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• December 2011 Issue
• commentary
  • Full stop - on his high horse
  • One Young World – Start Leading
• focus
  • A green office - Eliminate the paper with smart software (CQS Case Study)
  • Addressing the Challenge of Materiality - More than just Compliance
  • Assurance of the IR - Where are we in this part of the journey?
  • Financial Information in an Integrated Report - A Forward Looking Approach
  • Integrated Reporting - The Status Quo
  • IR – The SA Experience – KPMG
  • South Africa's Early Reporters - Not yet an Ideal Landscape
  • Sustainability - The Stakeholder Revolution and the sme
  • The Experience of a Long-time Integrated Reporter Novo Nordisk
• analysis
  • Social and Ethics Committees - Blessing or Burden?
• life
  • Treasuring Art - Cash in the Attic
  • VW Scirroco R
  • Your Portfolio Life
• report
  • Transformation: Understanding well your Sphere of Influence
• CPD Verifiable Articles
  • Assurance of the IR - Where are we in this part of the journey? (1500min)
  • Addressing the Challenge of Materiality - More than just Compliance (1500min)
  • Sustainability - The Stakeholder Revolution and the sme (1500min)
  • Social and Ethics Committees - Blessing or Burden? (1500min)

Unclaimed Benefits Funds

As a result of the surplus legislation in 2001, a number of entities have entered the market to assist trustees in tracing these members. With the introduction in 2005 of the revised format annual financial statements, provision was made to account for unclaimed benefits separately, based on the policy in place for these, as determined by the trustees and/or the fund's rules.

Many fund rules allowed unclaimed benefits to be written back to the fund, usually after a period of three years. This practice of writing benefits back to the fund was discouraged by the Financial Service Board (FSB) and, on 16 March 2007, the FSB issued Pension Fund Circular 126 where, under paragraph 2, the FSB required funds to amend their rules to remove any provision that required unclaimed benefits to be written back to funds, by 31 December 2008, stating that "Such a reversion of benefits detrimentally effects the rights of members whose benefits remain unclaimed".

With effect from 1 November 2008 a definition of unclaimed benefits was introduced into the Pension Funds Act (PFA) in terms of the Financial Services Law General Amendment Act, 2008. This definition in essence states that any benefit that is not claimed within 24 months of the benefit becoming legally payable becomes unclaimed.

As a result of the difficulties that funds may face in tracing these unclaimed benefits, particularly claims for demutualisation and surplus benefits, where benefits were awarded many years after members had left, funds can now transfer these member benefits, via Section 14, to an unclaimed benefit preservation fund.

A number of service providers have set up these funds that may only take and hold unclaimed benefits. The benefit of this is that, over time, these funds may have access to a greater number of databases in which to cross reference member data with members seeking benefits that they may not have claimed, and will, one hopes, potentially become skilled at focusing in tracing members. In addition, members will be able to approach these funds with their details if they believe they may have an unclaimed benefit.

We have recently seen the marketing material for one of these funds and this has raised some concerns about trustees taking the easy route and simply transferring the benefits to one of these funds so as not to have to trace and deal with these members. In their haste to implement what may seem like a practical solution, trustees may not comply with their fiduciary duties to the fund and the members.

These concerns include the following:

1. The fulfillment of the trustee's fiduciary duty to these members.
2. The costs involved with these funds.
3. The manner in which an unclaimed benefit fund is selected.

Section 7C(2) of the PFA under subsections (b) and (d) requires trustees to do the following:

(2) In pursuing its object the board shall— (b)act with due care, diligence and good faith; (d) act with impartiality in respect of all members and beneficiaries.

Members with unclaimed benefits are still members of the fund and the trustees need to apply the above principles to this group of members as well as to the active individual members, and indeed to all stakeholders in the fund.

The trustees will therefore need to be sure that they have followed and continue to follow a rigorous process in dealing with these claims while tracing them themselves, and before transferring them to an unclaimed benefit fund.

In doing this, the trustees will need to be clear how the unclaimed benefit fund is going to do the following:

1. How will the unclaimed benefit fund trace members and why will this achieve better results than the fund itself? Trustees should bear in mind that there are a number of entities that provide tracing services. One of the shortcomings that we have seen with funds is that they inevitably use one and, in some cases, have tried two tracing agencies.

Fund should explore using more agencies, particularly where the fee is based only on a successful trace. Funds can prioitise the submission of claims to agencies and, after an agreed period, move the claim to another agency. We too often see that the agencies used are those preferred by the administrator. In our experience, different agencies have different strengths and often have access to different data bases. They are not all the same.
2. Have all possible sources of tracing the member been exhausted? For example, has the member's data not held by the fund, been obtained from payroll records. Retirement fund administrators have historically only held data that they are required to in terms of the PFA, in order for them to administer the fund. Often the payroll data has important information such as last known address, which is rarely, if ever held by the administrator, identity number, etc. Have notices with missing members' names been posted at the members' office where they last worked? There are often existing members of staff that know the members and have stayed in touch. If the employer has union involvement, have those unions been approached for any data they or their affiliates may have?
3. What are the costs involved? These should not be greater than the cost that the fund is currently incurring in tracing and holding the records of these members. If this is the case, then there would need to be a clear benefit to the unclaimed members that the existing fund could not achieve. If this cannot be demonstrated, then the fund may not be treating members impartially or with due care and good faith. Just because it is administratively difficult to trace members does not mean the unclaimed members should be passed off to a more expensive alternative.

