Retirement Savings: Whose Money is it Anyway

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1 Retirement Savings: Whose Money is it Anyway Bruce Cameron Associate Editor: Personal Finance

2 Tonight s topics What has gone wrong Reasons why it goes wrong What should be done to stop it going wrong What you can do to protect yourself Some words on retirement reform

3 The Indictment Billions of Rands have been lost and it is getting worse. Losses are due to: Scams A failing justice system poor or no prosecution Poor products Poor regulation Conflicts of interest Inept trustees Bad administration of retirement funds

4 What has gone wrong

5 What has gone wrong: major losses Fedsure Fedsure used retirement fund and other money to build a financial empire Maladministration of retirement savings Offered excessive guarantees to attract investor money Members of building industry funds lose 12 percent of savings (R600 million)

6 What has gone wrong: major losses Secret profits Alexander Forbes and others more than R500- million industry wide Most made from bulking retirement fund bank accounts to earn extra interests Other sources trail commissions and kickbacks

7 What has gone wrong: major losses Fidentia Fidentia R1.6 billion Victims mainly beneficiaries of deceased members of National Union of Mineworkers Provident Fund. Fidentia Asset Management ignored conditions of asset management licence Arthur Brown and his accountant Graham Maddock convicted of fraud

8 What has gone wrong: major losses Glenrand MIB In 2010 liquidated its administration company Maladministration of retirement funds It deserted members of 20 funds who had already paid administration fees Losses unknown A former chief executive of the FSB was on the board

9 What has gone wrong: major losses Rockland Targeted Development Investment Fund In hectares of undeveloped, windswept sand dunes in Schaapkraal, facing False Bay bought for R36 million through structures created by Wentzel Oaker. Sold to a new vehicle he controlled for R260 million. Six retirement funds invest R519 million in new vehicle. Property valued at R980 million in December 210 (2 125 percent) Rockland Investment Managers (Oakland) receives a fee based on a percentage of assets under management

10 What has gone wrong: major losses Dynam-ique/AON (AON is the world s biggest retirement fund administration company) 2011 AON suspended from taking on new business (Suspension lifted June 2012) Cause: mis-management of Dynam-ique umbrella funds under previous administrator mis-management of some of its own umbrella funds Dynami-que: members set to lose 2.5% (R20 m) of savings Pension funds adjudicator orders former trustees to pay up No proper due diligence done by AON

11 What has gone wrong: major losses Trilinear/Canyon Springs Potential loss of R470 million for members of five funds associated with the Southern African Clothing and Textile Workers Union (Sactwu). Potential loss of R102 million for the Paper Print Wood and Allied Workers Union (PPWAWU) which invested in Trilinear via Interneuron Interneuron: Loss from investing in Trilinear and another R500 million in rogue derivative trading.

12 What has gone wrong: major losses Employer attacks (Non-payment of contributions) Non-payment of contributions collected from employees and employer share Loss of risk assurance cover Private Security Sector (umbrella) Provident Fund the worst Surplus stripping in the 1990s R1 billion plus Theft of retirement funds CAF/Korsten brothers

13 What has gone wrong: major losses Trade union attacks on member savings SA Commercial, Catering and Allied Workers Union (Saccawu): Estimated losses for members of employers of Saccawu National Provident Fund at time of curatorship estimated at R1.7 billion Trade unions set up investment companies, which in turn set up service providers for associated retirement funds which charge excessively and/or provide poor service Control hiring and firing of trustees Take commissions from life companies for sale of expensive life cover to associated funds

14 First Strut What has gone wrong: major losses Investors stand to lose R800 million in potential total losses of R-billions (mainly bank loans) 20 years of fraud South Africa s biggest unlisted company Asset managers that invested: Investec (R435 million), Sanlam (R236 million), Prudential (R51 million), Stanlib (???), Momentum (???) and Fairtree Capital (R131 million). Global Credit Ratings failure (BBB investment grade)

