| Article
4:
Protect
your Pension: When ‘commission’ becomes a dirty word
In the wake of recent revelations concerning the
pension fund industry in South Africa, questions have arisen about
the role of the pension fund administrator and consultant, and who
should earn the benefits from pension fund investments. This week
I take a look at practices surrounding outsourcing of pensioners,
raiding of pension fund surpluses and advice to members leaving
the fund.
Outsourcing of Pensioners
The outsourcing of pensioners is a pretty common phenomenon. Very
often the reason for a fund ridding itself from its pensioners is
to eliminate the contingent liability posed by its pensioners. A
pension is an obligation to pay a pension for life based on assumptions
made at the outset with regard to longevity and investment returns,
the outcome of which is totally uncertain. Typically the capital
of all pensioners in a fund is ‘pooled’ so that any
‘negative’ experience with one pensioner can be offset
against ‘positive’ experience with another pensioner
or by way of example, if pensioner A lives much longer than anticipated
while pensioner B dies much earlier than anticipated, the capital
left over after pensioner B passed away, is used to fund pensioner
A’s pension. Similar uncertainty prevails with regard to future
investment returns. The larger the pensioner pool of a fund is (in
number of pensioners), the smaller the risk of negative experience
impacting negatively on the fund’s financial position.
Clearly, if one party rids itself of uncertainty,
someone else has to take over this uncertainty and, if it is not
the pensioner him or herself, it always comes at a cost. The question
is, who carries this cost and who should carry the cost? Is it the
pensioner or the fund? If it were the fund, it would be the members
of the fund, by implication.
Very often funds manage quite a number of uncertainties
and in such a case each uncertainty serves as a form of a buffer
for negative experience with regard to another uncertainty. So it
wouldn’t make much sense to get rid of only some uncertainties
while retaining others, thereby raising the risk for the fund. The
reasons for outsourcing of pensioners must be consistent with the
fund’s philosophy and strategies and should be very clear
in the minds of the trustees.
Outsourcing of pensioners usually entails payment
of commission, where the asset and/or the liability is transferred
to an insurer, and sometimes also the payment of fees for any ongoing
involvement of the fund’s administrator. Typically the administrator
sometimes retains responsibility for the management of the pensioner
assets and/or the administration of monthly pension payments and
it is in cases such as these where the trustees must be weary of
what the true motivation for outsourcing of their pensioners is.
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 and/or the employer. Some
readers may recall the polemic in local newspapers in the 1970’s
when questions were raised about huge pay-outs made to a few remaining
fund members by a local municipal pension fund when it was terminated,
after another fund had been established for the workers and other
uninformed employees who did not realize what was happening ‘behind
the scenes’.
Today the courts and the regulator have cottoned
up to such practices and it is no longer so easy to get away with
the raiding of surpluses.
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). The commission remunerates
mostly these persons. Where members are able to preserve their capital
in the fund or in the fund of their new employer, no commission
would become payable and a commission earning employee is unlikely
to provide unbiased advice in such a situation. Having said this,
there may well be other disadvantages of the ostensibly cheaper
option that outweigh the cost savings. Again it is just important
to make sure that one gets unbiased advice and a second opinion
may not be a bad idea.
What you can do to prevent abuse
In our previous articles we have suggested a few ways how to prevent
abuse and avoid receiving biased advice. In short, proper education,
documentation, communication, integrity of your service provider
and the trustee, transparency and unbundling of services are key
principles in all strategies aimed at protecting the interests of
the fund and its members.
<<
Previous |
