Last month, Personal Finance published a front-page article based on a disturbing presentation by one of the country's top pension fund lawyers, Rosemary Hunter of Hunter Law, at the annual convention of the Pension Lawyers' Association.
In a nutshell, Hunter said that trade unions are increasingly interfering in the affairs of the retirement funds they sponsor. This interference includes hiring or firing trustees because they will or won't do the bidding of the trade unions.
And to make matters worse, she said, the Registrar of Pension Funds, namely the Financial Services Board (FSB), seems unwilling to do anything about it.
Since the publication of that article there has been total silence from both the FSB and the Congress of South African Trade Unions (Cosatu), which Hunter named in her presentation. This silence is despite the fact that Personal Finance sent Hunter's full presentation, a draft of our front-page report and a draft of this column to Cosatu and the FSB for comment.
The full scope of the law - statutory, case and common - requires that retirement fund trustees act in the best interests of their funds to protect fund members. Trustees have a fiduciary duty to do so.
The law also requires that, unless a specific exemption is granted, 50 percent of trustees must be elected by the members.
There is no exception that states trade unions or any other person or body can hire and fire trustees, nor may a union prevent a board of trustees from removing a trustee who promotes the union's interests above those of the fund.
There is definitely nothing in the law that allows a trade union to make decisions about what a retirement fund should and should not do.
There is a growing list of trade unions that incorrectly interfere with retirement funds and/or make decisions that undermine the retirement savings of workers.
Over the years, Cosatu has built up a sound reputation for taking up the cause of retirement fund members when the private sector misbehaves. For example, Cosatu was forthright in its criticism of the retirement industry when many of the major administration com-panies made secret profits by bulking the bank accounts of funds.
Cosatu has also played a major role in much-needed reforms to the Pension Funds Act. These reforms include the requirement that 50 percent of trustees are elected by retirement fund members.
What concerns me most about union interference in the duties of trustees is that increasingly there are significant, totally unacceptable conflicts of interest between retirement funds and some unions, including Cosatu affiliates.
These conflicts of interest centre on the investment companies set up by many trade unions and union federations, such as Cosatu.
Potential problems
There is nothing wrong with the concept of trade union-controlled investment companies, particularly as most of these companies are dedicated to improving the financial lot of union members.
However, problems may arise with union-controlled investment companies when:
- A retirement fund associated with the union invests its assets in the investment company. Investment decisions are effectively removed from the board of trustees when money is transferred to the investment company, and union officials may not act in the best interests of fund members (see "Control of trustees" in the case studies below).
- An investment company owns subsidiary companies that provide services to a retirement fund associated with the union, and, in particular, when retirement fund trustees are pressured in any way to use the services of these subsidiary com-panies (see "NUM and Fidentia").
So it is of major concern when trade unions believe they can - and do - interfere in the affairs of retirement funds.
In other words, some misguided union representatives believe they can order trustees to invest their fund's assets in a company controlled by a union associated with the fund or a company in which the investment company of a union-associated fund has a stake.
The conflicts of interest that arise cannot be managed. They are unacceptable, even if the unions do not in any way interfere with the trustees and the trustees are directly elected by the members.
It is with concern that I record that Cosatu has established its own financial services company, Ke Matla Financial Services, through its investment company, Kopano Ke Matla Investment Company.
Ke Matla Financial Services, through various subsidiaries, has entered into joint ventures with:
- BoE, to run a trust company that will look after the benefits due to widows and orphans of deceased retirement fund members;
- Coris Capital, for retirement fund administration;
- Momentum, to provide group risk assurance; and
- Simeka, for investments.
(Incidentally, Momentum, as the risk assurer for the much-abused Mineworkers' Provident Fund, is still a cause of misery for widows and orphans of the fund. There are huge delays going back 10 years in the payment of death benefits.)
I am not saying there is anything untoward happening at Ke Matla. The problem is that no one can safely predict what will happen in the future. The potential for danger exists, particularly if the trustees of funds associated with Cosatu are placed under any pressure to use or continue to use the services of one of these companies.