15 What has gone wrong: major losses Unregistered products Ovation: Losses of R200 million in unregistered money market fund Common Cents No adviser checked whether registered as a collective investment scheme Money stolen by owner of Ovation, Angus Cruikshank Corporate Money Market (Dynamic Wealth) Dynamic Wealth Specialist Income Fund (posing as an investment club) invested R230 million in unregistered Corporate Money Managers (CMM) Fund CMM: Potential losses of R1.1 billion invested in failed property developments not money market instruments

16 What has gone wrong: major losses Poor products R-billions lost by members because of: High costs particularly individual life assurance products - Rusconi research Double charging asset management fees Opaque poor investment returns products Confiscatory penalties (levied by life assurance companies on retirement annuities) Escalating premium risk assurance

17 What has gone wrong: major losses Mis-sold (but not necessarily bad) products R-billions lost by consumers because of mis-selling of investment linked living annuities: Draw down rates too high High risk investment strategies vain attempt to make up to counter high draw downs. Much of this took place prior to 2008 in a reasonably high interest environment when guaranteed annuities offered better value

18 What has gone wrong: major losses Indirect losses: Retirement funds are major shareholders in big companies listed and unlisted. Members will be paying the R1.4 billion penalty handed down by the Competition Tribunal to 15 construction companies for collusion over the World cup stadiums. Members will be paying for successful civil actions against the guilty companies

19 What has gone wrong: major losses Then there are the others in which pensioners have invested retirement savings, including: Masterbond the original biggie investors with R600 million invested (16 known sucides) back in 1984 The Leaderguard Forex scam run from Mauritius. (R27 million of R300 million recovered) Property syndications: Unknown R-billions in potential losses (one known suicide)

20 Reasons why it goes wrong Lack of proper regulatory oversight Conflicts of interest Information asymmetry Under-trained retirement fund trustees Lack of ethical and moral standards

21 Regulatory failure Financial Services Board (FSB) misses too many problems in retirement saving and other areas Fidentia: Warned at least 18 months before collapse. Fidentia Asset Management contravened licence conditions FSB should also have picked up others earlier, including: Fedsure Ovation CMM Relative Value Arbitrage Fund (RVAF) a ponzi scheme posing as a hedge fund in which investors stand to lose R2 billion

22 Regulatory failure Other failing goalkeepers include: Auditors Lawyers Property valuators Banks Company directors, particularly independents Retirement fund trustees Retirement fund administrators Retirement fund consultants

23 Conflicts of Interest A conflict of interest is a situation where outside financial interest(s) or obligation(s) (real or perceived) have the potential to bias a decision or cause harm (to retirement funds and their members) Avoidable conflicts of interest underlie almost every attack on retirement fund savings

24 Conflicts of interest Section 19 of FSB guidance note to retirement funds PF 130 states that: The fiduciary duty owed by a board of trustees and a principal officer requires that they avoid conflicts of interest. Trustees should distinguish between conflicts of interest which may be structural, and therefore unavoidable, and those conflicts which can be avoided or, if this does not compromise the credibility of the governance arrangements, managed appropriately. Trustees must ensure in relation to any service provider to the fund, that a conflict of interest is removed or, if this is not possible, resolved transparently and defensibly.

25 Conflicts of interest: Example 1 Fidentia Buys Mantadia Renames as Living Hands Umbrella Trust Appoints trust trustees Trustees appoint Fidentia Asset Management (FAM) as asset manager Instructs Old Mutual to transfer assets FAM uses assets to buy assets for Fidentia Group

26 Conflicts of interest: Example 2 Rockland: Wentzel Oaker, controlling director of Rockland Group, owns Rockland Investment Managers (RIM) which controls Rockland Targeted Development Investment Fund (TDIF). TDIF buys Schaapkraal sand dunes from Rapicorp 122 & 123 (Company controlled by Oaker) at a R224 million profit RIM receives asset management fee of two percent plus 20 percent of returns above the inflation rate

27 Conflicts of Interest: Example 3 Riscura (and its associated company, Riscura Analytics): Retirement funds pay Riscura to advise trustees on judicious management of assets (members retirement savings) Riscura receives fees for transitioning assets between fund managers Riscura Analytics sells its services to asset managers. Services include indexation, risk and compliance reporting, and investment performance reporting, including performance attribution and technical risk analysis. (Fees a percentage of assets)

