Open Secrets researchers Michael Marchant, Mamello Mosiana, Leila Khan and Zen Mathe found that the pensions industry had been structured to “benefit its dominant corporations while leaving pensioners and other fund members out in the cold”.
The report, titled “The Bottom Line”, probed the “multiple failures” that led to the mass cancellation of 6,000 pension funds by the FSB between 2007 and 2013 while many still had assets and beneficiaries.
These unpaid funds were shifted to the “unclaimed benefits funds” of private companies appointed by the Financial Services Board to administer them, at a fee. According to the FSB’s 2018 Annual Report, more than R42-billion in benefits is owed to more than four million pensioners and pension fund members.
How did this come to light?
We can mostly thank two whistleblowers, pensions lawyer Rosemary Hunter and former Liberty Corporate employee Michelle Mitchley.
In 2013, Hunter, a respected employee benefits and pension fund lawyer, was appointed as the deputy registrar of pension funds of the then Financial Services Board (FSB), now known as the Financial Services Conduct Authority (FSCA).
The FSB or FSCA is the market conduct regulator for all services in the fastest-growing sector globally — financial services. Its job, essentially, is to protect you and me from predatory, unethical and abusive practices in this sector.
A few days into her job at the FSB in 2013 Hunter was presented with a pile of documents which required her signature. The documents related to the cancellation of the registration of pension funds.
The project was initiated by the FSB in 2007 and saw the cancellation of 6,757 supposedly “dormant” pension funds. The project followed a shift from single-employer or stand-alone occupational retirement funds to umbrella funds.
In the process, thousands of original stand-alone funds were turned into “orphan funds” — apparently without properly constituted boards and seemingly without assets or liabilities.
Companies appointed to administer these included Liberty, Alexander Forbes, Sanlam, Momentum and NBC. It was their job to ensure that members were traced and paid out any outstanding benefits before the fund was deregistered.
Enter Michelle Mitchley.
Mitchley worked in the complaints department of Liberty Corporate before being assigned to the company’s “backlog project” which managed the cancellation of pension funds administered by her employer.
By 2011 Mitchley headed a team investigating the financials of all pension funds before these were submitted to the FSB for cancellation. She grew alarmed when she realised that due diligence had not been performed and some funds still held assets and owed benefits to members.
Mitchley alerted her seniors. When her concerns were met with silence she turned to the anonymous whistleblower hotline at the FSB.
But instead of investigating the tip-off, the FSB alerted Liberty to beware, an ethical person worked in their midst.
Mitchley told Open Secrets researchers that management embarked on a concerted hunt for the leak. Under pressure from her supervisors and the department, Mitchley admitted to being the whistleblower.
Several disciplinary hearings followed before she was fired. Liberty eventually reached an out-of-court settlement with Mitchley.
She told Open Secrets:
“They threw everything at me, and senior executives watched the process.”
Mitchley was unable to find work until 2018.
At the launch of the Open Secrets investigation in Cape Town, Hunter recounted how she had refused to sign off cancellations without supporting documents that a forensic investigation into each fund had been conducted, that the funds were indeed dormant and that there were no assets, liabilities or beneficiaries.
“Are you telling me how to do my job?” was the bringer of the file’s response to Hunter’s request for a paper trail.
“It is my signature that is going to be on these documents and I need to know that a proper investigation has been done,” Hunter told the colleague.
And so began Hunter’s lengthy and costly battle with the FSB to ensure proper oversight over the cancellations project. Hunter found that at least 4,000 funds had been cancelled without due process having being followed.
Over and above this, Hunter also found that the FSB’s CEO, Dube Tshidi, had appointed employees from the fund administrators as trustees of these very same funds.
These employees — all economic and legal graduates — were then tasked with certifying that the funds had no assets before requesting the FSB to cancel them. The courts later found Tshidi’s appointment of these trustees unlawful.
After raising her concerns, taking the matter to the Hawks in 2015, and obtaining a legal view confirming that the cancellations had indeed been unlawful, Hunter soon met with fierce resistance from Tshidi.
At first, says Hunter, she was offered R6-million to leave before her contract expired in July 2016. When she declined, she faced a disciplinary hearing.
Hunter lodged an internal complaint which then led to the appointment of Judge Kate O’Regan as chair of an inquiry.
O’Regan found that the registrar’s appointment of the “authorised representatives” was indeed unlawful. She also recommended that the FSCA appoint an independent firm of auditors to investigate “a statistically significant” sample of funds to determine “the likelihood of material financial prejudice” that occurred during the cancellations project.
A subsequent KPMG investigation was unable to confirm that the information available to the registrar when it made the decision to cancel the funds “was sufficient for a reasonable person in the position of the registrar to have concluded that the funds had ceased to exist”.
