The Government Employees Pension Fund (GEPF) is putting in place revised checks and balances to safeguard the R1.1-trillion total retirement savings of its 1.2 million members.
The reason for the revision is the changes to regulation 28 of the Pension Funds Act, which sets the parameters of prudential (safe) investing for most South African retirement funds – a notable exception from its ambit is the GEPF.
John Oliphant, principal officer of the GEPF, who was speaking at the annual conference of the Institute of Retirement Funds (IRF) this week, says although his giant fund is not subject to the Pension Funds Act, the GEPF trustees see the Act and regulation 28 as best practice to be followed.
It would be wonderful if all retirement funds and their service providers saw regulation 28 and the Act as best practice.
The failure to do so has been highlighted by the way six major retirement funds invested in the Rockland Targeted Development Investment (TDI) Fund with seemingly the most cursory of examinations of the fund and its structures by both the trustees and their asset management advisers (see “What the funds say they did”).
What is even more problematic is that changes to regulation 28 open the way for retirement funds to place a lot more money into what can generally be called “alternative investments”, allowing greater scope for poor investment decisions.
The point Oliphant is making is that although the regulation 28 changes give retirement funds a wider range of investment opportunities, there is an onus on trustees to be a lot more careful in making those investments.
The key issue is due diligence. Proper due diligence is what is missing in nearly every investment that goes sour, whether it is the latest scam, where about 3 000 investors put about R2 billion in a Ponzi scheme masquerading as a hedge fund, the Relative Value Arbitrage Fund; or the Rockland TDI Fund, which, along with its asset manager, Rockland Investment Managers (RIM), was placed under provisional curatorship last month.
The need to avoid conflicts of interest at all costs and the need for proper due diligence checks were recurring themes at the conference.
Oliphant, whose fund in recent years has blazed the trail for responsible and sustainable investment in South Africa, says that the fiduciary duty placed on trustees requires even greater application of their attention when considering these new investment avenues, and this includes doing a thorough due diligence into any such offering.
And the problem is accentuated when advisers, be they individual financial advisers or asset management consultants to retirement funds, also carry out only the most perfunctory of checks.
The problem becomes even worse when there are unmanageable conflict-of-interest issues with advisers and product providers.
Jurgen Boyd, the Financial Services Board (FSB) deputy chief executive in charge of retirement funds, told the IRF conference that one of the problems is that retirement fund trustees give their advisers too much power.
He says the recent advice given by investment advisers to retirement fund trustees to invest in the Trilinear and Rockland offerings highlights how poor and costly this advice often can be.
He says if more attention was given to things such as the level of advice provided by fund advisers, the high costs and profit margins of retirement fund service providers and sub-optimal investment strategies, there would be greater benefits for retirement fund members.
The trustees, principal officers, and asset management consultants involved in the Rockland affair, who answered questions put to them by Personal Finance, claim that they did their jobs before investing in the Rockland TDI Fund.
Then the question has to be: if this is the case, how come the problems were picked up only by the Paper, Print, Wood and Allied Workers’ Union (Ppwawu) National Provident Fund after it appointed a new asset management consultant?
It seems to me the trustees and their advisers followed a tick-box approach. As Oliphant says, a lot more is required when investing in the unusual.
Boyd says the FSB will be “engaging” with the trustees and asset management advisers to establish what happened with Rockland.
I would suggest that the FSB do this most forcefully. It should particularly take a very close look at the clear and unacceptable conflicts of interest that exist in the relationships that asset management consultant Riscura and its subsidiary Riscura Analytics have with the Telkom Retirement Fund, the Mine Employees Pension Fund and the Sentinel Mining Industry Retirement Fund and with the various asset managers that hold investment mandates with those funds.
The retirement funds themselves seem to have little idea of how to handle conflicts of interest, and the conflicts are extensive and serious.
In simple terms, a conflict of interest is serving more than one master at the same time.
As a retirement fund trustee, in my view an asset management consultant should mainly play policeman to asset managers while also undertaking due diligence investigations into investment offerings (both the product and the provider). The consultant must be unfettered by conflicts of interest, doing the single job of checking on others and reporting to the fund trustees.
There is a major problem when a consultant, such as Riscura, starts getting income from doing jobs such as deciding on switching investment managers, negotiating investment mandates, undertaking the switching of assets between managers (and charging “transition fees” for switching the assets) and providing various services to asset managers, with its fee often being a percentage of assets under management.
The asset management consultant is no longer the policeman it should be when it is as conflicted as a consultant such as Riscura.
If fund trustees cannot understand why these conflicts of interest are unacceptable then the FSB must intervene in the interests of fund members, even, if necessary, placing the funds under joint management of itself and the trustees. All the conflicts of interest can then be thoroughly examined and unwound.
Too many things have gone wrong, at significant financial loss for retirement fund members, because of avoidable conflicts of interest and because of sloppy or perfunctory due diligence tests of high risk investments.
You as a retirement fund member need to ask your retirement fund trustees about conflicts of interest in your own best interests.
The unacceptable conflicts of interest of Riscura as the consultant to the Telkom and two mining retirement funds should be of great concern to the fund members.