28 Conflicts of Interest: Example 3 Riscura jointly manages with Investec Asset Management a high interest portfolio into which Riscura channels retirement fund assets The Riscura/Investec high interest portfolio held the R435 million in First Strut bonds. Riscura holds itself out as an expert in assessing risk but it could not detect: the 20-year First Strut fraud the Rockland artificial property valuations and conflicts

29 What you can do to protect yourself Questions: 1. Who guards the guards: the primary duty of a consultant is to guard others? 2. What are trustees of Telkom and Sentinal retirement funds doing about it? 3. How many more fractional losses to members will be acceptable? 4. When will the FSB do its job properly?

30 What you can do to protect yourself Be aware of loss of protection: You have greater protection as a member of a employer-sponsored retirement fund, mainly because members elect 50 percent of the trustees Your employer is entitled to make the decisions on umbrella retirement fund membership, which may not be in your interests. The fund sponsor makes most of the decisions about the management of both umbrella funds and retirement annuity funds

31 What you can do to protect yourself Signals that something may be going wrong: 1. No benefit statements 2. Confusing benefit statements 3. Delays in paying members on withdrawal from a fund and at retirement 4. Delays in paying benefits to dependants and beneficiaries after the death of a member. 5. No interaction/communication with members

32 What you can do to protect yourself Generally ensure: You read the rules of your fund Your fund has both an investment policy statement (IPS) and a communication policy statement read both Your fund has a code of conduct for trustees and for the appointment of service providers You receive a benefit policy statement at least once a year preferably on demand

33 What you can do to protect yourself An employer-sponsored fund: Elect member trustees who have knowledge and will ask questions not people you necessary like Ensure your trustees keep you informed including with report back meetings Read and understand your benefit statement

34 Umbrella fund: What you can do to protect yourself Your employer should set up a member/employer. You should demand details of costs. Insist on details of what any consultant/adviser is paid and what the consultant is expected to do for the payment Check the details of trustees to ensure no conflicts of interest Avoid funds where all services including asset management and risk assurance are provided by the sponsor. What measures are in place to inform you of nonpayment of contributions

35 What you can do to protect yourself Retirement annuity fund: Check the costs before you sign up Avoid RA funds where a penalty will be charged You have no say in the appointment of trustees but avoid a fund loaded with employees or former employees of the fund sponsor Avoid funds where all services including asset management are provided by the sponsor. Expect your trustees to report back to you on a regular basis

36 Retirement reform Piecemeal approach Lump sum taxes Prudential investment Regulation 28 overhauled Treating customers fairly (TCF) Omnibus bill before Parliament (Action against employers) Five discussion papers Enabling a better income in retirement Preservation, portability and governance for retirement funds Incentivising non- retirement household savings Simplifying the tax treatment of retirement funds. Charges in South African Retirement Schemes

37 Top 10 proposals 1. Governance: PF 130 updated and made a statutory requirement 2. Trustee training and minimum qualifications 3. Preservation of savings for retirement 4. Compulsory annuitisation (End of provident funds) 5. Cost controls: Of saving; of annuitisation; of distribution 6. Increasing competition 7. Improved umbrella fund regulation 8. Default investment choices/annuities 9. Making statutory funds subject to PFA 10. Further tax changes (contributions)

38 Remember the Pension Funds Adjudicator 4th Floor Riverwalk Office Park Block A, 41 Matroosberg Road, Ashlea Gardens PRETORIA 0081 P.O. Box 580,MENLYN, 0063 Tel: / Fax: Enquiries@pfa.org.za Website:

39 QUESTIONS

South African Communications Union (SACU)

Unit 522 Level 2 Riverside Lofts Tyger Falls PO Box 38094 Gatesville 7766 Tel: 086 100 7228 Fax: 021 914 5883 South African Communications Union (SACU) Good Day Trustees, Good governance and trust are