Brief Summary

Competition — Merger Approval — Liberty Group Limited's acquisition of Investec Employee Benefits Limited — The Competition Tribunal approved the merger between Liberty Group, a long-term insurer, and Investec Employee Benefits, which operates in the retirement fund industry — The transaction involves Liberty acquiring IEB's business of marketing, underwriting, and administering certain insurance policies — The Tribunal found that the merger would not substantially lessen competition in the relevant market and would enhance customer benefits through increased product flexibility and transparency.

Comprehensive Summary

Summary of Judgment

Introduction

The matter concerned large-merger proceedings before the Competition Tribunal of South Africa, culminating in written reasons for decision following an earlier issuance of a merger clearance certificate.

The merging parties were Liberty Group Limited (the acquiring firm) and Investec Employee Benefits Limited (the target firm, referred to in the reasons as IEB). Liberty was described as a registered long-term insurer active in the retirement fund industry and listed on the JSE, with Standard Bank Group Limited identified as its controlling shareholder. IEB was described as a long-term insurer registered under the applicable insurance legislation, wholly owned within the Investec group structure ultimately controlled by Investec Limited, also listed on the JSE.

Procedurally, the Tribunal recorded that it issued an unconditional merger clearance certificate on 5 August 2003, and that these written reasons followed thereafter (dated 18 August 2003). The record also reflected the participation of the Competition Commission (which had made a recommendation) and that the Tribunal considered the papers and the hearing.

The general subject-matter of the dispute was the competitive and public-interest assessment of Liberty’s acquisition of part of IEB’s business in the retirement fund industry, specifically involving the provision of group investment, risk underwriting, and administration services to relevant categories of retirement funds.

Material Facts

Liberty proposed to acquire from IEB the business of marketing, underwriting, and administering certain long-term insurance policies, together with the associated rights and obligations under those policies. The transaction was to be implemented by way of a transfer agreement concluded between Liberty and IEB, involving the transfer of the relevant business, related business assets, and “policy assets” required to support liabilities of the transferred business.

The transferred business related to two components identified in the reasons. The first was part of IEB’s long-term investment and risk policies issued to pension funds where Investec was appointed as administrator, described as the “Fully Administered Retirement Fund Business.” The second was a component described as the “Disability Claimant Business,” relating to IEB’s performance of obligations to pay disability benefits under an existing policy in circumstances where benefits had already been claimed and there was no concomitant receipt of contributions.

To address timing risks and market disruption associated with delays in effecting the transfer, the parties agreed to enter into a reinsurance agreement and an administrative agreement. The reinsurance agreement was related to the transfer agreement but was described as independent, in that it would become effective even if the transfer agreement were not approved. Liberty agreed, as a prerequisite for the reinsurance arrangement, to administer the business under the administrative agreement. The Tribunal recorded that Liberty would, prior to the proposed transaction, exercise control over the business being purchased in terms of the administration agreement, and that post-transaction it would own the acquired business.

A further material fact was that the transfer agreement required court approval under the Long-Term Insurance Act, and the parties were uncertain when such approval would be obtained. This contextualised why reinsurance and administration arrangements were put in place pending transfer implementation.

As to the scope of competitive overlap, both the Competition Commission and the parties emphasised that Investec’s individual products and annuities were not part of the transaction, and that only group products were relevant for the purposes of the merger assessment. The Tribunal also accepted, for the purposes of market definition, that the Disability Claimant Business did not constitute a separate product market because it related to performance under an existing policy rather than the supply of a separable product.

With respect to competitive conditions, the Tribunal recorded market share information (based on member contributions in the market for services to section 2(3)(a) exempt funds) indicating Liberty at 13.9% and IEB at 4.1%, yielding a post-merger combined share of 18%. The Tribunal further recorded the presence of various substantial competitors (including Old Mutual, Sanlam, Momentum, Sage, Metropolitan, Discovery, and a range of independent brokers).

On public-interest facts, the parties stated that no retrenchments were envisaged as a result of the transaction. The Tribunal recorded that the arrangement effectively entailed outsourcing by IEB to Liberty of business administration and that Liberty undertook to employ IEB’s employees on similar (not less favourable) terms and conditions, with the employee transfer contemplated under section 197 of the Labour Relations Act. The parties also indicated that, on a worst-case scenario, not more than 7 of 255 employees might be affected, and that alternative employment would be pursued before retrenchment.

Legal Issues

The central legal questions were whether the proposed merger was unlikely or likely to substantially lessen or prevent competition in the relevant market, and whether any public interest considerations, particularly concerning employment, justified conditions or opposition to the transaction.

The dispute primarily involved the application of law to facts. The Tribunal was required to define the relevant product and geographic markets, assess competitive effects through factors such as market shares, the extent of existing competition, countervailing power, and barriers to entry, and then apply the statutory merger standard (as reflected in the Tribunal’s formulation of the test) to the established industry facts. The public-interest assessment similarly required evaluation of factual commitments and anticipated employment effects against the applicable public-interest framework referenced in the reasons.

No material factual controversy was presented in the reasons as requiring resolution by way of credibility findings. Instead, the Tribunal’s task was evaluative: selecting an appropriate market framing for competition analysis, determining the competitive significance of the transaction within that framing, and assessing whether employment-related considerations required protective measures.

Court’s Reasoning

The Tribunal approached the competitive assessment by first situating both firms within the retirement fund industry and describing the industry’s functional components: administration, investment, and risk underwriting. It explained that retirement funds may perform these functions internally or outsource one or more of them to professional service providers, including long-term insurers, specialist administrators, asset managers, and brokers acting as intermediaries.

