Trustees of retirement funds need to beef up the governance of their funds and must formalise many of the processes that are currently informal, a recently released survey of the country's retirement funds has shown.
George Cavaleros, the author of Retirement Fund Governance in South Africa 2005, says members of retirement funds should challenge their trustees to improve standards of fund governance.
Cavaleros is a partner in the Financial Services Team at professional services company Deloitte.
Trustees are responsible for protecting the retirement savings of millions of South Africans and, as such, must be able to demonstrate that they have performed their duties to an acceptable standard, he says.
The survey's results suggest many trustees could find this difficult.
The main finding of the survey is that although trustees are more aware of the importance of governance than they were four years ago, when the last survey was conducted, the level of governance has not yet reached an acceptable level.
Another key finding of the survey is that many retirement funds are still governed in an informal manner. The trustees, therefore, do not always contribute to effective risk management, the protection of members' interests and the achievement of the fund's financial objectives.
The survey is based on interviews with the principal officers of 80 retirement funds.
The results reflect principal officers' perceptions of the status of governance within their funds.
The overall governance of funds was rated 6.5 out of 10 - with principal officers believing there had been a slight improvement in the way that their funds are being governed since the last survey in 2001.
However, Cavaleros says, based on Deloitte's analysis of the responses received, a rating of six out of 10 is probably more realistic.
Although it appears that the participants in the survey overrated themselves, they do appear to appreciate the importance of fund governance slightly more than they did previously, he says.
This is probably because of the increased awareness of the importance of fund governance, which has received attention in the media and has been the topic of conferences over the past few years.
Findings of the survey
Other findings of the survey include:
- There is a perception among some principal officers that employers view a retirement fund as an extension of their business, and that the employer has undue influence over the decisions of the fund's board of trustees.
- Many funds fail to formally evaluate the performance of their trustees, chairperson and principal officer. Without formal evaluations, members cannot be certain that their financial expectations are being met and that their fund is not being exposed to unacceptable levels of risk.
- The level of formal training that trustees receive - 15.5 hours, compared with 10 hours in the 2001 survey - is still insufficient to enable trustees to carry out their onerous duties.
- Only one-quarter of boards of trustees have an independent trustee. Boards should consider using an independent trustee to achieve the objectivity and impartiality required.
- Trustees need to be more proactive in checking and evaluating the reports issued by the auditors of the administrators of their funds. These reports, which by law must be conducted each year, deal with the administrator's ability to continue to operate and the adequacy of the administrator's bookkeeping, computer and control systems.
- An immediate improvement is necessary in the selection by funds of service providers and the way funds select and evaluate the performance of their service providers. Service providers include investment managers and administrators. Trustees may be held legally liable where the actions of service providers result in funds losing money.
- Few funds have implemented a formal code of conduct, have formal processes in place to ensure that trustees comply with ethical standards or require their trustees to confirm that they acted ethically in carrying out their duties.
- Few funds perform formal assessments of risks or have implemented formal risk management policies, including controls to ensure that identified risks are managed, or monitor the effectiveness of controls that are implemented. Major risks facing funds include investments risks, the inefficiency of trustees arising from insufficient training, a breakdown in key controls and Aids.
- The level of knowledge that trustees have about their funds' investments is insufficient for trustees to claim that they have the necessary skills to contribute to the effective management of their funds' investments and to avoid inappropriate dependence on investment professionals.
- One-third of the funds surveyed do not have a formal investment policy statement.
- Trustees give too much attention to the investment manager's prior performance and relationships with the investment manager Past performance is not a guarantee of future performance and choosing a manager on the basis of a past relationship is not the way to choose a manager. The manager must be evaluated on a range of criteria so that the trustees can try their best to choose the right manager for the job.
- While 70 percent of the funds surveyed monitor their investment manager's performance against a benchmark, about 44 percent of the principal officers were uncertain whether their fund's benchmark was appropriate. This finding indicates that trustees might not fully understand investment benchmarks and how they are constructed.
- A total of 41 percent of defined contribution funds surveyed offer their members a choice of investments, as opposed to 39 percent in the last survey. But 58 percent of principal officers do not know whether the investment options are appropriate.