This article was first published on Business Day on
7 December 2022
Whose money is it, anyway?
The answer to the Commissioner’s question as to whether you create a central fund or allocate funds to Treasury: Don’t dare do either!
What is this about?
Financial Services Conduct Authority (FSCA) Commissioner Unathi Kamlana has declared that for the first time in around 100 years of financial services regulation, “unclaimed benefits” are suddenly to become a “strategic focus”. This is perhaps not so surprising. Spread across the entire field of insurance, medical aid and pension funds is an estimated R60 to R90 billion in as yet unclaimed benefits.
A paper on the subject recently issued by the FSCA makes 13 specific recommendations. In essence, it proposes that a Central Unclaimed Assets Fund be created, into which any and all unclaimed funds from a wide variety of financial products should be deposited. That Fund will apparently be encouraged to “unlock” the money for “social, environmental and developmental initiatives”. It does however, deign to say that “the first preference remains to return unclaimed assets to their rightful owners, failing which they should be re-purposed for public good”. However, “if the customer does not maintain his current contact details with his product or service provider, thereby preventing the assets becoming unclaimed”, he and his dependants will not be entitled to full restitution after the funds have been transferred to the central fund!
Without bothering with the mandatory accompanying impact and cost benefit analysis, the rest of the FSCA’s recommendations focus on improving record keeping and reporting, adding substantially to the already mammoth cost of compliance and reporting regulations borne by SA financial service providers and their clients in an already grossly over-regulated industry.
Providers of financial services receive money (premiums or contributions) from their customers in the present, in return for a guarantee of a benefit to be paid on a future occurrence. Insurers, pension funds and medical aids must therefore make provision for their future liabilities in the form of reserves. Regulators ensure that certain minimum levels of provisions or reserves are held in balance sheets as a safeguard to ensure that funds are indeed available when required.
As yet unclaimed funds, together with all other institutional funds, are invested across the entire spectrum of securities for the ultimate benefit of the entire country. They are managed across a wide spectrum of experienced investment managers who naturally make reference to all appropriate ESG and sustainability considerations. With such a wide variety of experts applying their minds to it, it would therefore be difficult to improve on the overall wisdom of how these funds are set to work for the benefit of the country as a whole.
Amounts set aside by insurers from their premium and other income belong to them and not to the underlying fund securing the risk. Where actuarially determined reserves are insufficient, insurers are required to make good the difference, taking funds from their shareholders through the income statement. In turn however, where the fund’s reserves exceed the actuarially determined requirements, shareholders may through the same process move the excess to their own funds as taxable profit, awaiting any future calls thereon.
Pension funds are different in that their accumulated assets belong to contributors and beneficiaries still in their system. In that case, they can apply any excess funds to reduce the level of contributions required, to increase benefits payable, or both.
The provisions made for future claims are thus owned by either the policyholders or by the owners of the insurance company, medical aid or pension fund. By no stretch of the imagination do these funds belong to the public or the state at any moment in time.
How do unclaimed benefits arise?
At some stage, it becomes clear that enough time has passed for a provision not to be exposed to further claims. For instance, it is unlikely that there will be a claim from a pensioner fifty years after retirement date. Or, it may be for example that the period of indemnity under a policy is limited to twenty years and then there is little likelihood that there will be further claims. It may even be that a beneficiary is not traceable and that the payment cannot be made.
Although the total of unclaimed benefits is estimated at perhaps more than R60 billion, this is a very small proportion of overall reserves held. A lack of legal clarity together with statutory demands for ever higher levels of institutional solvency, have served to fix these reserves in place for long periods. Unclaimed benefits naturally then form part of the capital and reserves that make up the solvency and underwriting capacity of an insurer or pension fund. Among other unintended consequences, the coerced extraction of such funds could also dramatically impact the solvency of several financial service providers.
It is problematic that the FSCA blithely lumps together “all industry segments”, including (but apparently not limited to) Short-term insurers, life insurers, pension funds, bank deposits and collective investment schemes. This shotgun approach ignores the fact that financial services providers must vary widely in their reserving practices in providing for future client payments.
This over-simplified view is further exacerbated by the assumption that the “problem” of unclaimed benefits could be solved with a single “aligned” approach. For example, every year short-term insurers provide for Incurred But Not Yet Reported (IBNR) claims. These reserves automatically grow or reduce according to company size and market exposure. Underwriters with liability exposures extending many years into the future must keep sizeable provisions for those future claims. What proportion of these reserves are to be paid across to the new state fund? Medical aids operate on largely the same protocols.
The FSCA proposes that there should a common escalation system for the identification of unclaimed assets, and that is all very laudable. The difficulty however, will be in the practical process of who will decide whether an asset has been abandoned? The suggestion that a central database be created also raises questions of privacy, ownership of client data and the State forcing financial service providers to share confidential data. This is unlikely to pass Constitutional muster.
One wonders too whether the FSCA has properly considered the provisions of the latest version of IFRS 17, the accounting standards with which insurers must comply. These standards have as a main objective the measurement of insurance contracts using current estimates and assumptions that reflect the timing of cash flows and other uncertainties. The standard is not yet clear on how financial service providers should recognise funds that might no longer be claimed. In principle though, these funds are to be used to either reduce the contributions of the existing insureds or members, or to increase their benefits. If that is not possible, the funds must revert to the underwriter in the case of risk-based products, or to the owners of the fund.
Instead of making plans on how unclaimed benefits could be redirected to the tender mercies of our trusted bureaucrats, time and effort should be spent by the FSCA and PA, working with the insurance, pensions, actuarial and accounting professions, to identify ways to reduce the future occurrence of this phenomenon in ways that will neither diminish the value of established beneficiary claims nor undermine sound solvency reserving practices.
The FSCA Commissioner’s proposal
It was entirely predictable that a sum of money such as this would attract bees to the honey. Whilst one has no objection to an improvement in the required bookkeeping of financial service providers to make sure that members and their dependants get what they are due, the suggestion that some sort of central fund be created for the existing “loot” is troubling, especially if this super-fund will then be controlled by persons appointed by the state. It also does not matter that there is a claimed intention to use proceeds for “public good”, as that may merely be the bait in this particular bait and switch scheme. Moreover, the FSCA’s own proposal brazenly admits that it might well “cause tension between the objectives of the central fund to honour future claims and to distribute surplus funds for the benefit of positive impact”, whoever and however they define “positive impact”.
Taking funds like this amounts to flagrant expropriation. These benefits belong to existing policyholders, their dependants, their insurers or the remaining fund members and to no one else on earth. It is worrying that after all these years the FSCA appears to suddenly think that it is perfectly reasonable to take control of these funds, and to be able to decide how and where to expend them, as if it has simply stumbled upon a wad of cash lying in the street.
The answer then to the Commissioner’s question is blindingly obvious: As to whether you create a central fund or allocate funds to Treasury, you do neither. Focus instead on getting unclaimed funds back into the hands of legitimate beneficiaries as far as possible, or taking them though the profit cycle of the underwriters who stood by the risk all along.
This is by no means public or state money and there are no other jurisdictions in the world that say that it is. This is not money for the taking!