THE RETIREMENT FUND REFORM PAPER AND RETIREMENT FUND GOVERNANCE
By Thabang Masingi
The theme of retirement fund governance is currently of interest amongst retirement funding industry stakeholders. It is therefore appropriate, within the context of the retirement funding reform process, to outline proposals to strengthen fund governance in order to prevent failures like those that have dominated the press in the past two years.
The question that then becomes pertinent relates to the envisaged role in fund governance of those managing fund affairs, trustees, and those tasked with supervising and regulating funds, the Registrar of Pension Funds and the Financial Services Board.
The National Treasury released a retirement fund reform paper in November 2004 and again in February 2007. On the issue of fund governance, the 2007 proposals do not change the proposals outlined in the 2004 paper. In this regard, more detailed legislative and regulatory proposals are to be published in March 2007 and some issues will be addressed in proposed amendments to the Pension Funds Act due for consideration by parliament sometime this year.
The 2004 paper provides that due to most fund failures emanating from poor governance, the governance structure, the design and reach of the regulatory regime are important in preventing such failures and protecting member interests. Therefore, amongst the objectives of the reform process is to improve standards of fund governance, including trustee knowledge and conduct, protection of member interests, accountability, and disclosure of material information to members. The paper proposes various changes with regard to the role that the Registrar and trustees should play in ensuring effective governance of funds.
The supervision and regulation of retirement funds: With regard to the role of the Registrar, the latter currently supervises funds through the FSB wherein it is a functionary. The Registrar has such powers as to inspect the affairs of funds and to recover monies unlawfully removed from funds and to replace trustees with curators in cases of mismanagement. The paper proposes to place funds under the supervision of the Registrar, separate from the FSB. The Registrar will then be constituted by a board of persons reflective of stakeholders in the industry.
The Registrar is currently tasked with, inter alia, checking fund rules, financial statements and valuation reports. The paper recognises that the Registrar has no human resource capacity sufficient to enable it to effectively discharge all of its duties. It therefore proposes the outsourcing of some of the Registrar’s functions through the licensing of specialists to undertake certification of compliance by funds with legislation and standards set by the Registrar. Such specialists would also be empowered to report to the Registrar on any irregularities in fund administration they encounter while discharging their duties. The Registrar’s powers to deal with fund irregularities are bolstered in that it is empowered to inspect fund affairs and to fine, suspend or remove trustees, and to fine and/or withdraw licenses of service or product providers which fail to fulfil their duties.
The paper also grants the Registrar powers to formulate non-legally binding codes of good practice and to compel funds to report information in their financials which will help identify funds at risk of funding shortfalls or that are being mismanaged. This should result in the Registrar being able to intervene quickly and prevent massive losses of monies belonging to fund members.
Retirement fund governance and trustee conduct: With regard to trustees, the paper proposes to retain the current dispensation entitling members to elect 50% of trustees. However, concerns are raised around the lack of expertise of some trustees. In this regard, trustees without expertise are required to undergo training or to seek expert advice at the expense of their funds.
In line with international practice, the paper raises the legal standard of judging trustee conduct from ‘the standard to be expected of a person in the position of the trustee in question’ to that of the requirement that ‘trustees act with the skill and prudence of persons familiar with issues under consideration’. This will have the effect that more caution will be expected of trustees and it will be incumbent on trustees to seek knowledge to enable them to effectively deal with fund affairs.
The paper imposes duties on trustees and provides that trustees owe fiduciary duties to their funds; that they must avoid and disclose conflicts between their own interests and those of the fund and that they owe a duty of good faith to all fund stakeholders. Moreover, the main common law duties of trustees are codified and of relevance to member protection, is the duty to disclose to members, information reasonably required to make appropriate choices and to protect their rights. Member protection is further bolstered in that trustees are required to convene annual member meetings and to furnish each member with an annual report detailing fund affairs as they affect each such member. Trustee independence is also assured through the prohibition of payments and rewards to trustees in relation to their position as trustees other than by their funds. The 2007 paper also adds to this by proposing the introduction of compliance officers for funds or the extension of principal officers’ functions to include a compliance function.
These proposals are to be welcomed with the hope that they will ultimately lead to a more efficient retirement funding industry with high levels of security as regards protection of member interests.