• Corné Heymans – Actuary

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.

Lessons learnt