Admin foul-ups trap members in badly run umbrella funds
Members of umbrella retirement funds may be disadvantaged by the administrators of these funds using their failures or those of participating employers to prevent funds from switching to another administrator.
This has been revealed by the ongoing problems at Aon Hewitt South Africa, the local subsidiary of United Kingdom-based Aon, the world’s biggest retirement fund administration company (see “Fund still waiting to be transferred to another administrator”, below).
When a participating employer applies to be transferred to an umbrella fund that it believes will be more efficiently administered, the administrator of the fund can rely on various administrative and legal requirements to block the transfer.
Transfers of participating employers from one retirement fund to another are known as section 14 (of the Pension Funds Act) transfers. The transfer must be signed off by the valuator of the retirement fund, after which it is submitted to the Financial Services Board (FSB) for approval.
The FSB may declare an umbrella fund to be valuation-exempt. Where both funds that are party to the transfer are valuation-exempt, a valuator does not have to be appointed. In this case, the transfer process is known as a “recognition of transfer”.
Jaco Kok, chief executive of Aon Hewitt, concedes that by not meeting the requirements for a transfer to be effected, participating employers that want to move could be held captive. But, he says, Aon is providing services free to participating employers that have applied to be transferred until such time as the transfers can be effected.
“Aon has no incentive to keep a (transferring) fund on its books any longer than it needs to, and indeed the sooner we can move it on the better it would be for Aon from a resourcing and financial point of view,” Kok says.
Jurgen Boyd, FSB deputy executive in charge of pensions, says the valuator of a fund may refuse to sign off the transfer of a participating employer for whatever reason the valuator deems material, which may include outstanding financial statements and/or statutory actuarial valuations.
The FSB will query a transfer application where it is based on an incorrect or outdated actuarial valuation, Boyd says.
The requirements of the registrar of pension funds at the FSB, and the valuator’s qualifying his or her certification, may delay the transfer of a participating employer from one umbrella fund to another.
Reasons for outstanding financial statements or valuations include the inefficiency of the fund’s administrator, or a participating employer not providing sufficient information about its employees and their contributions and/or not performing a proper reconciliation of members and contributions.
Poor administration of retirement funds by service providers has been fairly widespread.
The Private Security Sector Provident Fund has had ongoing problems with both its administrator and participating employers.
The FSB eventually placed the fund under management and the administrator was switched from NBC to Absa.
In 2010, Glenrand MIB liquidated its administration company, Glenrand Benefit Services, to escape its liabilities to 80 000 members of 20 retirement funds, the records of which had been left in a mess.
The FSB put Old Mutual on notice a few years ago, when its Orion umbrella fund – the first and biggest umbrella fund in the country – began to experience severe administrative difficulties.
In December 2011, the FSB suspended Aon Hewitt South Africa from taking on new retirement fund business. The suspension, which was lifted in July last year, was imposed because of numerous problems with the administration of its stand-alone and umbrella retirement funds.
Aon Hewitt’s woes in part arose when it took over the administration of four Dynam-ique Consultants and Actuaries umbrella funds, which were riddled with problems.
The four funds are still subject to major disputes because of the costs incurred by members to rebuild the records of the funds.
Boyd says the suspension on Aon Hewitt’s taking on new business was lifted once the company had addressed regulatory concerns satisfactorily; independent auditors had confirmed the appropriateness of Aon’s new administration systems; and the FSB was satisfied that any new business would not be affected by the problems experienced by the existing funds.
“Whilst legacy problems with certain existing funds remain to be resolved, Aon is under enhanced supervisory oversight regarding the resolution of these problems,” Boyd says.
Kok says: “As the biggest global administrator of pension benefits, with a strong international reputation, we are committed to putting right anything that might have gone wrong in the past, and to use this as a springboard to set a new benchmark for the level of service and value for money available to South African retirement funds.”
