JOHANNESBURG, South Africa -- Thirty municipal employee pension funds worth 30 billion rand ($5 billion) are being mismanaged and could be at financial risk, the South African Local Government Association claims.
The association plans to overhaul South Africa's roughly 46 municipal pension funds, estimated to be worth 50 billion rand, and create a single retirement fund for local government employees.
"The aim is to transform these funds to ensure that municipalities are not ripped off anymore in the administration of these funds," said Patrick Flusk, a member of the SALGA executive committee.
SALGA's findings, based on preliminary research conducted by auditors Negotiated Benefit Consultants, Johannesburg, have stirred up a political storm and have put the association on a collision course with South Africa's municipal pension funds and municipal trade unions.
According to industry sources, SALGA, which represents South Africa's 843 municipalities, is using municipal pension funds as a Trojan horse to exert greater political control over individual municipalities and local government as a whole.
The Board of Trustees of the Cape Joint Funds, Newlands, in a statement, suggested the investigation was "merely a strategy to demonize the existing management structures of the local government pension funds" and then force them to merge into a single fund.
Cape Joint Funds administers defined contribution and defined benefit funds for 280 local authorities in the Northern, Western and Eastern Cape.
In its preliminary findings SALGA claims:
* Many municipal pension funds have no formal investment policies, use unreliable performance measurements and lack clear guidelines on selecting and monitoring investment managers;
* Municipal defined benefit plans are "up to 100% more generous" than private sector and central government retirement plans, and in some cases the municipal councils are unable to afford the benefits they pay;
* Some fund administrators also act as money managers, leading to a conflict of interest;
* Local government pension fund administrators charge fees almost double the private sector rate; and
* A number of funds pay benefits to non-existent members of the fund -- known as "ghost pensioners" -- and provide "peculiar" benefits such as an annual bonus to pensioners and benefit increases that tend to be above inflation.
Pension fund associations from across the country have angrily rebutted SALGA's claims.
The Cape Joint Funds officials said none of the association's claims relate to the funds it manages. The Cape Joint Funds are registered with the Financial Services Board and all of its funds are managed externally, fund officials said in the letter.
The Financial Services Board is the financial services regulator. Funds registered with the FSB have to comply with relatively strict reporting and disclosure requirements.
The Johannesburg-based Local Government Retirement Funds Association said in a statement that its 18 member funds -- from municipalities in the former Transvaal, which covered the northeastern part of the country, with assets around 25 billion rand -- "are able to pay all their benefits and have sound investment policies."
"If a national audit of the pension funds was necessary, the Financial Services Board would have done it long ago," said Danie Crous, secretary to the LGRFA, in an interview.
It is possible, however, that some of the smaller pension funds run by municipalities in poorer, rural areas might not be properly administered and could have a problem meeting their liabilities, said a source at a large municipal pension fund.
A full audit of the management and administration of the local government pension funds will be released at the end of this year, Mr. Flusk said. He would not say which funds were being mismanaged.
A single pension fund would be cheaper to operate, as it would generate greater economies of scale, he said, but a cut in benefits would be likely because many of the municipalities cannot afford to meet their current pension liabilities.
But both the launch of a single fund and the possible cut in benefits will depend on the outcome of ongoing negotiations between SALGA and the trade unions representing municipal workers.
Sources in government said the current administration of municipal pension funds is inefficient and suggest consolidation of the funds will cut management costs and improve performance.
"There are grounds to argue for a limitation of fund numbers," said a senior government source.
But the South African Municipal Workers Union, Cape Town, representing 120,000 local government employees, said it was concerned SALGA would use the audit findings to accelerate setting up a single pension fund and avoid negotiating the issue with the union.
The union wants employees to be able to choose the pension fund they wish to join, said spokeswoman Anna Weekes.
The union welcomed SALGA's attempt to investigate malpractice in the administration of municipal pension funds, but wants the association to standardize all employer pension contributions to 18% of salary from the current range of between 12% and more than 25%.
The Financial Services Board is due to meet with the Ministry of Finance this week to discuss the report, said FSB pensions specialist Renier Botha.
The FSB is not "unduly concerned" about the SALGA findings because the board has not received any complaints about the administration of the municipal pension funds, he said.
"We will only be able to act on concrete evidence, which has not been given so far," Mr. Botha said.
The auditor, Negotiated Benefit Consultants, did not respond to requests for comment.