘not lawful’ practice, more specifically in
instances where the client is not aware of such practices that benefit
the service provider:
1.
Bulking of investible cash of retirement funds
This practices allows the administrator to negotiate
preferential interest rates with a bank on participating retirement
funds’ capital that becomes available for investment after
payment of monthly expenses and benefits. The administrator gains
a monetary advantage.
RFS position: We employ a ‘cash management
system’ with a local bank for all fund who also use this bank,
that affords participating funds preferential interest rates. The
credit interest is calculated by the bank and credited monthly directly
to the participating fund’s bank account, as are all bank
charges. We do not bulk capital of different retirement funds in
a single bank account except for the situation explained in the
next point.
2.
Bulking of Capital for Pension Payments
The practice is to open a single bank account for
a number of participating funds into which each fund pays the total
net monthly pensions payable and from which electronic transfers
to the pensioners are affected. Participating funds benefit from
the fact that the fund does not have to set up its own electronic
banking facility. This account obviously earns interest and carries
bank charges the disposal, and the recovery, of which respectively,
may raise questions.
RFS position: We do operate such a bank account
which is reconciled monthly and cleared back to the source fund
in respect of any pensions not drawn. Fixed bank charges are spread
across all participating funds and are recovered from the participating
funds as a fixed cost every month. Variable charges and interest
are assessed annually in arrears and recovered monthly over the
new year, as a monthly cost per pensioner from each participating
fund.
3.
Commission on Risk Schemes
The maximum commission that an insurance company
may pay to an intermediary in respect of group reassurance schemes
(group life scheme, is regulated in terms of the Long-term insurance
Act. An intermediary (i.e. the person that was officially appointed
by the fund to act as such) can make any arrangement with the insurer
that between 0% and 100% of the statutory maximum commission be
paid to him.
RFS position: Commission is one of our two sources
of income, the second being fees based on monthly invoices. Where
we are appointed as intermediary between an employer and an insurance
company that manages the retirement fund of a client, we always
receive commission, as our only source of income for the services
we provide in such an arrangement. We never hide the fact that this
is the manner in which we are remunerated nor do we hide the quantum
of our remuneration.
When we tender for new fund administration business
we state explicitly in our tender documents whether or not commission
will form part of our remuneration. We never consider commission
to be ‘windfall’ income but always take this into consideration
when determining the fee we need to charge to a client. In most
cases we specifically exclude commission. Our administration agreement
also specifically states whether or not we are entitled to commission
and we have a practice of reminding our clients of the facts, where
we are entitled to commission, whenever we carry out a reassurance
market review.
4.
Home Loans
There are two types of pension backed home loan
schemes. Firstly ‘direct loans’, where a fund grants
loans to members directly, applying its own capital and using the
member’s share in the fund to secure such loan. In this arrangement,
the administrator must recover any fees for administering such a
scheme from the fund and the fund in turn may, or may not as it
may decide, recover the fees from the borrower.
The second ‘indirect loan’ scheme is
usually funded by a bank and is administered either also by the
bank or by the fund administrator. Since the scheme is essentially
administered without involvement of the participating fund, the
participating fund plays no role in the determination or recovery
of costs or fees, or the determination of the interest rate, and
may not be fully appraised of all remuneration components. These
schemes sometimes entail the accrual of an interest margin to the
loan administrator and other fee based remuneration.
RFS position: The only scheme we have been involved
in, that was funded and administered by a local bank has been closed
for new business by the bank for a few years now. The agreement
entered into between the bank, RFS and the participating employers
provided for a once-off fee of N$ 50 per loan granted to be paid
to RFS for its administrative involvement. We do not offer administration
of a bank funded ‘indirect loan’ scheme.
Where funds that are administered by RFS offer direct
loans, our fee structure is set out in the administration agreement
and we recover these fees on a monthly basis from the fund by means
of a statement. All fund Cheques are counter signed by a fund official.
5.
Outsourcing of Pensioners
The outsourcing of pensioners is a pretty common
phenomenon. In certain instances the administrator retains responsibility
for the management of the pensioner assets and/or the administration
of pension payments. This can entail payment of commission where
the asset and/or the liability is transferred to an insurer and
the payment of fees for any ongoing involvement.