WHAT IS AN UMBRELLA FUND
Umbrella funds enable groups of employers, known as participating employers, to join a single retirement fund. The main motivation for an employer to participate in an umbrella fund is that the employer does not have enough employees to make it cost-effective to sponsor its own retirement fund. The objective in becoming a participating employer is to reduce costs and the administrative burden.
There are two types of umbrella retirement funds:
* Administrator-sponsored funds. Administrators (normally major financial services companies) provide most or all of the services to the fund. Different employers sign up as participating employers, with each a sub-member of the umbrella fund. The employer in effect signs up its employees, who become members of the umbrella fund.
The decision to join or leave an umbrella fund lies with the participating employer, not a member employee. Normally, the decision is made in conjunction with the employees, and in terms of the rules of the fund.
* Sector funds. These funds may be sponsored by a trade union, an employer grouping or both, or a financial services provider. Membership of the fund is restricted to employees in a particular industrial or commercial sector. These funds normally outsource services to private sector service providers that have been approved by the Financial Services Board.
FUND STILL WAITING TO BE TRANSFERRED TO ANOTHER ADMINISTRATOR
Leading commercial and industrial property investment company Improvon decided to provide its employees with a retirement-funding vehicle, settling on the Aon Umbrella Provident Fund. Grenville Phillips, Improvon’s human resources executive, says: “From the start, we had shoddy service, to say the least.”
Improvon joined the Aon Umbrella Provident Fund on January 1, 2009. Initially, it deposited employer and employee contributions into Aon’s bank account, before its own bank account for contributions and benefit payments was set up on March 31, 2009.
The contributions were transferred from the account to the fund’s asset manager only on May 8, 2009.
Jaco Kok, chief executive of Aon Hewitt, says the Improvon members actually scored from the delay in having their contributions transferred to the asset manager.
“If you consider equity market returns for the first four months of 2009, by reference to the JSE All Share Index, you will find it to be a negative four percent over the period,” he says.
Phillips says the non-investment of the contributions “only came to light when we contacted the asset manager directly to find out how our assets were doing, after being sent from pillar to post by the administrator, Aon Hewitt. We were told by the asset manager that they had not received any Improvon contributions from Aon.
“After many other problems, we gave them notice in August 2011 to move our fund to 10X Investments, effective December 1, 2011. Yet to date the fund has not been transferred, 14 months after notice was given.
“We are at our wit’s end, and our staff are understandably very concerned about their pensions.”
Kok says the problems with the Aon Umbrella Provident Fund are not “all of our own making”.
He says in June last year, while trying to sort out the fund’s administrative problems, Aon discovered that there were problems with the contributions that another participating employer had transferred to the provident fund.
The employer had transferred its segregated fund to the Aon umbrella fund, and there had been administrative problems with this fund before it was transferred. The employer was unable to provide correct information about the contributions to the fund. This resulted in the audits and valuations of the Aon umbrella fund falling behind.
Kok says that 12 section 14 transfers relating to four participating employers have been affected by the Aon umbrella fund’s problems.
Jurgen Boyd, Financial Services Board (FSB) deputy executive in charge of retirement funds, says the FSB was approached by Improvon and, following talks between Aon and the FSB after the FSB had conducted a compliance review, it was agreed that the troublesome participating employer should be ring-fenced and the fund should get on with the transfers.
Improvon can now expect the transfer to the 10X Investments provident umbrella fund to take place only later this year. This is despite Aon undertaking in its contract to effect section 14 transfers within six months and Aon’s arrangement with the FSB.
Kok says the valuator has declined to sign off on the umbrella fund at the moment. “I recognise the authority and discretion of the valuator in this regard, as their role is to safeguard the interests of all members of the fund,” he says.
Kok says that since mid-2011 Aon has invested significantly in systems, people and processes to resolve legacy and ongoing administrative issues.
“The issues experienced by Improvon are part of the legacy problem,” Kok says, and the problematic part of the fund has been ring-fenced while attempts are made to resolve the issues.
The FSB has, however, lifted a ban on Aon taking on new business.