Rockland problems uncovered by the FSB
The problems with the Rockland entities under provisional curatorship uncovered by a Financial Services Board (FSB) inspection include:
* The Rockland structure was riddled with massive conflicts of interest and, the FSB says, was dominated by a single person, Cape Town businessman Wentzel Oaker.
* The underlying investments were dominated by a single investment in a 480-hectare barren piece of land at Schaapkraal on the Cape Flats, the value of which rocketed by more than 2 000 percent in three years. And the earnings of Rockland Investment Managers also skyrocketed, based on an annual two percent of assets under management plus 20 percent of any returns above the inflation rate plus five percent over a rolling three years – an astounding amount.
* The property was first bought by Oaker and two trusts for R36 million and then sold to the Rockland Targeted Development Investment (TDI) Fund for a “discounted” R224 million, providing R188 million profit. The TDI Fund collected R519 million from six retirement funds.
What the funds say they did
Personal Finance asked all six retirement funds and their service providers what they did to protect the interests and savings of their retirement fund members before investing in the Rockland Targeted Development Investment (TDI) Fund.
No reply has been received from the Paper, Print, Wood and Allied Workers’ Union (Ppwawu) National Provident Fund, which invested R59 million (current value: R142 million); the Metal Industries Provident Fund, which invested R100 million (current value: R155 million); and the Engineering Industrial Pension Fund, which invested R200 million (R311 million).
The Telkom Retirement Fund (TRF), which invested R60 million (now R72 million), says it “follows a stringent due diligence process when considering any investment, no matter how big or small the investment is in relation to the total assets of the TRF.
“In this particular case, the due diligence was extended even further, which confirmed that Rockland’s auditor was reputable and that the valuator of the investment asset with Rockland had the correct credentials. Furthermore, a Deeds Office verification process showed that the investment asset existed, and in fact still exists today.”
The jointly managed Sentinel Mining Industry Retirement Fund, which invested R65 million (R107 million), and the Mine Employees Pension Fund, which invested R35 million (R57 million), say “a due diligence was performed. In this specific case the due diligence included looking at the financial statements and going to the Deeds Office to confirm ownership of the underlying assets.
“The trust deed of the fund was reviewed. It was established that the Rockland TDI fund is registered as a bewind trust in terms of the Trust Property Control Act. Underlying assets in a bewind trust are owned by beneficiaries pro rata to their participation in the fund.
“It was established at the time that the auditors of the fund were independent and reputable and that the valuators’ credentials were in order. The Deeds Office was checked, and with reference to the financials and the various Rockland entities disclosed in the financials.”
What should have been done
Let’s look at what both trustees and their asset management consultants should have done. And this is not with the benefit of hindsight. It is with the benefit of past, very public experiences of which the trustees and particularly the asset management consultants should have been aware.
The trustees and the asset management consultants should have:
* Checked the ownership trail. Taking an unacceptable profit as a middleman and not properly declaring this profit is not new. It was a tactic used in the Leisurenet scandal as well as in a number of property syndication schemes, most notably in the BlueZone scam. The BlueZone scheme was a 190-hectare agricultural property in Mpumalanga with a municipal valuation of R1 million. It was bought in 2003 in the name of a company called Blue Dot, whose directors and shareholders also happened to be directors of the BlueZone property syndication company. The property was sold by Blue Dot to the Spitskop property syndication company for R118.3 million. It was then valued for syndication purposes at R425 million.
* Checked the continually soaring valuations. Increasing the valuations way beyond market averages should be an immediate alarm signal, not a signal for contentment. It was a trick used by Fidentia in an attempt to make out that assets were well managed and doing fine while it earned more in asset management fees. Over-valuations are also the reason why so many property syndication schemes are imploding.
* Checked the valuator. A valuation certificate from one source should not be accepted, particularly when the valuator has been retained by the product provider (asset manager). Like the BlueZone property, which had a single valuator retained by BlueZone, so the Rockland Schaapkraal property had a single valuator. A proper due diligence should involve at least one independent valuator appointed by the retirement fund or the asset management consultant.
To say the valuation was assessed by an auditor is pretty meaningless. Auditors have proved time and again they cannot be relied on to protect the interests of retirement fund members. Their track record is worse than dismal, to the extent that more than one has gone to jail in recent years for actually being part of an unacceptable scheme, including in the Fidentia case.
* Checked for conflicts of interest. The FSB inspection report showed that the person behind the entire Rockland structure was Wentzel Oaker, who filled nearly every role, from compliance officer, chief executive, trustee to controlling director of numerous associated companies. This is unacceptable.
* Andrew Davison of financial planning company acsis told the IRF conference: “Retirement fund members ultimately bear the cost of all decisions taken by retirement fund trustees. Often, trustees do not see the importance of decisions, and retirement fund members don’t know how much value was created and destroyed. It is important that trustees make all decisions consistently well.”
* Nolwazi Boqwana, a director of law firm Thipa Incorporated Attorneys: “Too often retirement fund trustees put too much trust in others and abdicate decisions to others. This gives service providers too much power.”