If the trustees of your retirement fund get the basic principles of fund governance right, the rest will fall into place, Alister Duminy, a trustee trainer at Old Mutual Actuaries and Consultants, says. Big problems in retirement funds normally start with little mistakes, he says. Duminy was speaking at the recent Personal Finance/Old Mutual Actuaries and Consultants retirement governance seminar.
There are a number of early warning signs that the trustees of your retirement fund may be getting the small things wrong - and that bigger problems may follow, Alister Duminy says. These signs include:
- Only a few trustees participating during board of trustee meetings;
- One trustee (usually the most senior, employer-appointed trustee) dominating the discussions;
- Trustees arriving late for meetings and leaving early;
- Trustees failing to prepare for meetings, and even arriving without their minutes and agendas;
- Trustees regularly missing meetings of the board; and
- An over-reliance by trustees on the fund's principal officer, consultant and/or administrator.
Duminy says your trustees should be checking on each other in a number of key areas to ensure that they are properly administering your fund. These key areas are:
1. Trustee conflicts of interest
Duminy says current discussions about conflicts of interest centre around service providers, and little attention is being paid to the more important area of conflict: that among trustees themselves.
He says trustees often divide into two camps that vigorously "represent" their respective constituencies - namely, the employees and the employer. Trustees need to decide once and for all in whose interests they are required to act.
"The Pension Funds Act makes it abundantly clear that trustees must act in the best interests of their members at all times. This means making the difficult calls.
"If this means taking an action that appears to favour one of the other stakeholders, such as the employer, then they must be particularly vigilant in following processes and getting expert advice that will show just how they got that conclusion," Duminy says.
Whether a trustee was appointed by the employer or elected by the fund's members should not define or control a trustee's decisions or behaviour, Duminy says.
"Once someone becomes a trustee, they have to shift their allegiance to the fund and its purposes. A trustee is there as a natural person and not as a mandated representative of some other entity, such as your employer, a union or even a group of individuals that voted for your trustee.
"Trustees have to apply their own minds and speak their own thoughts and then vote in line with that and not some mandate from another entity," Duminy says.
2. Service provider conflicts of interest
Duminy says conflicts of interest involving the fund and service providers can occur when:
- One firm provides multiple services - such as administration, risk underwriting, investment management and consulting - to a fund.
- A financial arrangement exists between service providers. This conflict not only arises when one provider owns the other. It can also occur if two providers have an agreement to direct business to each other.
- There is a relationship between a trustee, or trustees, and the fund's service providers.
In dealing with conflicts of interest involving service providers, Duminy says your trustees must:
- Ask service providers to disclose to which companies they are linked and declare all relationships that could create a conflict of interest; and
- Draft separate contracts for each service, even if one company provides all the services. A fund should manage each service relationship separately, Duminy says.
3. Managing conflicts of interest
Duminy says your trustees should manage conflicts of interest in a structured way. This includes:
- Disclosing or identifying a conflict of interest. Your trustees must disclose and discuss any matters that have the semblance of a conflict of interest. Trustees must be brutally honest with each other or resign.
- Evaluating any conflict of interest, its extent and its potential impact on the fund. In this regard, the questions trustees must ask include:
- Is the conflict of interest within the agreed limits of acceptability?
- If asked, would the members approve of the trustees' actions?
- Should the trustees ask the members for their opinion? and
- What financial, legal and/or ethical risks does the conflict of interest pose to the fund?
- Mitigating against any conflict of interest. This can be done by:
- Drawing up a code of conduct with the service provider;
- Making sure the service provider takes partial or full responsibility (in writing) for any affect on the fund;
- Including an "escape clause" in any agreement so that the trustees can cancel the agreement if a conflict of interest arises; and
- Trustees recusing themselves from discussions and decision-making if they have a personal interest in a matter. If a trustee experiences a major conflict of interest, he or she should resign.
- Reviewing the results of the trustees' action(s), and taking further steps if necessary.
- Having a code of conduct for trustees that highlights how conflicts of interest must be managed.
4. Act with care and in good faith
Various pieces of legislation stipulate the duties required of trustees, Duminy says. A trustee is in a position of "trust" - members have (knowingly or unknowingly) put their faith in a trustee to look after what belongs to them.
He says trust involves two fundamental principles, which are:
- To act with care; and
- To act in good faith
All the other duties of trustees are rooted in one or both of these principles, Duminy says.
"I believe that one of the main reasons anyone agrees to become a trustee is because the person suffers from a terrible human condition: they care. Trustees may care mainly about their own retirement benefit, but why take on the risks associated with looking after everyone else's benefits? The reason is they care," he says.
Duminy says trustees should use that motivation to review all their discussions and decisions. He says trustees should ask themselves the following questions:
- "Did we act with greater care than the reasonable person, and are our decisions and actions above reproach?" and
- "Could we explain our actions to mom and not be admonished?"
5. Managing remuneration, expenses and gifts
Duminy says your trustees must decide in advance how they will handle remuneration, expenses and gifts.
- Trustee remuneration. He says that any change in the law that would result in the trustees of your fund being paid will require a change to the rules of your fund.
Duminy says a better way for trustees to deal with the issue of remuneration is for the employer to include an employee's role as a trustee in the employee's performance contract. In this way, he says, an employer can begin to appreciate what a trustee does, why it takes up so much of his or her time, and how it benefits the company.
- Trustee expenses. Duminy says your board of trustees must:
- Have a budget for expenses and manage it properly;
- Ensure all trustees know and follow the accounting procedures;
- Ensure the audit trail is robust - expenses must be recorded in the minutes before they are expended; and
- Hold the administrator of the fund accountable for adhering to rigorous standards of accounting.
- Gifts and courtesies. Duminy says accepting gifts can create a conflict of interest. Your trustees should discuss and agree on how to respond to gifts. This should be written into your fund's code of conduct.
6. Trustee training
That all trustees should receive training is beyond question, Duminy says. Nevertheless, too many trustees do not make training a priority. Furthermore, he says, it is often believed that only the member-elected trustees need to be trained.
Until a better alternative becomes available, Duminy says trustees should avail themselves of the training provided by their fund's service providers. However, trustees must demand that this training is of a high standard and includes assessments.
"By far the majority of trustees indicate that they are not really willing to write a test (they will do it if they have to). This will become non-negotiable when the training providers apply for approval of their training from the South African Qualifications Authority," he says.
7. Proper records
Duminy says your fund's trustees must keep proper records of their meetings and decisions.
8. Inform members
You, as a member, are entitled to be kept informed about the decisions the trustees take, Duminy says. Your trustees must regularly and frequently inform you of their decisions and the issues facing the fund.
9. Contractual arrangements
Your trustees must ensure that letters of appointment clearly define service providers' roles and responsibilities, Duminy says. This includes any agreement with employers. The terms and conditions of all policies and mandates must be checked to ensure that they do not conflict with the rules of the fund.
10. A strategic plan
Duminy says it is essential that a fund has a strategic plan covering all its areas of operation, particularly its investments. The plan needs to be reviewed constantly.