Government needs to take a long hard look at the way it is regulating the various aspects of the private sector’s provision of what can be considered social protection. What is happening at the moment is increasingly chaotic, undermining the ability of people who can, to a greater or lesser extent, provide their own protection against the unexpected.
The private sector provides medical schemes, products that cover you and your dependants in the case of death or your inability to work, and products that allow you to defer spending now to ensure that you have an income in retirement. These are all forms of social protection.
Professor Alex van den Heever, who holds the Chair in Social Security Systems, Administration and Management Studies at the University of the Witwatersrand and who spoke at two important conferences this week – those of the Institute of Retirement Funds (IRF) and the Board of Healthcare Funders – emphasised that private-sector products and services are an important part of overall social security.
If they are allowed to continue to lose credibility, not give value for money or simply become unaffordable – as is increasingly the problem with medical care – the pressure on the government’s wallet will increase.
And what is the point of forcing medical schemes to have reserves of 25 percent of annual contributions if this forces them to shrink your benefits and increase your contributions?
It is absurd that it is now 2013 and we seem to be no further towards finding an integrated social protection system for this country than we were 10 years ago.
An interministerial and an interdepartmental committee have been dealing with this issue for 10 years and all we have is deathly silence.
Government virtually ignored the IRF conference, with no representatives from National Treasury or the South African Revenue Service present, while the Financial Services Board sent a replacement speaker for its chief executive Dube Tshidi. The speaker was simply ill-prepared and left the more than 1 000 retirement fund trustees befuddled.
Instead, the FSB was supposedly introducing its new head of pensions, Rosemary Hunter, and head of financial advisory and intermediary services, Caroline da Silva, to the media in Pretoria.
Hunter should have been at the IRF conference, as should her boss Tshidi. This is not a very auspicious start for a key person in an organisation that looks increasingly dysfunctional in parts. For one thing, they could have learned a lot about conflicts of interest and how they are perceived by many trustees (See “Confusion at the FSB”, below).
Van den Heever issued a warning against government pressing ahead with its proposed new “twin peaks” regulatory regime, because he says this will undermine comprehensive social security reforms.
Another reason is that it may simply be a waste of time, particularly when it comes to the FSB taking over the regulation of market conduct of the entire financial services industry.
If it is already so inefficient in protecting consumers against the excesses of the financial services sector, to say nothing of its inability to halt straight theft and fraud, even when it receives ample warning, what makes anyone think it will perform any better in a new regulatory regime?
And this inefficiency is compounded by the fiasco of a justice system that cannot even manage to get convicted fraudster Arthur Brown, of Fidentia notoriety, sent to prison.
It is time for government to get its act in order.
CONFUSION AT THE FSB
I received what I considered an astounding email from the Financial Services Board (FSB) this week that sums up its inconsistent approach to protecting consumers. In a guidance note on good governance (PF130) it admonishes retirement fund trustees to avoid conflicts of interest. The same is required in terms of regulations under the the Financial Advisory and Intermediary Services Act.
Where conflicts cannot be avoided they must be fully declared and managed. In simple terms, a conflict of interest is an arrangement or situation where an outside financial interest or obligation (real or perceived) has the potential to bias a decision or cause harm (in this case, to retirement fund members or their funds).
A conflict of interest can be avoided by a retirement fund by, among other things, not using a service provider for more than one service or one that provides a service to any other party which would allow it to profit.
Last year, Personal Finance raised this issue in the wake of the Rocklands property saga, which was riddled with conflicts of interest that allowed exorbitant gains at the expense of retirement fund members.
One of the issues that came out was the way in which financial services company Riscura provides asset management advice to retirement funds and also gets asset management companies, in turn, to pay it for doing risk assessments on their products.
This is a conflict of interest that can be avoided. The FSB decided to investigate.
Asked this week about the outcome of the investigation, the FSB said: “As far as the conflicts of interest question is concerned, Riscura and the management thereof was investigated and it was found that such conflicts were adequately managed and in instances where such conflicts could not be avoided, they were comprehensively disclosed.”
So why admonish retirement fund trustees to avoid conflicts of interest?
I raised the question with the FSB because Riscura’s name came up in connection with the default on R925 million of corporate debt owed by South Africa’s largest unlisted company, First Strut.
It is not that Riscura was involved in anything fraudulent, but it runs an investment product jointly with Investec Asset Management. Most of the money in the portfolio comes from retirement funds that Riscura advises on investment.
Riscura recommends to retirement fund trustees that their funds should invest in its product, for which it earns a fee – a clear conflict of interest. As the adviser to the funds, Riscura should be giving advice and policing the investments. The perception could be that Riscura will advise trustees to put retirement funds into its product because it earns extra money.
Another problem is that Riscura could tender at a lower price than its competitors to give advice to retirement funds because it can potentially earn extra from investments into its product.
It gets more interesting. Retirement fund money held in the product was invested in the Investec Credit Opportunities portfolios that held R435 million in First Strut bonds.
What this has cost the various retirement funds, and which ones are affected neither Riscura nor Investec are saying. And remember, Riscura holds itself out as an expert in assessing risk – but it could not detect a 20-year fraud!
And the FSB thinks that the Riscura conflicts of interest can be managed? I think not.
Although the losses for the retirement funds are fractional at member level, the questions are whether conflicts of interest in the First Strut debacle exposed retirement fund members to unacceptable risk and what responsibility the funds’ trustees could bear as a result.
These are questions that could be settled by the Pension Funds Adjudicator, Muvhango Lukhaimane. She set a precedent last month by ordering that the former trustees of four umbrella funds left in disarray by fund administrators Dynam-ique pay back the R20 million required to rebuild the funds’ records. It cost the 11 000 members of the fund 2.5 percent of their savings.
At least two big retirement funds, namely the Sentinel mining fund and the Telkom fund, are exposed to the First Strut losses. They did not respond to email inquiries this week.