The FSCA was not “satisfied” with the KPMG findings and appointed attorney Michael Mort to review it. Mort’s first inspection report in June 2016 found that while some of the funds assessed had assets at the time of their cancellations “there was no evidence of any material financial prejudice having been sustained by any member, beneficiary or creditor of those funds”.
Two further reports by Mort exonerated administrators.
Hunter turned to the high court and then later the supreme court to compel the FSCA to properly investigate her original complaint.
When the courts ruled in favour of the FSCA, Hunter took the matter to the Constitutional Court, claiming that the FSCA “had a duty to conduct an investigation into the alleged irregularities in the cancellation project, particularly in view of the fact that substantial evidence of actual financial prejudice as a result of the project.”
Previous investigations, she said, had been inadequate.
In the Constitutional Court, five of the eight judges ruled against Hunter.
The majority felt the FSCA had conducted enough investigation while three were of the opinion that the procedural route Hunter had followed was appropriate.
In his minority judgment Judge John Froneman remarked:
“There were many mistakes made in the course of the project. There are potentially hundreds of errors that will go undetected without further investigation.”
In the meantime, because of Hunter and Mitchley’s actions, Liberty, which administers R2-billion in unclaimed benefits, later admitted to cancelling 130 funds which owed R100-million to about 3,000 people. The financial giant has since reinstated 25 of these funds.
The revelations of the huge stash of cash — R42-billion and counting — that administrators are sitting on sparked the birth of the Unpaid Benefits Campaign, a coalition of civil society organisations and pensioners, many former mineworkers, some of whom were in attendance at the launch in Cape Town.
Pensions and social security “go to the heart of other fundamental human rights, including the right to dignity,” said the authors of the report.
The mass cancellation of funds should not have occurred “precisely because they still had assets meant to provide for the payment of unpaid benefits. If they were deregistered anyway, this suggests that no one was trying to find and pay beneficiaries”.
Then there is the not-so-small matter of beneficiaries who attempted to claim their unpaid benefits, but who would not have known if they could still be claimed and, if so, from whom.
“When administrators such as Liberty and Alexander Forbes submitted the pension funds to the FSB to be cancelled, they often transferred (or at least attempted to transfer) them into their own UBFs, from which they could draw fees.”
Open Secrets argues that the cancellations project pointed to a “deep systemic failure in the rule of law: the interests of large corporations have trumped the interests of vulnerable pensioners. This is the crux of the matter.”
As the assets in question grew, the stakes grew ever higher for fund managers.
“Any effort to address the issue of unpaid benefits must privilege the interests of beneficiaries, and the ones who benefit from this injustice will not change the rules of the game.”
Almost all pension funds are governed by the Pension Funds Act of 1956 and outside of its technical stipulations, “the core purpose of the PFA is to protect vulnerable pension fund members from ‘unscrupulous employers and other people dealing with pension funds’.
“This is not an abstract worry. Some of corporate South Africa’s greatest frauds are associated with the looting of pension monies,” said the authors, citing the example of J Arthur Brown’s Fidentia which defrauded pension funds of more than R1-billion from widows and orphans.
A more recent example the study also cited, was the looting of VBS bank.
“When VBS went bankrupt, following its looting by its own management to pay for parties, sports cars and bribes, many small account-holders could not access what little money they had deposited with the bank.
“This included the Bophelo Beneficiary Fund (BBF), whose curator unlawfully placed R300-million of the fund’s assets in VBS Bank just months before it folded. In both cases, it was the widows and orphans of mineworkers who lost out,” said Open Secrets.
South African law required administrators to report to the regulator any risks to funds or their members and the Financial Institutions (Protection of Funds) Act required “any person or company that holds, invests or controls the money of others to observe the utmost good faith and exercise care and diligence”.
Concluding the report, the authors recall Bennet Vavi, one of the former mineworkers interviewed during the investigation. Mineworkers, Vavi told the authors, are the veterans of the South African economy.
“We built this country with our hands,” he said, adding that mineworkers should be “shareholders” in this country, not cast out to the margins.
“Given the pivotal role of mining in the modern South African economy, Bennet’s words ring true. The elderly poor who built this country should be justly compensated and afforded a dignified retirement.”
This applied to all South African workers.
“This is the meaning of the struggle for unpaid benefits. After whatever injuries they sustained as workers, the final injustice is to then be denied the benefits that are due to them from the pension schemes they were required to pay into throughout their working lives,” concluded Open Secrets.
There was no single simple explanation for this failure.
Private fund administrators, employers and regulators had “failed collectively to build transparent and accountable structures for the management of pension funds”.
“Instead, a system of perverse incentives flourishes. The enormous profit generated by and for financial services corporations seems to weight the balance in their favour and against the interests of pension fund members and the protection they are owed by the state regulator. The need for sweeping reform is obvious and urgent.” DM
Japan had a monster-collecting card game as far back as the Edo period (1603-1868).