The good, the bad and the ugly stories of terminating retirement funds – Four real life case studies
The decision to place a fund into voluntary liquidation or, alternatively, to just deregister the fund after the Fund’s assets reduced to zero, generally rests with the Trustees when a fund comes to the end of its life. There are no clear guidelines on which option to follow and one option may not appear to be better than any other. The Trustees are therefore often left to their own devices to make this difficult decision and very few trustees have a full understanding of the potential consequences of the different options at their disposal.
What better way to learn than from someone else’s successes or failures? Some of the advantages and disadvantages of different termination options are illustrated through the following case studies. These real-life stories* highlight a couple of the good, the bad and the downright ugly outcomes that were experienced under these different scenarios.
*(Names and places have been changed to protect the innocent.)
“Really Big Umbrella Fund”
Bulk transfer of multiple employers
Background – This commercial umbrella fund had to terminate due to a corporate restructure of the Fund’s administrator. A new administrator could not be secured and the Trustees considered liquidating the Fund. The liquidation fee of 0.5% of the Fund’s assets appeared excessive to the Trustees. The Trustees could, however, not find a Liquidator who was willing to accept the responsibility and risks associated with a liquidation of this scale for less than the prescribed fee.
The Trustees, being confident that there were no clear and obvious administrative risks, decided to do bulk transfers of the respective Participating Employers to alternative funds and to then deregister the Fund once all assets and liabilities reduced to zero.
The Good – For the majority of the Participating Employers this was a quick and painless transition from one fund to the next.
The Section 14 (Transfer) process is a very time- and cost-effective method to transfer members’ benefits to a new Fund. This also ensures full preservation of retirement benefits and members have continuous access to their benefits if they should retire or withdraw during this transfer process.
The Bad – The distribution of the reserve accounts posed serious challenges to the Trustees as some data or processing variations are bound to accrue during transactions of this magnitude. Managing this moving target became the thing of nightmares for the Trustees. Distributing too much of the reserves too soon could expose the Fund to very real financial risks if there should be any major data or processing variations once the reserves have been depleted. Distributing too little from the reserves at first, on the other hand, could leave a disproportionate balance to be allocated to the last transferring employer.
The Ugly – Not all Participating Employers were cooperative during the transfer process and neither were some of the receiving funds. Certain transfers were therefore significantly delayed.
Time was not on the Trustees’ side, as the next set of Annual Financial Statements became due ... and the next set … and another … and now the next Statutory Actuarial Valuation is also due. By this time the sum of all these expenses, plus the cost of having professional Trustees, significantly exceeded the original cost of liquidation. And still there is no end in sight with a couple of stragglers still left in the Fund.
To make matters worse, a substantial unexplained surplus arose in the reserve account as a result of the accumulation of minor processing variations during the transfer process. This could now require agterskot transfers and top-up payments to thousands of members.
The transfer of benefits via the Section 14 process remains the most time- and cost-effective method to move members’ benefits from one fund to another, provided that all parties involved play their part.
Liquidation provides a better structure to manage the distribution of reserves and all processing variations in a regulated and controlled manner.
The liquidation process removes some of the unknown future variables that could, amongst others, impact on the overall termination costs to the Fund.
“Workers’ Provident Fund”
Background – Contributions towards this free-standing fund for the union members of a blue-chip employer ceased following salary restructuring negotiations. The Unions demanded that the Fund pay their members a cash benefit even though members were still employed at the time.
The Fund had a complex history including various legal battles regarding eligibility disputes and the constitution of the Board, amongst others. The Fund’s administration records were also questionable. This history made liquidation the obvious choice for Trustees to protect the Trustees against potential risks and for members to get cash in hand.
The Bad – There were delays in getting the Liquidator appointed as the Fund had many outstanding statutory requirements that needed to be brought up to date first. The Rules of the Fund further had to be amended to allow for the appointment of a Liquidator and the Fund’s assets were invested in non-compliant and illiquid asset classes.
These delays started getting members impatient who already got wind of “imminent” cash pay-outs.
The Good – With effective and pro-active support to the Liquidator, the Union Leadership assisted with communication to their members to manage expectations regarding the liquidation process. The legal issues were resolved and no objections were received from any stakeholders in liquidation, thereby drawing a line under a history that was fraught with operational and financial risks.
The FSCA further assisted with quick turn-around times and the Preliminary Liquidation Accounts were prepared, submitted, advertised and approved for payment to more than 2 000 members within 4 months from appointment of the Liquidator.
The Ugly – The state of the Fund’s affairs created significant initial pressure on the process. Was it not for the close cooperation between the Liquidator, Union Leaders and the FSCA, this could have turned out very ugly very quickly. There have been known past instances where the offices of the FSCA were occupied or where a Liquidator was physically held hostage by disgruntled members who insisted on the immediate payment of their benefits!
Another less tangible but truly ugly consequence of this case, which will only be evident when these members reach retirement age, is that there were almost zero preservation of retirement benefits once members were given access to cash benefits through liquidation.
Through liquidation, the Trustees can achieve complete closure on any legacy legal and administrative issues that could have haunted the Fund in future.
Management of stakeholders’ expectation through proper cooperation and communication is key to the successful completion of any termination process, not only liquidation.
Be wary of assets which are illiquid, e.g. infrastructure bonds or private equity investments, where the costs of early termination can be significant.
