Why your retirement will survive, even if 10X doesn't

Is it safe to entrust my retirement to 10X? That is a legitimate question thanks to the many incidents of poor industry practice, failed investment schemes and embezzlement that have caused great harm to investors in various South African companies over the years.

Examples of large-scale investment fraud associated with names such as Masterbond, Fidentia and PSC are embedded in our national memory. So too are the more recent events related to the bulking and surplus stripping scandals.

Although 10X Investments has been managing money since 2007 it is still a relative newcomer. Understandably, some investors will feel a little nervous. For most people, their retirement savings are their single biggest asset, so there is a natural concern that this is properly managed and protected.

10X cannot expect to ease these concerns simply by proclaiming its good intentions and integrity. A good reputation is earned, and that takes time. But what we can do is explain the legal and oversight structures that safeguard your assets and your interests.

Legal structure ensures assets are ring-fenced

The main concern for most investors is, “What happens to my savings if 10X goes under?” The short answer is that your savings will not be affected at all.

That’s because the 10X retirement funds – the 10X Umbrella Pension and Umbrella Provident Funds, the 10X Retirement Annuity Fund, the 10X Pension and Provident Preservation Funds, as well as any stand-alone funds – are all separate legal entities, apart from 10X.

Legally, these funds are owned by the participants (members) in each of these funds, which means the underlying assets are ring-fenced. All investments are recorded in the name of the relevant fund and kept separate from those of 10X. In the unlikely event of the liquidation of 10X, the company creditors have no recourse to the money held in the 10X funds.

Each fund has its own bank account and no member money – other than fees remitted to 10X in terms of the service level agreement (SLA) – passes through to 10X. The retirement fund then holds units in the 10X unit trusts, where all scrip (proof of investment ownership) is held in safe custody with, and overseen by, Rand Merchant Bank.

All 10X funds are market-linked, which means that, at any time, the total value of assets (fund investments) must equal its liabilities (the amounts owing to fund members). The two are also reconciled on a regular basis. There are no unallocated surplus accounts to obscure or complicate matters.

The ‘risk’ with policy-based retirement funds

The legal structure is fundamentally different when retirement savings are subject to a policy (as is the case with life insurance retirement funds). In that situation, the fund owns a policy that guarantees certain benefits (typically the market value of the holder’s savings).

The underlying investments are, however, owned by the life insurer and included on their balance sheet. In a worst-case scenario (liquidation of the insurer) other creditors could lay claim to these assets. Admittedly, the chance of liquidation is very low as these companies tend to have high credit ratings.

The only instance where 10X investors are subject to a policy structure is within the 10X Living Annuity. Here, the policy structure is a legal requirement. 10X Living Annuity holders are, however, assured that the underwriter, Guardrisk Life (a MMI Group company), has the highest possible rating on the Moody’s National Scale (AAA), representing minimal credit risk.

Investment style safeguarded by investment policy statement

In the unlikely event that 10X succumbed to financial difficulties, the fund structure would not only secure the members’ assets, but also the way those assets were managed.

The 10X fund trustees would then simply appoint a new manager to assume 10X’s investment responsibilities. The new manager would be required to run the 10X funds using the same investment rules currently employed by 10X. These are specified in the 10X funds’ investment policy statement, which also binds any future investment manager.

In that situation, 10X fund members would not experience any disruption to the way their savings were managed. New employers would still join the 10X Funds and existing employers would still be free to transfer assets to other funds, as before.

10X has been appointed by each 10X retirement fund to act as administrator and investment manager. Each appointment is subject to an SLA. Oversight structures ensure that 10X acts in the members’ interests and according to these SLAs.

We refer to this as governance. Proper governance is fundamental to the way we run our business, and is, in our view, far more important than a familiar name (the bulking and surplus stripping scandals implicated some very well-known names in the South African retirement fund industry).