Investment limits
It is interesting that a retirement fund sponsored by an employer is limited to investing no more than five percent of its assets in the employer and its subsidiaries.
The reason is to protect retirement fund members from incidents such as the Enron debacle in the United States in which 100 percent of the retirement savings of most Enron employees was invested in the company. These employees were left with virtually nothing when Enron collapsed as a result of management dishonesty.
We saw a similar situation in South Africa a few years ago when Old Mutual unlawfully paid money from the CAF pension fund to the Korsten brothers. These Pretoria businessmen used the money unsuccessfully to prop up a company that went belly up.
I think even five percent of fund assets is too high; it should be reduced to three percent. And the limitation should apply equally to investments in employers, trade union investment companies and financial services companies that sell retirement products, such as retirement annuity funds, umbrella funds and preservation funds.
And as a double safeguard, no retirement fund should be allowed to own more than three percent of the shares of any entity, including any subsidiaries of that entity.
But most of all, the Registrar of Pension Funds must enforce the requirement of the Pension Funds Act that 50 percent of trustees are elected by fund members and that trustees are fully independent of a union, a financial services company and/or an employer. There should be no exceptions or exemptions.
And when trustees are elected or even nominated, they must be protected fully from undue interference by any party.
The only things that should concern trustees are the protection of members' retirement savings and the efficient and prompt payment of the benefits due to members and their dependants.
These case studies illustrate the things that can go wrong
Fund 'owes' the union
1
The Cosatu-affiliated South African Commercial, Catering and Allied Workers' Union (Saccawu) believes that its associated Saccawu National Provident Fund (SNPF) should pay royalties to the union because Saccawu helped recruit the union members and signed up companies (as participating employers in the fund) whose employees became members of the fund.
At its ninth national congress last year, Saccawu resolved that the union was "entitled to compensation for its financial and human resources for the establishment, marketing and servicing" of the provident fund, because the "funds that were utilised belong to the union".
The congress's resolution said the "royalties to be claimed and income derived from such compensation for building the (provident) fund must be invested for the benefit of the union and its members".
There are a number of problems with this approach. They include:
- On the basis of the logic used to justify the collection of royalties from the SNPF, any employer that provides its employees with membership of a retirement fund could claim a royalty from that fund.
- Many members of the SNPF may not be members of Saccawu. Yet the union derives a benefit from non-union members, and union members may receive better benefits in total than the non-union members, because they may receive benefits from the provident fund and from the union.
- The union members of the SNPF should be better protected if all their retirement savings are managed in terms of the Pension Funds Act. Once any money is managed outside the Act, this protection is lost.
The Saccawu congress also resolved to re-establish an investment company by June this year. There is no indication of how the investment company will be capitalised.
There could be a problem if the investment company is even partly capitalised with savings from the SNPF and/or if the investment company is associated with a retirement fund service provider that has or could have a relationship with the SNPF.
Already, according to union documents in the possession of Personal Finance, Saccawu has relationships with financial sector service providers, from which the union receives commissions.
Saccawu also encourages its members to use these service providers. For example, Old Mutual Group Schemes is "a service provider of choice for individual member investments, life cover, funeral cover, and long- and short-term insurance policies", while the "union decided Ingwe Medical Aid must be the service provider of choice for medical aid for staff and members".
The congress also resolved that Old Mutual and Ingwe should increase the level of commissions paid to Saccawu. Of the commissions, 20 percent must be invested over the next three years.
Incidentally, in September 2002, the Pretoria High Court placed the SNPF under curatorship after an application by the Financial Services Board (FSB) following allegations of unauthorised expenditure totalling R1.7 billion, including payments to fund trustees.
The police are still investigating charges against the fund's former principal officer, Abram Mosiuoa, who, according to court documents, misappropriated more than R14 million to fund an opulent lifestyle.