4. For how long or for how many attempts will the unclaimed preservation fund make to trace a member? And if this is unsuccessful what happens next? Remember the unclaimed benefit preservation fund provider will be making money on the fund and every time they pay a claim will have less assets and less members on which to receive fees. There is therefore a conflict between the provider and the fund. Sponsors of unclaimed benefit funds have not generally set these up for philanthropic reasons; they were set up because they believe they can make a profit on them. The trustees need to know how this conflict will be managed and be comfortable that it is being managed.

5. In the information that was provided, the unclaimed benefit preservation fund was looking to charge an investment fee of more than 1% (100 basis points) of assets and a monthly administration fee of 0.005% (50 basis points) of members' assets, with a minimum monthly fee of R15 per member. If we look at what funds are currently paying for unclaimed benefits or what existing preservation funds for normal exiting members are charging, these fees seem excessive.

The investment strategy that most funds have for unclaimed benefits, is to hold these in cash, or a cash equivalent investment portfolio, and in some cases an absolute return fund (rightly or wrongly). This is understandable, in that one can understand the trustees' desire to protect an existing member's capital, and we will not, however, debate the correctness of this strategy. As it is the most common strategy we have observed, we will use it as a basis to compare the fees charged by similar investment products.

A quick search on the internet revealed the following fees for a money market portfolio and an absolute return portfolio for three multi managers. The fees reflected are the maximum fees, and as the assets exceed certain monetary limits, the fees reduce.

Therefore, in the worst case scenario the investment fees based on a similar strategy should be no more than 40 basis points in a money market fund and 85 basis points in an absolute return fund. Having said this, the aim of these unclaimed benefit preservation funds is to attract the unclaimed benefits of a number of funds and, in reality should have no problem in exceeding the minimum asset levels to receive the lower investment fees, which in all the money market funds were 25 basis points. The investment fee should certainly be lower than what the fund that the member comes from is paying.

In terms of administration fees, unclaimed preservation funds will need to load the member's record with as much information that they can obtain from the previous fund, and which the previous fund provides. They then need to trace the member. Their fees are therefore fairly comparable to existing preservation funds. In fact it should be simpler to administer, as they do not need to send out member communication to each member, hold and amend addresses, etc., they merely need to hold a record, give it in return and trace and pay the member.

Most funds do not pay a monthly administration fee for unclaimed members and, where they do, this is substantially less than that paid for active members, which is understandable, as they no longer receive contributions or require any further maintenance.

So for what is a monthly administration fee required, and should it be charged as a percentage of the member assets?
Certainly the cost of holding static data is not significant, and applying fund returns is merely entering a portfolio return onto the system each day or month, which in most cases is automated or linked to the same portfolio held on the administrator's system, and is therefore entered only once onto the administration system. These functions are not linked to the size of a member's assets and are normally related to the fixed cost of the administrator in terms of its system and administration staff.

The fund as a whole would need to produce accounts, audited, and pay levies, etc., all of which are charged to the fund on a flat basis by the service provider to the fund.

In terms of the tracing costs, most funds deduct these from the unclaimed benefit, as they deem it unfair to have active members pay for these, where a member has not taken the trouble to claim their benefits, resulting in the fund having to pay additional costs to locate the member. There is every reason why this practice should continue.

We can also envisage that unclaimed preservation funds will advertise through the media or other means to let the public know that the fund exists and can be contacted to claim any benefits they may have. Once again, these costs can be budgeted for and are not related to the size of members' assets.

We therefore cannot see why any administration fee should be based on member assets and, in fact, should be a low per member per month fee as it would appear that all the costs related to the administration are flat based and, therefore, one would expect these to be recovered from members on a similar basis. In terms of tracing, these should continue to be success based, and charged to the member concerned. Once again, these fees should not be greater than what the fund is currently paying for these members.

Should a fund transfer unclaimed benefits to an unclaimed preservation fund where the costs are greater than the existing funds, and there is no discernable basis for these? A member could hold trustees accountable for any potential reduction in benefits.

6. Should the trustees decide to explore unclaimed benefit funds, they should approach a number of service providers to obtain comparative quotes, including looking at existing preservation funds for comparisons, as well as the existing costs in their own fund prior to selecting a provider.

Trustees should also independently obtain lists of unclaimed benefit fund providers, particularly where their fund's existing providers also provide these services. Automatically selecting your existing service provider's fund, without having performed a proper review, on the basis that it is convenient, may not meet the high fiduciary requirements expected of trustees.

As unclaimed benefits will require to be transferred through the Section 14 process, we certainly hope that the FSB will be paying attention to some of the matters discussed above to ensure that the transfer is fair and equitable to all the members.

Trustees should also bear in mind that tracing or other costs associated with unclaimed benefits should be charged to the unclaimed members, as it would not be equitable for other members to pay or share in these costs, which have arisen solely as a result of the unclaimed members not claiming their benefits. This can only be done, however, if the rules specifically allow for the deduction of these costs from the unclaimed members' benefits.

Tim Rutherford CA(SA), BCom (Hons), NDip (Management), is Assurance Director: Ernst & Young.

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