DEFINING THE LIMITS

Friday, June 15, 2012
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The Registrar of Pension Funds, which falls under the Financial Services Board (FSB), has issued an important circular (PF130) on the governance of funds. Says Jurgen Boyd, deputy executive officer for pensions at the FSB: "The Pension Funds Act sets out trustees' duties in very broad parameters. With PF130, we are codifying appropriate governance structures."

The circular sets out requirements for investment management, a code of conduct for trustees, and communication guidelines. Its emphasis is on transparency and visibility.
Investment Consulting & Trustee Services MD David Weil says: "Trustees now have to rate themselves on their performance, and be seen and perceived by members of the fund to be doing a good job." The communication policy is particularly welcome, as most cases that end up at the Pension Funds Adjudicator's office are related to poor communication by funds.
Failure to perform their duties effectively can result in trustees being held liable in their personal capacities.

Rowan Burger, head of consulting strategy at Alexander Forbes, tells of a 2001 case where a trustee had to pay a death benefit from his own pocket, because he had not paid over fund contributions for six months and had invalidated the insurance policy.

Weil says: "PF130 clarifies that trustees' conflicts of interest are not the problem - rather, the nature of that conflict." An extreme example of a dodgy conflict is what has become known as the Ghavalas surplus-stripping scheme. The scheme resulted in a reported R1bn being stolen from unwitting pension funds. But this is beyond the ambit of PF130, and the common law would apply.

In the case of Lifecare, a fraudulent section 14 application for the merger of the Picbel fund with the Lifecare fund was issued to the registrar. But the merger did not take place. Lifecare purchased the Picbel fund's principal employer instead, and paid a dividend of about R9m to Peter Ghavalas's company.

How will the registrar mitigate the risk of fraud? Says Boyd: "We have introduced risk-based supervision. Trustees now have to submit reports to the registrar, including financial information. We would be able to pick up governance anomalies very quickly and inspect the offices of the fund."

Though there has been significant progress in general corporate governance through the King codes, it has been slower to manifest in the pensions industry in SA.
Boyd says SA's retirement funds "are global leaders where governance is concerned. We are in constant communication with our peers. In fact, the UK's Financial Services Authority and the OECD have congratulated us on the scope of PF130, and will use its principles."

It would seem to the layman that pension fund governance should follow from good (or bad) corporate governance. But, as Boyd says: "The perception that the fund is inextricable from the employer is wrong. You should never see a situation like Enron, where the retirement fund tanks along with the corporation."

Aspects of the circular have been questioned. Hunter Employee Benefits Law director Rosemary Hunter says: "The circular has skewed the emphasis to trustees' duties towards members of funds, making it sound like a trade union. This is incorrect, as trustees have a fiduciary duty to the fund (not the members)."

Though trustees should be aware that the circulars themselves are not law, they are best practice. And the registrar reserves the right to legislate circulars should compliance prove poor. Trustees are expected to exercise the greatest care that may be reasonably expected. Says Boyd: " Though we concede that it was not historically clear to trustees how much attention should be afforded to governance matters, we hope the circular will make them stop and think how serious a trustee's duties are."

Glenrand MIB Benefit Services head of best practice Wayne van Rensburg says: "This circular should create a greater awareness that a trustee needs to be more involved with the running of the fund, and not merely delegate its management to service providers."

The PF130 circular allows trustees to delegate matters to subcommittees, but also requires them to undergo training in areas such as risk management and investment management, at the cost of the fund. There should now be no room for excuses for incompetence or lack of internal control.