Control of trustees
2
In 2002, the Cosatu-affiliated Chemical, Energy, Paper, Print, Wood and Allied Workers' Union (Ceppwawu) passed a resolution that all "worker trustees are accountable to the union", and that "employee trustees must therefore take mandates from the union before and after they attend board of trustee meetings".
Since then, Ceppwawu attempted to fire some of the trustees of its associated Chemical Industries National Provident Fund (CINPF) for wanting to terminate the services of retirement fund administrator NBC.
Ceppwawu fired one of its officials for supporting the trustees who sought to fulfil their fiduciary duty by acting in the best interests of the fund. It also expelled the fund chairman from the union. This meant he lost his full-time job as a shop steward at Mondi.
Ceppwawu acted against the trustees despite a High Court judgment that the resolution was unlawful. In addition, members of other trade unions who belong to the CINPF have no say in the election or nomination of the fund's trustees, who are nominated by Ceppwawu.
The question must be asked whether Ceppwawu's insistence on controlling the trustees has led to the trustees making some very poor decisions. For example:
- Towards the end of last year, an arbitrator apparently ruled in favour of the CINPF after a deal with investment company Ceppwawu Investments almost resulted in the fund losing R130 million. The full terms of the arbitration settlement have not been disclosed to fund members.
Ceppwawu Investments borrowed money from the CINPF to buy shares in Aspen Pharmacare to give the company a black empowerment stake to allow it to continue to obtain government contracts. The shares were held by the investment company, which, in turn, was supposed to issue the CINPF with preference shares in Ceppwawu Investments.
The investment was locked in for seven years.
The preference shares were never issued to the CINPF (something which all the service providers to the fund, the trustees and the principal officer failed to pick up). Furthermore, the fund was not informed about the lock-in period.
Ceppwawu Investments then attempted to wipe out its debt to the CINPF by saying that, because the preference shares had not been issued after three years, prescription applied on the debt. In other words, the debt no longer existed.
There also seems to be a further investment, organised through a Sanlam assurance policy, that was designed to sidestep the limitations on how much money a retirement fund can invest in a participating employer. (This was needed because Aspen employees belong to the CINPF.)
And the person who signed the agreements was the principal officer of the CINPF, Krimis Tsolo, who also happened to be a member of the union trust that controls Ceppwawu Investments and a director of the investment company. All of which raises issues of conflicts of interest.
The problem with the preference share investments arose when the FSB instructed the CINPF to get rid of the shares, because the fund had exceeded the limitations on how much money a retirement fund may invest in unlisted investments.
- The CINPF has inexplicably changed its investment adviser from one that charged R160 000 a year to one that charges R8 million-plus.
Num and Fidentia
3
Almost 50 000 widows and orphans who are living in abject poverty because of the Fidentia debacle may have been far better off if a union investment company had not been involved.
The Mineworkers' Investment Company (MIC), which is associated with the National Union of Mineworkers (NUM), co-owned, with financial services company Momentum, a now defunct retirement fund administration company called Lekana.
Living Hands Trust Company (controlled by Fidentia) paid a kickback to Lekana (and other administrators) to direct the funds due to the widows and orphans of deceased members of the NUM-associated Mineworkers' Provident Fund (MPF) for management and safekeeping. Some safekeeping!
The Living Hands kickback made Lekana - and therefore also the MIC - more profitable.
As recently as this year, destitute widows have held sit-ins at Momentum offices in an attempt to obtain their benefits, which have not been paid because of the Fidentia scam and the general inefficiency at Momentum, which is the provider of group life benefits to the MPF.
Of the R2 billion that went up in smoke at Fidentia, almost R1.2 billion was due to the mineworkers' widows and orphans.
This debacle may have been prevented, or at least its enormity may have been reduced, if this conflict of interest had not existed.
Some of the trustees did speak out and wanted to fire Living Hands. But people at Lekana brought pressure to bear to maintain the relationship.
- Cameron is the author of the book Retire Right (Zebra Press), which is now in its second edition.