Due to a lack of understanding of the long-tail risks involved, many funds still default to the initially easier route of simply deregistering funds after all assets and members have transferred out of the fund.
"While deregistering a fund has been the default option for many funds, the reality is that deregistration exposes employers, beneficiaries and fund trustees to indefinite latent risk. This is because deregistration is not final - a deregistered fund can under some extreme circumstances be reinstated, leaving employers, beneficiaries and fund trustees open to liabilities and risks indefinitely," explains Corné Heymans of ARGEN Actuarial Solutions.
"While there may still be instances in which the deregistration of a fund would be appropriate, liquidation is the option that offers employers, beneficiaries and fund trustees the best protection against long-tail risks and liabilities, ensuring good governance and solid risk mitigation. This often offsets the marginal cost savings and perceived ease of simply deregistering, even for small funds."
In line with good governance principles, liquidation provides for a more thorough, transparent and public process than deregistration. The legal basis of the process of deregistering funds is also currently under investigation by the Financial Services Board (FSB), which has received independent legal advice indicating that deregistration may not be the correct legal procedure.
Jonathan Mort, a pension funds attorney in Cape Town, agrees. "The liquidation process provides employers, beneficiaries and fund trustees complete legal certainty that the existence of the fund has been extinguished and that there can be no future claims against the fund, the company or the employer or the trustees in their personal capacities, which is possible in the case of a deregistered fund, which can be resuscitated years - and even decades - later, if the fund is found to have assets or liabilities," he comments.
"Furthermore, the liquidation process involves open, transparent disclosure and a defined public engagement procedure including, for example, preliminary accounts and advertising to allow for public objections. As such, once a fund is liquidated, there is no further recourse against the fund, the employer or the fund trustees."
Employers or fund trustees who are considering wrapping up a retirement fund are well advised to seek professional advice to ensure they understand the full implications of opting for either deregistration or liquidation. "An independent and professional actuarial review of a fund's circumstances to determine the full extent of the fund's liabilities will ensure employers and fund trustees make informed decisions when wrapping up a fund," concludes Heymans.
