Personal Finance Retirement

Retirees the losers in Fedsure saga

Published

This week another chapter in the ongoing saga of the implosion almost eight years ago of the Fedsure financial services group played itself out in the Witwaters-rand High Court.

In brief, 11 building industry retirement funds unsuccessfully attempted to prevent Investec Employee Benefits (IEB) from transferring its insurance business to Capital Alliance, which is now owned by Liberty Life.

The retirement funds opposed the transfer because they believe their more than R3-billion claim against IEB might go unpaid if the court approved the process.

The retirement funds say they had received assurances that IEB had more than sufficient assets to cover the claim should it succeed, but most of these assets have since been paid out in dividends to the Investec holding company.

Background

At this stage a brief history is necessary. Fedsure started out in the 1930s as an insurance company for workers in the building industry. In the 1990s, Fedsure, under the leadership of chief executive Arnold Basserabie, attempted to build itself into a major financial services company. It bought outright or bought controlling stakes in a number of companies, including Norwich Life, Saambou Bank and FBC Fidelity Bank.

The absorption of Norwich gave Fedsure, which was already having significant problems with systems, a severe case of indigestion. This was exacerbated by the failure of FBC Fidelity Bank in 1999, and the final straw came with the collapse of Saambou in 2002.

Investec, which was a significant shareholder, stepped in and bought Fedsure as a going but very wobbly concern.

In effect Fedsure imploded. It was to be no more. At the time of the Investec take-over, Fedsure had a very interesting board on which a number of luminaries sat as non-executive directors. They included Stephen Koseff, the chief executive of Investec; Hugh Herman, the chairman of Investec; and David Nurek, an executive director at Investec.

But there were also Mervyn King, better known as Mr Corporate Governance; Azar Jammine, the well-known Econometrix economist; and Naas van Staden, a former Registrar of Insurance.

Incidentally, King's name recently also cropped up in court documents as a director of the liquor company Pichold and as a member of the board of trustees of the company's retirement fund. The chairman of the company, Jan Picard Jnr, had entered into a plea bargain in which he admitted to illegally assisting with the stripping of a surplus of the retirement fund for the benefit of the company.

Jumbled assets

One of the problems fingered by a Financial Services Board (FSB) investigating panel into the implosion of Fedsure was that the savings of policyholders were jumbled with the assets of shareholders in something called the net main life fund.

In other words, no one really knew what belonged to whom, and it is not clear whether the board of Fedsure was even aware of the mismanaged mess that it was supposed to be controlling.

When Investec took control of Fedsure (which it renamed IEB), it removed R600 million, or 12 percent, of the savings of building industry retirement funds to, in effect, balance the books making up for the shortfall that had been incurred by Fedsure in its net main life fund.

This is a massive amount of money to remove from anyone's retirement savings, particularly when you take into account future investment growth.

By August this year, the claim had grown to R3.8 billion. This is money that thousands of building industry workers and their dependants simply will not have.

In my view, a lot of people should shoulder the blame for this, including the then Fedsure executive, the Fedsure board and the FSB, which was simply not doing a proper job of regulation.

But what is now of even greater concern is:

- Judge Meyer Joffe said in his judgment this week that the court action set in motion by the affected retirement funds to recover this money could still take another five years to decide. In other words, many of the affected members will move into retirement, probably with insufficient money, and many will die before they see any of this money, should any court action succeed.

- The growing legal costs. Any such action, such as that of the past week, costs millions of rands. This money, including the costs of this case to Investec and Capital Alliance, has been placed at the door of the retirement funds, further reducing the benefits of the fund members.

One wonders about the wisdom of having taken this particular issue to court. The judge seemed to be rather irritated by the latest action and dismissed the intervention of the retirement funds, with costs.

Ciaran Whelan, the executive director of IEB, told me recently that Investec offered in 2002 to refer the matter to arbitration - a far quicker and cheaper process than the courts. He says the retirement funds rejected the offer.

I would suggest that, in the best interests of the affected retirement fund members, Investec make the offer again and that the retirement funds accept it. This would see the dispute being settled far more quickly and cheaply.

Finally, those people who falsely accuse the government of attempting to steal their retirement savings with its retirement reform proposals need look no further than the Fedsure case to see how the private sector has too often badly managed retirement savings to the detriment of ordinary working people, who cannot afford this type of bad management and poor regulation.