Trustees should keep their funds’ statutory affairs in order and make sure their rules allow for any eventuality.
The unfortunate reality is that members, almost without exception, prefer cash over preservation whenever they are presented with this option through liquidation.
“So-and-So and Sons Retirement Fund”
Background – This was a small free-standing defined contribution retirement fund to a family owned business. The Fund only had a single orderly change of administrator in the past. It is a well governed and stable fund that is exempt from the requirement to submit valuation reports.
Following a corporate merger, all employees are now contributing towards the “New Corporate Provident Fund” and contributions towards So-and-So’s fund ceased. All benefits were subsequently transferred and the fund was reduced to an empty shell a couple of months after the merger. An application was submitted to the Authority for the Fund to be deregistered.
The Good – For all practical reasons, the transfer of benefits from the one fund to the other was a mere formality as far as members were concerned. The transfer costs were minimal and all benefits were fully preserved. This could be the scenario for the vast majority of funds that are terminated.
The Bad – The Free-standing DC Fund has still not been deregistered, some 6 years later. And not due to a lack of trying from the Trustees or their advisors, but unfortunately the Authority has not processed this deregistration to date.
The Ugly – While awaiting deregistration, the orphaned child of a former deceased employee came to light who was owed part of her father’s benefit upon reaching maturity. This benefit fell through the cracks during the change of administrators when it was supposed to be transferred to a Beneficiary Trust some 15 years ago. This is therefore a 100% valid claim, but there are no assets left in the Fund to honour it.
The Trustees could therefore be held liable for failing their fiduciary duty to this beneficiary by transferring all the Fund’s assets, even if the Fund was already deregistered.
If the Fund was liquidated, the Trustees would not have faced any liability. The liquidation process includes a formal opportunity for any beneficiaries to lodge any claims, or forever hold their peace. However, this would have left the beneficiary without any recourse if she only lodged her claim after the liquidation was approved.
Luckily for all concerned, the generous employer settled this claim on behalf of the fund which let the Trustees off the hook without any prejudice to the beneficiary.
The Section 14 transfer process can be quick and efficient and preserves members’ retirement savings.
Even if a fund does get deregistered, it does not mean it is dead and buried for ever. Such deregistration can be reversed for various reasons and could present an open-ended liability for Trustees or the Employer if there should ever be any valid claims against the Fund at some point in the future.
Liquidation does provide protection to the Trustees in the long term as it will close the door to any future claims. However, this protection could be at the expense of a former member or beneficiary with a valid claim.
“Sinking Ship Retirement Fund”
Background – The employer of this small Defined Benefit fund went into sudden and unexpected liquidation. These circumstances prompted a compulsory liquidation of the Fund in terms of the rules. The Fund had a large Employer Surplus Account (ESA) at the time.
Mr. IR Greedy, the appointed liquidator of the company, lodged a claim to the Fund’s Liquidator for the balance in the ESA. The Fund’s Liquidator rejected this claim as the employer went into liquidation before the Fund did and, rightfully so, indicated that the value of the ESA will be distributed to members in terms of the Pension Funds Act (as opposed to paying creditors of the company).
The Bad – During the liquidation process, all benefit payments are frozen until such time as the Authority approve the payment of liquidation benefits. Due to the ongoing legal dispute, this approval was not forthcoming.
The Act allows for advance payments to be made in cases of proven “financial hardship”. However, there is no guarantee that such an application will be approved and, if it is, then less than half of the total benefit payment can be advanced.
Given that the liquidation process is so tightly regulated (which is a good thing), there is unfortunately not much room for discretion for the Liquidator to accommodate stakeholders’ expectations (reasonable or not) prior to the Authority’s approval for payment.
The Ugly –The Company’s liquidator had access to company resources to fund his legal battle, regardless of the time and costs wasted, while the wheels of justice were turning at an excruciation slow pace. The court cases dragged on for the better part of 3 years before the liquidation could proceed.
As a result, many of the members, who also just lost their jobs, were left without any access to their retirement benefits. Verbal abuse and threats against the Liquidator from desperate members were at the order of the day.
The Good – The well-regulated liquidation process, in the end, meant that members received their rightful benefit from the Fund, which included a whopping 90% enhancement from the amount in the ESA. (Following which the abuse from members to the liquidator stopped somewhat unsurprisingly!)
The Pension Funds Act favours members over the Employer under these circumstances.
Any legal disputes should be avoided, although members’ rights should be defended where necessary.
Communication to all stakeholders to manage expectations remains a key factor.
The liquidation process is strictly regulated for all the right reasons which provides significant legal protection to all concerned.
Achieving the best outcome for members could take a very long time.
The lesser of two evils
History has unfortunately not proven either liquidation or normal deregistration as the default option to terminate a fund. It all depends on the specific circumstances.
There are clearly advantages and disadvantages to both options. If anything, these case studies illustrated how badly a wrong decision can end, but also that the “right” decision will have some disadvantages that should not be underestimated. Terminating the vehicle that is supposed to support individuals in retirement is unlikely to result in a “good outcome”, whichever way you approach.
The lessons learnt from these experiences are for Trustees to gather all possible information and to obtain expert advice in advance. Then to make the decision that will best serve the interests of all stakeholders, knowing that there may be pitfalls. The key to managing these inevitable pitfalls is to manage stakeholders’ expectations through open and transparent communication.