Over the past few weeks, I have received numerous inquiries from retirement fund members and trustees about the Alexander Forbes settlement offers to disburse the secret profits the company made from the bulking of retirement fund bank accounts.
I cannot give advice on this issue, but my general view is that trustees need to weigh up whether they can justify accepting the settlement offer to their members. That is, they must be able to say that the settlement was fair.
Obviously, the trustees could call in squadrons of lawyers and accountants to establish whether they are receiving every last bean due to them, but the costs of doing this would very likely negate any additional amount that could be forced out of Alexander Forbes. In the end, the funds could well be worse off.
I have spent many hours talking to retirement fund lawyers about this issue and have also spent many hours talking to various people at Alexander Forbes who are involved in trying to get the settlement finalised and put this very unfortunate incident behind the company.
In my view, the issues that trustees need to take into account in assessing the validity of the offers made to them are:
1. The Alexander Forbes compensation calculation
The total amount which Alexander Forbes says is due to retirement funds was calculated on the "secret" profit Alexander Forbes made over at least 10 years of bulking retirement funds' money, and not on the amount that could have been made by these retirement funds.
This is not semantics but a fundamentally different approach that could affect how much each fund will receive as compensation from Alexander Forbes.
Let me explain why.
The Alexander Forbes calculation is based on the following figures (in millions of rands):
Gross income received R(m)
(the secret profits): R416.5
Less VAT paid:
R45.5
Sub Total:
R371
Less corporate tax paid:
R161.5
Sub Total:
R209.5
Plus compound interest:
R154.5
Total Owing:
R364
In my view, and in the view of a number of pension fund lawyers I have consulted, the calculation should be more like this:
Gross amount that the funds could have earned as a result of bulking
Less any interest paid
(Some interest was always paid to funds but this varied from fund to fund at the discretion of Alexander Forbes)
Plus compounded interest
Less retirement fund tax
(which varied over the 10-year period)
Whether retirement fund tax (RFT) is payable is open to debate.
The total reached in the second calculation should be greater than the figure of R364 million provided by Alexander Forbes, as less tax would be subtracted.
The Alexander Forbes approach to calculating compensation is confirmed in a letter sent to members by trustees of at least one fund. The letter states: "Alexander Forbes has emphasised that its offer does not represent 'extra interest that funds might have earned', but constitutes a settlement payment without admission of any liability. The gross value of these 'payments' roughly equates to the fees earned by Alexander Forbes over the period in question, plus interest thereon."
Deon Viljoen, the financial director at Alexander Forbes, says, however, that the second approach was also considered in calculating what was due to each fund.
This calculation is based on the Standard Bank corporate cash management rate (a variable rate) paid to the bank's best customers (in other words, a bulking rate) less only what would have been paid in RFT.
Pension lawyers do not all agree on whether retirement funds are entitled to the net profit made by Alexander Forbes after costs and after tax, or whether the funds are entitled to the full amount, less what may have been payable in RFT. In both cases, the retirement funds are entitled to compounded interest.
Viljoen says the legal opinion that Alexander Forbes received (presumably from Deneys Reitz Attorneys, which was part of the independent investigation into the bulking earlier this year) states that it is the net profit that was made from the not lawful secret profits from bulking that must be distributed to the funds.
Viljoen says that if the South African Revenue Service (SARS) agrees that all, or part of, the Alexander Forbes reimbursement to the affected retirement funds is tax deductible, then this tax saving should also be distributed to the retirement funds as it would be part of the net secret profits that the company made.
2. The tax consequences
An obligation to pay tax lies with the recipient of funds. In other words, if a retirement fund receives funds which are taxable, the trustees of the fund are obliged to ensure the correct amount of tax is paid.
Quite clearly from the above calculations, Alexander Forbes has paid tax, but it is company tax accrued against the profits made by Alexander Forbes as well as the VAT on the transactions.
Normally, when interest is paid to a retirement fund, it becomes subject to RFT.
Over the period of at least 10 years that Alexander Forbes and any other retirement fund administrator was making secret profits, the rate of RFT has varied.
RFT is currently being applied at a rate of nine percent on all interest, net rental income and non-exempt foreign dividends earned by retirement funds.
When fund trustees receive an offer of compensation from Alexander Forbes, they will have to decide whether the settlement amount is subject to RFT.
Alexander Forbes is arguing that the payment is in the form of compensation that comprises a non-taxable amount because it is not considered interest and therefore is not subject to RFT.
Viljoen says Alexander Forbes has agreed to reimburse the funds the RFT should SARS decide to levy it on the settlement amounts they receive from the fund administrator.
To my mind, the best way that the affected retirement fund trustees can protect themselves and their funds is for them to insist that Alexander Forbes has the accountants (Ernst & Young) and the lawyers (Deneys Reitz) that it has used to assess many of its business practices, sign off the settlement offers as being fair and reasonable.