| Article
1:
Protect
your Pension: Improper Bulking
In recent weeks, a number of improper practices
have come to light in the South African retirement fund industry.
Most notable amongst these has been the practice of improper ‘bulking’.
Bulking of capital contributed to a retirement fund
is practiced in a number of different ways, most of which are fair
and reasonable. If it refers to the practice of pooling of contributions
of individuals into one larger fund to be invested in bulk on behalf
of all the members, it is an implicit principle of pension business.
Another method of bulking is to flag the moneys held in separate
bank accounts of a number of different funds as belonging to the
same ‘interest group’. By bulking funds in this manner,
pension fund administrators are able to negotiate lower charges
on investments and higher interest rates.
If the benefit arising from the arrangement accrues
directly to the individual participating funds, it is an entirely
acceptable tool? However, unprincipled administrators may take the
view that the benefit is due to their intermediation and that they
should either participate in the benefit for the value added or,
worse, that the entire benefit arising from bulking accrues to them.
Whether the administrator should benefit at all may well be questioned
but every client should at least be fully aware if the administrator
benefits.
A third type of bulking is to establish a ‘trust
account’ with a bank which is funded from the administrator’s
various clients’ individual bank accounts for the purpose
of making benefit payments and disbursing other fund expenditure
such as reassurance and professional fees. Here again there is a
lot of scope for the administrator to generate additional revenue.
Typically the account will bear interest at favourable rates and
may incur bank charges at preferential rates. Cheques will remain
outstanding for a while or may even turn stale which will generate
interest gains. In this arrangement the administrator should not
benefit at all and, if the administrator does, every client should
be fully aware of this.
Bulking is not illegal although the South African
Financial Services Board seems to consider this in breach of the
administrator’s fiduciary responsibility towards its clients.
Some might argue that it is the benefit of economies of scale, a
common principle in business. However any code of ethics requires
that remuneration for services rendered should be fair in relation
to the expense incurred, which in turn is a function of the expertise
and experience applied. A client who does not have the full picture
of what benefits accrue to its administrator in return for the services
provided, will not be able to assess whether or not he or she receives
value for money and should rightfully feel aggrieved.
But
watch out, bulking is but one of the methods of profiting!
The focus of the debate of secret profiting has
concentrated on bulking, though this is just one method for service
providers to generate additional, potentially undisclosed profits.
There are a number of other methods which we will cover in future
columns.
In our capitalist world there seems to be an attitude
of considering such practices as ‘business acumen’,
being clever in going about business. This is driven by the demands
of shareholders for higher returns, year on year and fears that
shareholders will desert companies who don’t deliver incremental
growth on an annual basis. There is definitely a case to contemplate
the ethics of business practices and to place greater emphasis on
fairness and ethical behaviour!
What
you can do to prevent abuse
The most important single thing that any individual
and a trustee can do is to ensure that he or she is familiar with
the fund rules and the contractual arrangements with services providers.
The following are of particular importance:
The
parties to the fund: Who has been contracted to provide
services to the fund and how are they remunerated?
The contract: what are the expenses that have been
agreed upon and contractually stipulated? Does the contract clearly
stipulate that the service provider shall not be entitled to any
income arising from its appointment other than what is stipulated
in the agreement?
The returns: what are the actual returns earned
by the fund and what are the returns that the fund reports and distributes
to individual members of the fund? Is there any discrepancy, and
if so what is the reason for any discrepancy?
The reporting: is the reporting regular and comprehensive,
are regular meetings held to discuss the management and status of
the fund?
Independent supervision: Is the fund audited by
independent auditors? The ultimate expert in the pension fund industry
is the actuary. Is the fund subject to regular actuarial reviews,
and more importantly, is the actuary independent of the administrator
of the fund?
Board of trustees: Is the board of trustees capable
and experienced enough to manage the affairs of the fund without
outside interference and is it managed in an unautocratic manner
free of fear of victimisation?.
In this regard, each fund has a duly appointed fund
administrator who must be able to provide the answers given fair
notice.
Bulking of
funds, although a beneficial practice, has proved open to abuse.
Other methods are also employed or lend themselves to abuse. But
with a bit of querying, regular reporting and transparent management
in the interest of members, no individual need fear the security
of his / her pension.
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