Articles

Closing the stable door…

Without Prejudice/Business Law & Tax Review October 2007
By Maryann Middleton

Gaps in legislation allowed Fidentia to fall through the net of protection provided by the Pension Funds Act, 1956 (PFA). The PFA provides that no asset of a registered fund in excess of 5% of the value of the fund, may be invested in or into the business of an employer participating in the fund.

Where the employer is a company, the business of every other company which is a subsidiary or holding company of that company is deemed to be part of the business of the employer company.

The limit of 5% may be waived by the Registrar on application by the board of management. However, this waiver only extends to 10% of the value of the fund, to be invested or lent to the employer's business, provided that the board of management certified it has consulted with the members and that the members support the making of proposed investment or loan to the employer’s business.

s 37C(2) of the PFA, which deals with the disposition of pension benefits upon the death of a member, reads "For the purposes of this section a payment by a registered fund to a trustee contemplated in the Trust Property Control Act for the benefit of a dependant or nominee contemplated in this section shall be deemed to be a payment to such dependant or nominee."

Living Hands was a registered trust in terms of the Trust Property Control Act. The Trust Property Control Act does not provide for a regulatory body to oversee the financial controls or investment decisions of trusts. A trust is not subject to the PFA and is not controlled by the Financial Services Board. Trusts are not required to be audited.

The Financial Institutions (Protection of Funds) Act, 2001 does impose some regulations on trust companies. In terms of s4 a director, member, partner, official, employee or agent of a financial institution which administers trust property under any instrument or agreement may not cause such property to be invested otherwise than in a manner directed in, or required by, such instrument or agreement. However, the terms of such agreement are not prescribed.

A further requirement is that a financial institution must keep trust property separate from assets belonging to that institution, and must, in its books of account, clearly indicate the trust property as being property belonging to a specified principal. It appears that Fidentia failed to comply with this requirement.

It has been reported that the trustees and the investment managers of the Living Hands Trust were related parties, with the result that the trustees did not comply with their fiduciary duties in overseeing the activities of the fund manager. Living Hands lent to, advanced to or invested the trust assets it was administering in Fidentia and the maze of subsidiaries and associated companies in the Fidentia Group.

Clearly the provisions of clause 37C of the Pension Funds Act, which allows the payment of benefits to a trust established under the Trust Property Control Act, need to be reviewed as a matter of urgency. National Treasury has accepted the challenge and is in the process of drafting an amendment to the PFA which will seek to create beneficiary trusts for the purposes of receiving s 37C distributions.

Talk to a specialist

Maryann Middleton

Consultant
011 775 6364
E-mail Maryann Middleton