Fund ordered to explain failure to submit financials, Sharemax investments

Fund ordered to explain failure to submit financials, Sharemax investments
2015
By Laura du Preez

IOL ruling

The Pension Funds Adjudicator has ordered the Pietermaritzburg Corporation Provident Fund to report to the pension funds regulator on its failure to submit financial statements for the past nine years and on its investments in two failed entities.

In investigating two complaints to her office about delayed payments from the fund, Muvhango Lukhaimane, the adjudicator, was informed that the fund paid the former members only half their benefits, because the fund’s financial statements have not been prepared since 2006 and because the fund invested with two troubled entities, Corporate Money Managers (CMM) and Sharemax Investments.

The former members were employees of the Msunduzi Municipality in Pietermaritzburg.

Retirement fund trustees are obliged to act with due care and diligence when managing your retirement savings, and the failure to prepare bi-annual financial statements and the nature of the investments made by the fund raise the question whether the trustees’ fulfilled their fiduciary duties.

The fund invested R15 million in CMM, which ran a money market fund. Investors’ funds were lent to property developers in contravention of the Collective Investment Schemes Control Act.

The manager was put under curatorship in 2009, at which time it had received R1.1 billion from a variety of investors.

The curators have indicated that they expect to recover only a quarter of the money from various developers and Absa, the custodian of the fund’s investments.

The fund invested R3 million through Sharemax Investments, which promoted various unlisted property syndication schemes that ran into financial difficulty.

In 2012, in a court-sanctioned scheme of arrangement, the schemes were taken over by Nova Property Group Investments, and investors were issued with debentures in Nova.

It is not clear what percentage of the fund’s assets these investments represented. However, according to the rulings issued by the adjudicator on the complaints, the fund’s investment broker informed Lukhaimane that the fund was unable to determine the values of the investments, and this, together with the fact that financial statements have not been prepared for many years, meant that the fund could not determine the final benefits due to the members who complained to Lukhaimane.

The broker said the Financial Services Board (FSB) had advised the fund that it would be prudent to pay only 50 percent of the benefits until the fund’s financial affairs were put in order, to avoid over-paying benefits.

In her rulings, Lukhaimane takes issue with the trustees for their failure to act in members’ interests and keep proper records, as required by the Pension Funds Act. She also notes that the office of the Registrar of Pension Funds at the FSB has not been monitoring whether the fund filed its financial statements with the regulator.

Corlia Buitendag, the head of pensions enforcement and surveillance at the FSB, says the FSB paid a compliance visit to the fund in 2011 to find out why it had failed to submit audited financial statements. After a second compliance visit, the FSB determined that the board of the fund was not constituted as it should be in terms of the Pension Funds Act.

Buitendag says the Registrar of Pension Funds appointed a respected pension fund lawyer to the board to investigate and regularise the affairs of the fund and re-constitute the board of trustees.

The adjudicator has ordered the fund, within six months of her rulings, to report to the registrar on its failure to prepare and file financial statements. She sent a copy of her rulings to the FSB.

Lukhaimane says the fund, aware of the FSB’s concession that it could pay only 50 percent of any benefits due, should have informed her office of its progress in obtaining accurate details of the benefits.

She therefore ordered the fund, within eight weeks of her rulings, to submit a plan to the Registrar of Pension Funds indicating how it aims to deal with the payments to members. The fund could not avail itself of the FSB’s concession until the registrar had approved the plan, Lukhaimane says.

She also ordered the fund to submit to the registrar “a comprehensive report on whether the investments in CMM and Sharemax were prudent and compliant with the regulations”.

Funds are obliged to comply with regulation 28 of the Pension Funds Act to ensure that their investments are prudent. Regulation 28 restricts retirement funds’ investments in unlisted entities, such as the Sharemax syndications. However, the FSB is unable to determine whether the investment breached the limits, because the fund has failed to submit financial statements since the investment was made.

According to the adjudicator’s rulings, the wife of a deceased member of the fund, TM Mdlala, and a former member of the fund, MJ Makhaye, complained to the adjudicator that they had received only 50 percent the benefits due to them from the fund.

Lukhaimane says in her ruling that her office investigated whether the fund was justified in delaying paying Mdlala’s widow and Makhaye the remaining 50 percent of their benefits.

The adjudicator found that Mdlala’s husband had resigned from the fund before he died and that the fund had incorrectly paid the benefit as a death benefit, whereas it should have been paid as a resignation benefit. As the benefit had not been paid by the time he died, it should have been paid into his estate.

Lukhaimane ordered the fund to establish the accuracy of its records within three weeks of her determination, and a week after that to pay any outstanding benefits and any growth thereon into Mdlala’s estate and to Makhaye.

According to the curators’ latest report on CMM, which was filed in January, the curatorship is nearing an end.

The report says an inquiry in terms of the Companies Act against the mastermind of CMM and its money market fund, Johan Bakkes, had found that he was liable for R800 million owed to investors.

The curators also reported on their efforts to recover investors’ money from a variety of developers and other entities. In all, R106 million has been recovered and R70 million has been distributed to investors so far.

The curators have earned R24 million in fees; forensic costs were R30.9 million and legal fees were R68 million.