RFS position: RFS has to date handled two pensioner
outsourcing exercises, in once case at the insistence of the fund
and in one case on our advice, where the number of pensioners was
so small that it was not warranted to retain them in the fund with
very little prospects of the number growing meaningfully. In both
cases we retained no further involvement and we can state categorically
that we received no remuneration whatsoever from any third party.
6.
Conflicts of Interest
Some service providers offer a wide range of services
directly or indirectly through associated companies. Typically this
covers services such as fund administration, fund consulting, actuarial,
investment consulting, group reassurance, asset management, banking,
short-term insurance etc. Most of these individual service components
entail the payment of one or other form of remuneration when the
component is placed with a particular service provider, particularly
where business is placed ‘in the family’ and this may
evidently result in the client being given biased advice.
It seems to have become pretty much general practice
for composite service providers to ‘cross-sell’ its
services as widely and as effectively as possible, employing all
means at its disposal to achieve highest possible penetration. To
manage conflicts of interest in such a scenario is clearly very
difficult and poses a major challenge to trustees.
RFS position: It should be no secret to our clients
that we are focused on fund administration. It is true though, that
fund administration and consulting services in our industry are
not well defined and cannot be readily distinguished. We prefer
to draw the line between day-to-day fund management services and
ad-hoc or specialist advice. Our focus is on day-to-day management
services. In all cases fund administered by us employ an actuary
as the ultimate expert who oversees total fund management and of
course auditor who executes his statutory obligation.
Our main source of income by far is made up by our
payroll based ‘retainer fee’. For services that are
provided on an ongoing basis (we refer to standard services) we
normally receive a payroll based ‘retainer fee’ explicitly
set out in our administration agreement which we recover monthly
from the fund by means of a statement. Payment is effected by cheque,
counter signed by a fund official. . For services that are provided
on an ad-hoc basis (we refer to non-standard services) we receive
a fee determinable according to our administration agreement which
we recover from the fund by means of an invoice setting out the
reason for and the basis of the fee. Payment is effected by cheque,
counter signed by a fund official.
The remuneration we determine for groups that participate
in our Benchmark umbrella fund, is recovered in three ways, firstly
as an asset based fee, secondly and where so agreed with the participant,
by way of commission on the reassurance schemes maintained for the
group, and any remaining balance, by way of a payroll based fee.
We can also state categorically that we receive
no remuneration from placing assets with any asset manager at all.
7.
Raiding of Pension Fund Surpluses
In South Africa funds have been taken on for the
practice of raiding of surpluses to benefit a few members or the
employer only.
RFS position: As administrators we are not an active
party to any decision concerning the distribution of fund surpluses
as this is always the actuary’s ‘playing field’
and as we do not offer actuarial services.
8.
Advice to Members Leaving a Fund
Composite service providers often have in-house
resources whose responsibility it is to advise members when they
withdraw from a fund (retirement, resignation disablement etc).
Mostly these persons are remunerated mainly by commission. Where
members are able to preserve their capital in the fund no commission
would become payable and a commission earning employee is unlikely
to provide unbiased advice in such a situation.
RFS position: We do not employ a dedicated person
to deal with members withdrawing from funds and we do not employ
staff who are remunerated mainly by means of commission. We do not
offer any incentives to staff or third parties, other than a small
portion of any commission accruing to the company, for concluding
transactions with individual fund members.
We do not deny that we do earn some commission on
transfers of member capital between approved funds but believe that
our environment is such that we can provide unbiased advice.
9.
Conclusion
In conclusion, we unequivocally state that Retirement
Fund Solutions does not indulge, nor has it ever indulged in any
practice that might be considered ‘not lawful’ or even
questionable. All fees we generate and all income we receive is
disclosed to our clients and is in accordance with specific clauses
of our service agreements or is derived from general principles
contained in our service agreements.
Should you have any questions in this regard or
require any further clarification or independent confirmation, we
shall be pleased to provide any assistance that may be necessary
to satisfy you comprehensively and conclusively. Please do not let
the opportunity go by to raise any doubt or concern you may have.
Yours sincerely
Tilman Friedrich
tfriedrich@rfsol.com.na
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