Old Mutual Submission to the Portfolio Committee on Finance on the Practice of “Bulking”

1. 21 June 2006 Old Mutual Submission to the Portfolio Committee on Finance on the Practice of “Bulking”

2. Agenda • Principles • Bulking in principle • Bulking in practice: an OM example • OM investigation and overall outcome • Overall in line with principles • In some minor instances, not in line with our own standards/principles • The way forward

3. Old Mutual Principles • Old Mutual supports drive for • increased savings levels, • greater consumer protection, • good governance and transparency, and • greater access to savings vehicles • Improved governance the key focus of this hearing • Government Discussion Paper: • “Service providers should supply advice in writing, act in the best interests of the fund, be remunerated by the fund, and disclose all commissions and fees.” • Old Mutual endorses this recommendation • Old Mutual fully supports the enquiry by the FSB into potential “secret profits” by fund administrators, and welcomes the opportunity to provide information to this hearing

4. Bulking: In Principle • The use of fund scale to achieve beneficial interest rates and fee bases • Common and desirable practice in all industries • Allows retirement funds to benefit from scale: i.e. all funds, large and small, benefit equally from the bulking arrangement, because they all get top interest rates • This benefits the person-in-the-street (the individual fund member) • Key issue: whether any portion of such higher interest is retained by the fund administrator, and if so, whether this was disclosed and agreed to by the trustees of the pension fund

5. Bulking In Practice: Old Mutual example of privately administered funds (1) • Retirement fund current account balances are housed in different cash management groups (CMGs) • These CMGs receive preferential interest returns as a result of the bulking effect • These rates are negotiated in advance with the servicing bank and monitored on an ongoing basis • If, on a consistent basis, the servicing bank provides inferior competitive rates, we will move to the bank with the more competitive rate.

6. Bulking In Practice: Old Mutual example of privately administered funds (2) • As a result, retirement funds administered by Old Mutual receive better than Call Rates on daily current account balances, without having to move money • Currently the total daily current balance for privately administered funds is between R400m and R700m • This represents the current cash balances of 126 privately administered funds, many of which would have received very low interest on their current account balances • Additional benefit obtained for these funds is at least between R20m and R35m per annum

7. Old Mutual FSB report and internal review • All four Old Mutual administration companies negotiated preferential rates and tariffs with the bankers of the funds concerned • All four Old Mutual administration companies fully passed on benefits from bulking to funds • Our review showed that the processes and procedures of the two biggest administration companies (OMAM and OMLACSA), representing over 95% of retirement moneys administered by the group, were sound in all respects • FSB circular stimulated wider internal review of our processes and procedures: In respect of the 2 smaller administration companies, OMIS and OMIA, we discovered minor instances which did not comply with our own standards. These were fully disclosed to FSB and to trustees.

8. The Way forward • Retirement fund reform is crucial to individual welfare and economic growth in South Africa • The governance issues raised during this hearing are important contributions towards the retirement fund reform process, and further enhance the good work already done by National Treasury and the Financial Services Board • At the same time, we need to ensure that the confidence in retirement provision is not undermined • Old Mutual believes that a co-operative reform process is to be preferred, in which the industry works closely with Government, the regulator and other stakeholders

9. Thank you