FSCA takes action against Private Security Sector Provident Fund trustees

The FSCA is taking regulatory action against past and present trustees of the Private Security Sector Provident Fund (PSSPF) after concluding its three-year investigation into the board.

In a statement, the FSCA said an independent forensic investigation conducted on behalf of the PSSPF, an on-site inspection by the FSCA, and an investigation by its Enforcement Division found that:

• The board of the PSSPF, without justification, deviated from the fund’s procurement policy and processes when appointing service providers;
• Agreements in respect of the appointment of service providers were inconsistent with service providers’ tender proposals;
• Tender negotiations with service providers took place after the tender process had been concluded;
• The rates paid to board members during the 2017 financial period were higher than and inconsistent with the fund’s trustee remuneration policy;
• Board members were remunerated for attending a golf day and a conference; and
• The chairpersons of the fund’s sub-committees were paid a fixed monthly fee in addition to their fee for attending meetings, which is not standard practice in the retirement funds industry

The FSCA said it has concluded that the fund’s trustees:

• Failed to take all reasonable steps to ensure that the interests of members, in terms of section 7C of the Pension Funds Act (PFA), were always protected;
• Failed in their fiduciary duty of acting with due care, diligence and good faith, by failing to ensure that the procurement of service providers was done in a cost-effective manner; and
• Failed to ensure that the resources of the PSSPF were used in a sound and cost-effective manner, which was a breach of the board’s duties in terms of the PFA and the Financial Institutions (Protection of Funds) Act.

The Authority said it has served notices of regulatory action against the following people, who have been informed of their right to apply to the Financial Services Tribunal:

The FSCA did not disclose how much each of the above individuals had been fined.

The FSCA said it might take further regulatory action “on other parties once other processes are concluded”.

Following an on-site inspection of the fund in November 2017, the FSCA wanted to place the fund under curatorship. But, in September 2018, with the agreement of the trustees, the Authority appointed statutory managers to the board instead. The statutory managers commissioned an independent forensic investigation, which was carried out by Ngidi Business Advisory.

Investigation report

The FSCA has not released its investigation report. Last year, the FSCA declined media requests to do so, citing section 251 of the Financial Sector Regulation Act.

However, details of the report were published by various media outlets.

The FSCA’s investigation, triggered by a whistle-blower, was conducted to determine whether the PSSPF’s appointment of Salt Employee Benefits, the fund’s benefits administrator, was above board. The whistle-blower alleged there was “an improper relationship” between Salt EB and the PSSPF’s trustees.

The investigation covered the period 1 January 2016 to 30 November 2018.

“The tender process of awarding the contract to Salt EB was not in accordance with the fund’s procurement policy. In fact, Salt EB should not have been invited to tender and should have been disqualified. The board, in awarding the contract, did not act with due care and diligence required from them,” the report said.

Regarding the fees paid to trustees for attending meetings, the report read: “The remuneration of the trustees amounts to diminishing of the retirement savings of the members of the fund.”

Last year, the fund had R10 billion in assets and almost 600 000 members.

According to the report, in 2016, the PSSPF’s trustees decided to dispense with the services of Absa Consultants & Actuaries and appoint a new company to administer its members’ benefits.

“Salt should have been disqualified from the tender process. In actual fact, if proper vetting was done when the prospective administrators were identified, Salt EB should not even have been invited to submit a tender. Not only did the fund award the tender to a company that did not meet its non-negotiable financially sound criteria, but they also awarded the tender to a company that could not even provide three independent references,” it said.

The report called the fund’s decision to pay Salt EB an upfront fee of R17 million a “gross mismanagement of member funds”.

“Salt stood to be rewarded financially for providing administrative services to the fund. However, it also charged the fund R17m without any counter-performance or service being rendered. The members of the fund, in fact, had to pay Salt to enable it to, or to put it in a position to, take on the administrator contract,” the report said.

Although Salt EB’s decision to accept the advance payment did not break any regulations, the FSCA said: “Salt EB’s actions in receiving the retirement savings of pension fund members while it was not entitled to impacts on its fitness and propriety (in particular, that of honesty and integrity). This brings into question Salt EB’s authorisation as an administrator and financial services provider.”

The report detailed PSSPF trustees’ travel and entertainment expenses that had been paid by Salt EB.

It also took issue with the trustees for outsourcing the fund’s front-office operations to Salt EB.

“The fund confirmed that its front-office expenses for the year ending February 28, 2017, was R13.3m, and for the year ending February 28, 2018, was R13.57m. In the six-month period (September 2018 to February 2019) that Salt EB took over, the front-office function billed the fund R17.2m. This translates into projected costs of approximately R34m over a 12-month period. In other words, it is estimated that the outsourcing of the front office function will be approximately R20m more per year. The outsourcing of the front office could therefore not have been justified on the basis of cost savings,” the report said.

Salt EB’s response

In its response, Salt EB said the expenditure on entertainment, sponsorships and donations was for its account, not the PSSPF’s.

“The notion, therefore, that Salt is using the retirement savings of security guards to fund corporate expenditure is misguided. As a company that assists funds and their trustees to become responsible custodians of workers’ hard-earned savings, we take our ethical obligations and fiduciary duties very seriously. As a matter of law and moral principle, we do not engage in fruitless or wasteful expenditure.”

In a statement, Salt EB said it was acceptable for a company such as Salt EB to spend reasonable amounts on entertaining its staff and clients, and sponsoring items to be used for the greater good.

Salt EB said the PSSPF’s trustees decided to outsource the fund’s front office after conducting a cost benefit analysis.

“The amount quoted by Salt EB for this service was marginally above the fund’s budgeted amount. However, the board felt that the extra spending was justified on the grounds that outsourcing would add value by streamlining operations and decrease the direct human resource burden on the fund.”

The outsourcing of the front-office functions to Salt EB “greatly benefited” the fund and its members through increased efficiency, the statement said.