Accounting company KPMG recently published an excellent booklet entitled "Toolkit for the Retirement Fund Trustee". Any trustee or potential trustee will find the booklet very useful. It will also help anyone who wants to know more about retirement fund governance.
Trustees have a fiduciary duty to you, the retirement fund member. This means a trustee must always act with the utmost good faith, care and diligence when making decisions that affect your retirement savings. Indeed, trustees should exercise more care when dealing with your money than they do with their own.
This duty to act with care includes the proper management of conflicts of interest.
KPMG's booklet says the following about conflicts of interest: "Trustees are at all times required to put the interests of the fund first. They should, as far as possible, avoid situations that could give rise to a conflict of interest situation, where, for example, they were appointed by an employer, serving only the employer's interests."
Conflict of interests not only arise when trustees are nominated by an employer. They can arise over relatively minor issues such as a trustee accepting a bottle of whisky from a company that provides a service to your retirement fund (this could be seen as a bribe), or when a trustee owns a stake in a company that provides a service to the fund.
Earlier this month, I wrote two columns expressing concerns about umbrella funds that are sponsored by financial services companies. I questioned whether in such funds members' interests are properly protected and whether conflicts of interest are properly managed.
My view is that they are not, neither by the companies that sponsor the funds nor by legislation and regulation - although the Financial Services Board (FSB) is currently working at rectifying this.
One of the major problems with umbrella funds is that they contain an inherent conflict of interest. At the root of the conflict is that the boards of trustees of most umbrella funds are dominated by the senior employees of the financial services company that sponsors the fund. As senior employees, they are also likely to have share options based on the profits made by the sponsoring company.
Conflicts of interest also arise with retirement annuity funds and preservation funds, both of which must have boards of trustees.
Conflicts of interest in umbrella funds are exacerbated when the trustees are involved in structuring the fund in the first place, and are actively involved in marketing the fund.
The conflict is obvious: the trustee/employee has to weigh the profits of the company and the size of his or her pay-cheque against the interests of the funds' members. Not something I would like to do.
Typically, a conflict of interest also arises over whether to use the sponsoring company to provide services, such as asset management, to the fund.
The KPMG booklet warns that one of the disadvantages of umbrella funds is the conflict of interest for trustees employed by the sponsoring financial services company.
One trustee of an umbrella fund told me recently that there is no real conflict of interest, because the trustees follow the rules of the fund. The question is, who drew up the rules in the first place? Most often it was the sponsoring company's employees, who then became the trustees. The trustee must also confirm the rules of the fund. It is the trustee and not the sponsoring company, which must have the rules approved. The trustee's argument is unacceptable.
The KPMG booklet says: "Trustees are to administer the fund according to these rules at all times, provided that the rules are not in conflict with applicable legislation."
The FSB must approve a fund's rules, so you should assume they conform to legal requirements.
However, following rules does not relieve a trustee of the responsibility of acting in the utmost good faith in caring for your money.
If, for example, the asset management division of the company sponsoring the fund is producing appalling investment returns (as some do), does the trustee merely say, "Well, the rules say we must use the asset manager, so there is nothing we can do."
I do not believe that a trustee who took such a view would be performing his or her fiduciary duty towards you, the member.
The next question is, if the trustees decide to take all the services away from the sponsoring company, why should the company continue to sponsor the fund? After all, at the end of the day, it boils down to profit.
If there were no sponsoring companies and no umbrella funds, many of us, particularly on lower incomes, would have little access to tax-incentivised retirement saving vehicles.
Compounding the problems that arise over conflicts of interest is that you have little say in how your umbrella fund is run. You do not have the right to elect any of your trustees and, legally, your employer can make all decisions about your membership of the fund without consulting you - right down to deciding which umbrella fund you join.
Most umbrella fund trustees believe they are not even obliged to ensure you receive proper advice when it comes to investment choices. I think this is something you will be able to challenge with the Pension Funds Adjudicator and in court (in suing the trustees) if your reasonable expectations are not met.
It is a very tricky situation. Some sponsoring companies are trying to structure umbrella funds to give you, the member, as much protection as possible. But others still regard umbrella funds as another cash cow to milk, in the same way they milked investment-linked living annuities.
It is imperative that the issue of umbrella fund governance is placed high on the agendas of the government-initiated retirement fund trustee conference in September and the annual convention of the Institute of Retirement Funds a few days later.
In the meantime, if your employer is considering taking you into an umbrella fund, make sure you are fully involved in the process. If you are already a member of an umbrella fund, make sure your employer establishes a joint member/employer committee which takes all the decisions affecting the fund.
Definition
An umbrella retirement fund enables the employees of the fund's many different "participating employers" to belong to a single retirement fund.
Some umbrella funds are restricted to employees of particular industries or trade unions, while others are open to any group of employers/employees.
Most umbrella funds are sponsored or administered by a financial services company, mainly life assurance companies.
In the case of open umbrella funds, the employer decides whether employees' membership is voluntary or compulsory.
- For more information about KPMG's booklet, please contact Palesa Moloi on (011) 647 7394 or email [email protected]
Trustees of umbrella fund face criminal charges
Retirement fund trustees who do not do their job properly are increasingly likely to face criminal and/or civil action.
This week the Financial Services Board announced that trustees and other officers of a number of umbrella funds are to face criminal charges, while criminal and civil charges are still being investigated against trustees of some other funds which have lost millions of rands as a result of dubious activity and unwise investment decisions.
The trustees, including Stuart Deel-Smith, and other officers who face prosecution, were all involved with five umbrella pension funds that suffered losses of more than R18 million and are being liquidated.
The funds being liquidated are: Small and Medium Enterprise Independent Preservation Pension Fund; Small and Medium Enterprise Independent Pension Fund; Small and Medium Enterprise Independent Provident Fund; Small and Medium Enterprise Independent Retirement Annuity Fund, and Small and Medium Enterprise Independent Preservation Provident Fund.
The funds were administered by two of Deel-Smith's companies, Benefit Administrators and Deel-Smith & Company. Deel-Smith & Company was not registered as an investment manager as is required in terms of the Pension Funds Act.
Many of the 350 members of the funds, after a lifetime of saving for their retirement, are now destitute. Assets remaining in the funds amount to less than R1.5 million.