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Pension Funds
Wednesday, October 1, 2008
Secret profit warning

The Registrar of Pension Funds is concerned that recent media reports have not properly reflected the true nature of how the pension-backed lending businesses are structured and the extent of his supervisory powers in this regard.

Section 19 (5) of the Pension Funds Act permits a fund to provide a member with housing finance, either by way of a direct loan to the member or by providing guarantees to third parties. Funds generally prefer providing guarantees due to the administration costs involved in maintaining a loan book within the fund.
Trustees have two options when availing pension-backed lending to members: whether to approach mortgagors directly, or to allow a service provider to provide the finance to fund members.
The FSB’s investigation of the industry practice has revealed that where a third party service provider is used by the fund, this company is not the fund’s administrator, but normally a fellow subsidiary of the administrator, specifically set up to provide pension-backed lending.
Pension Fund administrators are required to be licenced by the FSB and are subject to regulation and supervision under the Pension Funds Act. The pension-backed lending companies on the other hand are not subject to the supervision of the FSB. As credit providers, these companies must comply with the requirements of the National Credit Act, and are therefore subject to supervision by the National Credit Regulator.
Pension-backed lending companies typically raise wholesale funds via the corporate bond market, by loans or by entering into joint ventures with established banking institutions. These funds are then used to provide mortgage finance to pension members and are secured by their underlying pension benefits.
As with any credit provider its profits are generated by the margin it earns between the cost of the funding and the interest it charges pension fund members. Such profits cannot be regarded as a secret profit; there is no principal/agent relationship between the company and the pension fund (members) to whom it is lending.
However, should any of the FSB-approved 13B administrators, whether a fellow subsidiary of the pension-backed lending company or not, earn any income from this company, which income flows from the fact that the members of pension funds under its administration are utilising these loan facilities and this has not been disclosed by the administrator to the pension fund concerned, this could amount to a secret profit.
The Registrar will expect such administrator to refund the secret profits, together with interest, to the pension funds concerned. Failing which, the Fit and Proper requirements of the administrator concerned will be brought into question, which could lead to the withdrawal of an administrator’s licence.
Based on the above, the FSB points out that it is therefore clear that:
• the Registrar has no jurisdiction over pension-backed mortgage lenders, and as such cannot investigate them;
• as credit providers, these lenders must comply with the requirements of the National Credit Act and are subject to the supervision of the National Credit Regulator; while,
• the profits earned by the lenders are not secret profits, but based on a commercial transaction with pension fund members.

Copyright © Insurance Times and Investments® Vol:21.9 1st October, 2008
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