In defining the relevant product market, the Tribunal accepted the Competition Commission’s identification of the overlap as the market for the provision of group investment, risk underwriting, and administration services to self-administered funds and/or section 2(3)(a) exempt funds, noting that the merging parties provide services to those categories. The Tribunal treated the Disability Claimant Business as not constituting a product market for merger analysis, because it related only to the discharge of obligations under an existing policy (with no concomitant receipt of contributions), and therefore did not represent an independently supplied product for market-definition purposes.

On the geographic dimension, the Tribunal agreed that the relevant geographic market was national, because the parties and their competitors provide the relevant products and services throughout South Africa and there was no dispute about consumers’ practical ability to obtain supply on a national basis.

The Tribunal then considered the transaction’s competitive effects, relying on the stated post-merger combined market share of 18% (based on the contribution of members in the relevant market segment). It regarded this share, even though making the merged entity one of the larger players, as not in itself raising competition concerns, particularly in light of the presence of multiple established competitors in the long-term retirement insurance market and the description of the market as characterised by a high level of competition.

The Tribunal placed weight on countervailing power in the market. It noted that pension funds and trustees enjoy independence entrenched by the Pensions Fund Act, including the ability to change providers of administrative functions with sufficient written notice, and that the link between administration and other functions (investment management and risk underwriting) could mean that termination of administration may also affect the associated services. This was treated as strengthening the bargaining position of pension funds. The Tribunal also accepted that the market is intermediated and that brokers, by negotiating products and prices with insurers and marketing bundled solutions, exert further competitive pressure and contribute to countervailing power by facilitating access to information and competitive offers.

The Tribunal assessed barriers to entry by differentiating among categories of providers. It accepted that regulatory requirements can impose relatively higher barriers for long-term insurers and administrators, including registration requirements (and registration with the Financial Services Board for administrators), while brokers may enter without significant capital, regulatory, or other requirements (subject to impending accreditation requirements referred to in the reasons). It nevertheless treated evidence of entry—reflected in the Commission’s figures about registrations of funds and administrators—as indicating that entry was occurring notwithstanding regulatory requirements. This supported the conclusion that the market would remain contestable.

On public interest, the Tribunal identified employment as the only public-interest issue raised on the record. It accepted the parties’ statements that retrenchments were not envisaged and recorded Liberty’s undertaking to employ IEB employees on similar terms, with transfer of employees contemplated under section 197 of the Labour Relations Act. It also noted the parties’ indication of a limited worst-case employment impact and the intention to seek alternatives before retrenchment. On the facts presented, the Tribunal did not treat employment effects as requiring conditions.

Drawing these considerations together—market definition, moderate combined market share, the presence of significant competitors, strong countervailing power, and evidence of ongoing entry, together with limited public-interest concerns—the Tribunal concluded that the merger was unlikely to substantially lessen or prevent competition and accordingly warranted unconditional approval.

Outcome and Relief

The Competition Tribunal approved the merger unconditionally and issued a merger clearance certificate to that effect (recorded as having been issued on 5 August 2003), with written reasons dated 18 August 2003.

No conditional remedies were imposed, and the reasons did not record any specific costs order.

Cases Cited

No judicial precedents were cited in the Tribunal’s written reasons.

Legislation Cited

The Long-Term Insurance Act 52 of 1998 (as amended) was referenced in relation to the regulatory requirement that the transfer agreement requires court approval before implementation.

The Pensions Fund Act 24 of 1956 (as amended) was referenced, including section 2(3)(a) concerning audit-exempt funds operating exclusively by means of policies of insurance, and in relation to the independence of pension funds and trustees.

The Labour Relations Act 66 of 1995 (as amended) was referenced, specifically section 197, in relation to the transfer of employees in the context of the administration arrangement.

“Policyholder Protection Rules” and “Financial Advisors and Intermediary Services” were referenced in connection with impending accreditation requirements for brokers (without fuller statutory particulars provided in the reasons).

Rules of Court Cited

No rules of court were cited in the Tribunal’s written reasons.

Held

The Tribunal held that the relevant product market was the provision of group investment, risk underwriting, and administration services to self-administered funds and/or section 2(3)(a) exempt funds, within a national geographic market.

It held that the Disability Claimant Business, being the performance of obligations under an existing policy without concomitant receipt of contributions, did not constitute a separate product market for purposes of the merger analysis.

It found that the merged entity’s post-merger share (recorded as 18% in the relevant segment), in the context of multiple significant competitors, strong countervailing power exercised by pension funds and brokers, and evidence of market entry, did not give rise to competition concerns, and that the merger was therefore unlikely to substantially lessen or prevent competition.

It further held that public-interest concerns were limited to employment and that, on the record (including undertakings and the contemplated section 197 transfer), the merger did not warrant conditions on public-interest grounds. The merger was accordingly approved without conditions.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment requires identification of a relevant product and geographic market, followed by an evaluation of whether the transaction is likely to substantially lessen or prevent competition in that market, taking account of structural indicators (including market shares) and qualitative competitive constraints.

In assessing competitive effects, the Tribunal treated countervailing power as a material constraint where customers (here, pension funds and trustees) are able to switch service providers, and where market intermediation (through brokers) facilitates access to market information and strengthens negotiating leverage over suppliers.

The Tribunal recognised that barriers to entry vary by category of market participant, with regulatory requirements affecting insurers and administrators more significantly than brokers, but that observed entry and registration activity may nonetheless support a finding of market contestability.

On public interest, the Tribunal treated employment effects as a relevant consideration, and accepted that an outsourcing/administration arrangement coupled with a commitment to employ transferred employees on not less favourable terms, with transfer contemplated under section 197 of the Labour Relations Act 66 of 1995, may address employment-related concerns in the merger context.

Liberty Group Limited and Investec Employee Benefits Limited (32/LM/Jun03) [2003] ZACT 42 (18 August 2003)