31 August 2021 Gareth Stokes
Each year, journalists covering the financial services sector have a field day commenting on the retirement fund industry’s unclaimed benefits dilemma. They latch on to the largest number mentioned during the occasional regulatory update on the topic, and proceed to lambaste the country’s greedy [their word] retirement fund industry for not returning billions of rand in unclaimed retirement fund benefits to untraceable members. If only it were that easy…
The ‘sticky assets’ debacle
Olano Makhubela, Divisional Executive: Retirement Funds at the Financial Sector Conduct Authority (FSCA) recently told journalists that assets in the unclaimed benefits space were ‘sticky’ and showed little sign of year-on-year decline despite the industry’s best efforts to trace beneficiaries and pay out benefits. He was commenting during a media presentation to address various industry concerns. “My personal view is that a sizeable 40% of these unclaimed benefits will never get back to beneficiaries because they are either deceased or there is simply not enough member data to identify and trace them,” he said. By year-end 2019 there was just short of R45 billion belonging to 4.5 million untraced beneficiaries held by 1286 retirement funds. This represents approximately 1.7% of total assets in the retirement funding industry.
An unclaimed benefit is a benefit owing to a retirement fund beneficiary or member that remains unclaimed 24 months after it falls due. How does it happen that these beneficiaries remain unpaid for decades? The regulator offered a list of reasons, beginning with the migratory nature of South Africa’s work force, especially during the 1980s and 1990s. “We are not only referring to people from outside the country’s borders, but also those who come from rural to metropolitan areas to seek employment,” said Takalani Lukhaimane, Manager: Conduct Supervision at the FSCA.
Those working in the retirement funds industry will no doubt appreciate the administrative complexity of keeping track of benefits due thousands of low income migrant workers who were employed in the mining, motor and metal and engineering sectors over the years. It is estimated that two thirds of unclaimed benefits were generated by these sectors. Other issues preventing beneficiary tracing include inaccurate member data, outdated or missing contact details and poor recordkeeping by administrators.
Prevention may be easier than cure
The FSCA is engaging with the retirement funds industry to improve the situation. During Q3 and Q4 of 2020, the Retirement Funds Conduct Supervision team conducted desktop reviews with a sub-set of funds with high unclaimed benefits values. The detailed study findings will be communicated to the industry in due course. Until such time, the regulator has flagged the lack of standard approaches to unclaimed benefits; passive management; failure to maintain records of previous ‘track and trace’ efforts; lack of competition in the tracing industry; and too few data integrity checks as among its main concerns.
Another fairly obvious issue is that many of the orphaned accounts are of such low value as to make tracing uneconomical. “From our investigations we have established that approximately 17% of unclaimed benefits are in accounts totalling R100 or less, with another 10% of the total in accounts holding between R100 and R250,” said Lukhaimane. It makes little sense for a retirement fund to spend R500 on tracing the beneficiaries of these accounts, let alone for the affected beneficiaries to complete the red tape necessary to collect the money. Some journalists attending the session were horrified by this statistic. How could a member account have accumulated less than R250 after compounding for three or four decades? they growled, suggesting that the retirement fund industry was somehow to blame. Fortunately, the issue relates more to administrative complexities and the low compounding effect on small values rather than outright exploitation.
By way of example, a low-income worker in the early 1980s may have been earning around R200 per month with only 5% of that, or R10, going to retirement savings. Assuming they hopped jobs after two months and could not be traced, the R20 in unclaimed benefits would hardly have grown over the ensuing decades: R20 compounding at 8% monthly over 30 years is only worth R218,71. It also frequently happened that a fund member would withdraw his or her benefits when leaving a job; but prior to the final period’s outstanding interest reflecting on the account. “The practice was to declare interest on a quarterly or annual basis,” noted Lukhaimane. She said that interest earned during the last month or two had often not been credited to members by the time they resigned because there was no unit pricing at the time. Small values also accrued to funds due to administrative surpluses being divided among all members of a fund.
Grabbing this money could be the right thing to do…
Makhubela said that the industry was considering ways to deal with the unclaimed benefit problem, with a recent National Treasury proposal being to consolidate all of the funds into a single, centralised fund. This would remove the conflict inherent in retirement funds keeping unclaimed benefits on their balance sheet as well as addressing the near impossibility of finalising low value accounts. “If we end up with a central fund, this should not be seen as a form of expropriation; we are not taking the benefits away from members who have valid claims and they will always be able to claim a benefit due,” he said. “The idea is to find an easier, more streamlined approach to managing and processing these benefits”.
The writer took to twitter immediately following this statement. “South Africa’s financial sector regulators are proving to be big supporters of centralised funds,” I lamented. “Hot on the heels of the proposed National Social Security Fund and the National Health Insurance Fund, we now have proposals for a Central Unclaimed Benefits Fund”. I did, however, concede that the latter seemed a sensible idea. My solution would be to sweep the industry-wide unclaimed benefits into an SA-focused infrastructure fund, preferably managed by the private sector. The handful of traceable beneficiaries could still be compensated out of a ring-fenced, liquid portion of the fund, with the onus on beneficiaries rather than fund managers to prompt such recoveries.
Innovation needed to tackle legacy issues
An impartial take on the current state of affairs is that untraceable benefits is largely a legacy issue. The widespread adoption of mobile technology should make future beneficiaries more traceable than ever, resulting in new cases of untraceable benefits becoming increasingly rare. “Even the lowest income fund member has access to a cell phone, which makes it easier to contact people and inform them of their benefits,” concluded Makhubela. “As administrators and employers work on improving their recordkeeping this should become less of a problem”.
Local taxpayers are quite familiar with calls for additional wealth-linked taxes to be levied on their assets and incomes; but this time the tables could be turned. What are your thoughts on centralising the retirement industry’s unclaimed benefits into a centralised capital pool that could be used to improve the country’s infrastructure? The writer believes this would create a sizeable lump sum to kickstart an infrastructure fund without National Treasury having to go the prescribed assets route. Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]