Reaction from the financial services industry to National Treasury’s recent paper “A Framework to Centralise Unclaimed Benefits in South Africa” reflects a long-held, prevailing view by the industry: the centralised administration of certain classes of unclaimed assets may be necessary to improve the distribution of these assets to their rightful owners; centralised custody of assets is not.
The paper, which invites input from stakeholders by September 19, provides for all unclaimed assets, beginning with unclaimed retirement benefits but eventually encompassing unclaimed banking, insurance and investment benefits, to be transferred to the Corporation for Public Deposits (CPD), from where they will be distributed to beneficiaries, once found. This would be enabled by the establishment of a central database and centralised administration and tracing system.
Read: Treasury’s proposed unclaimed-assets model revives central fund debate
Private-sector participants in a recent EBnet discussion on the subject (see “Unclaimed retirement benefits – a problem that won’t go away”) were largely opposed to a central fund, while being open to the centralisation of administration, data collection, and tracing. When approached for comment on Treasury’s paper, Old Mutual’s chief customer officer, Michelle Acton, who took part in the discussion, was careful not to pre-empt Old Mutual’s response to Treasury.
“Old Mutual supports efforts to resolve the shared challenge of unclaimed benefits. Addressing this challenge requires greater focus and co-ordination to keep members connected to their retirement savings when they change employers or funds. We welcome the focus on digitisation and believe reform offers an opportunity to improve tracing and payment, while ensuring these assets remain available for claims and are appropriately invested to generate sustainable long-term returns for members and create value for the wider South African economy. Old Mutual is carefully reviewing the proposal and will submit a considered response,” Acton said.
Nancy Andrews, head of legal for Discovery Corporate Employee Benefits and Discovery Invest, who spoke at Discovery Corporate’s inaugural Retirement Fund Forum recently, was unequivocal in her opposition to a central fund (see “Unclaimed benefits | Support for central tracing, not central control”). She was unavailable for comment for this article.
David Hurford, the chief executive of Fairheads Benefit Services, believes that channelling unclaimed benefits into a single administered fund will not adequately resolve the problem.
“The cost, complexity, and risk of maladministration certainly outweigh the potential benefits, which could largely be achieved without centralisation,” Hurford says, who adds there are practical actions that could be taken immediately to address the issue. These include:
- Stronger regulation of tracing, including prescribing a minimum standard operating procedure across the industry;
- Facilitation by the Financial Sector Conduct Authority of a central tracing database with input from a wide range of data sources, including the Department of Home Affairs, South African Revenue Service, the Financial Intelligence Centre, and the South African Social Security Agency;
- Stronger regulation on permissible fees;
- Stronger regulation on investment allocation, potentially boosting impact investments aligned with developmental objectives; and
- Simplified taxation for small benefits.
Jaco van Tonder, head of adviser services at Ninety One, recognises that the paper addresses a long-standing challenge for the financial services industry, and says Ninety One supports better tracing and record-keeping within a well-regulated, cost-effective, and responsive structure. But he says it conflates two separate problems that don’t need the same solution: finding legitimate beneficiaries of fund benefits and managing their money.
“Centralising tracing – having a single register, standardised data, and one point of contact for beneficiaries – is overdue and we support it. Centrally managing all these assets in a money-market type vehicle, however, is a different matter. Investing unclaimed retirement benefits with the CPD puts member money into a vehicle built for managing short-term cash, not for growing retirement capital over what could be decades,” Van Tonder says.
“Unclaimed retirement money is still retirement money. Therefore, we believe the investment proposition should not be simplified to a cash pool – consideration should be given for the funds to stay subject to the same prudential investment standards as any other retirement benefit. A central administrator can own tracing, verification and payment without investing all the funds in cash,” Van Tonder says.
He says a further, short-term, challenge is execution, the complexity of which should not be underestimated.
“Migrating decades of legacy records from multiple administrators, each running different systems with variable data quality, into one structure is a multi-year undertaking with real data-loss risk. The project should potentially be sequenced, building and proving the tracing register first, before touching custody of the assets,” Van Tonder says.
Niki Giles, the head of strategy at Prescient Fund Services, quoted by Citywire South Africa, also questioned assets being channelled into the CPD. She said the CPD had a conservative investment mandate, using short-term money-market instruments and treasury bills. Unclaimed assets were currently in retirement funds’ default investment portfolios whose mandates required a more growth-directed allocation.
“Trustees are legally required to ensure these members are well served by their investment arrangement. Transferring those assets to the CPD’s conservative cash pool would effectively override a carefully constructed, regulator-scrutinised fiduciary decision,” Giles said.
She also warned of problems arising from transferring assets from pension funds to the CPD. Underlying investments would, in most cases, have to be sold, resulting in transaction costs and a potential market impact. Funds in which unclaimed benefits represented a large portion of assets could face liquidity pressure and forced-selling risk, Giles said.