Proper governance requires and facilitates complete transparency. Thus, we fully disclose our practices and policies, and provide members full insight into every aspect of their retirement plan via My10X, our member portal.

Below, we explain the 10X governance checks that protect your money:

Regulatory approval and oversight

First off, it is important to distinguish between retirement funds and other types of investment vehicles. Retirement funds, as defined by the Pension Funds Act, are highly regulated. The majority of fraud incidents involving the misappropriation of pensioners’ monies (the aforementioned cases of Masterbond, Fidentia and PSC, for example) relate to other investment vehicles which lacked this oversight.

The Financial Services Conduct Authority (FSCA) monitors market conduct and consumer protection in the South African market. Retirement fund administrators and investment managers require a licence from the FSCA to operate, and the FSCA awards such a licence only after a careful due diligence process that covers the underlying systems as well as key individuals. 10X Investments is an authorised financial services provider and an approved administrator of retirement benefits.

The regulatory oversight extends to prudential asset limits and categories (in terms of Regulation 28), to protect investors from excessive exposure to individual assets and asset classes. All the 10X funds comply with Regulation 28.

Regulation 28, issued under the Pension Fund Act, limits the extent to which retirement funds may invest in particular assets or asset classes. The main purpose is to protect the members’ retirement provision from the effects of poorly diversified investment portfolios. This is done by limiting the maximum exposure to more risky asset classes, making sure that no unnecessary risks are taken with retirement money.

Independent board of trustees

There are three further layers of oversight. Firstly, there is the board of trustees, effectively the directors of the fund. In terms of the rules of the 10X funds, at least half of the trustees must be independent people who are not employed by or provide services to 10X. The chairman of the board is one of the independent trustees. This mitigates potential conflict of interest, as the board of trustees must also guard against administrative malpractices. If they are not satisfied that 10X is acting according to the SLA, or has remedied any breaches, they have the right to remove 10X as administrator and investment manager and appoint someone else.

In the same vein, in the unlikely event that 10X is liquidated, the trustees will appoint another administrator and investment manager to act as service providers.

Independent Principal Officer

The second layer of oversight comes from the Principal Officer (PO). The PO oversees the day-to-day affairs of the fund and signs off on all legal matters. Again, 10X uses an independent principal officer (Ms Dalene Willemse, a pension fund lawyer with almost 30 years’ experience) to perform this function.

Big 4 auditors

Lastly, 10X is audited by PwC and all the 10X funds are audited by Ernst & Young. Both are Big 4 audit firms. The audit process tests all important internal control processes and verifies the existence of each fund’s assets and liabilities.

Independent due diligence reviews and awards

As past investment and savings experience has shown, there is no safety in numbers. The fact that a firm has many reputable clients does not preclude improper conduct.

10X does have many reputable clients, including listed companies and local subsidiaries of multinationals. A number of these clients have carried out their own independent due diligence reviews of 10X’s administration and investment management systems (including one carried out by attorneys Cliffe Dekker). All reviews concluded positively on 10X’s systems and processes. Copies of these reviews are available on request.

10X has also won numerous industry awards including the Batseta Balanced Fund Manager of the Year and Employee Benefits Administrator of the Year (both 2015) as well as the Institute of Retirement Funds 2016 award for Best Investment Practices.

Trust is good, control is better

The key to successful long-term investing is not about amazing foresight, it’s about avoiding the big mistakes that can ruin retirement. They happen when investors take on unrewarded risks, such as paying high fees, or indulging in stock picking, fund manager selection, market timing or poor diversification. For the average investor, these practices all produce a sub-optimal outcome.

The lack of professional, independent oversight and control structures present another unrewarded risk, because it opens the door on all the other unrewarded risks, as well as on poor administration practices that have the potential to conceal fraud or other malpractices.

10X is all about avoiding unrewarded risks for our clients, which is why we have all the structures and controls in place to ensure that your retirement savings and your investment strategy are protected, even if 10X itself fails.