The calibre of the board of trustees of a retirement fund is the key issue in protecting your retirement fund interests, according to Wilma Mokupo, the head of pension funds at the Financial Services Board. Mokupo spoke at the recent Personal Finance / Old Mutual Actuaries & Consultants seminar on retirement fund governance in Johannesburg.
The Financial Services Board (FSB) has made good corporate governance by retirement fund trustees a priority, in order to protect the interests of retirement fund members, Wilma Mokupo says.
The members of the boards of trustees, she says, hold the ultimate responsibility to all the stakeholders for the retirement savings of members, no matter what responsibilities they delegate to other parties, such as asset managers and consultants.
Mokupo says the FSB is particularly concerned about umbrella funds, whose members are drawn from many different employers and organisations. She says that because of the way umbrella funds are structured, it is difficult for the views of members to filter up to the trustees.
One of the issues that umbrella funds need to address urgently is the independence of their trustees.
Trustees are responsible for ensuring that the fund has sound administration and investment policies.
Mokupo says that trustees can only govern a fund properly if they have a thorough understanding of their fund, its rules and the laws governing retirement funds - and then "ask the right questions, at the right times in order to make the right decisions".
She says the key good governance principles are the same principles as those spelt out in the second Merwyn King report on corporate governance for the South African business community. These key principles are:
- Discipline. Mokupo says this means trustees should act in a proper and ethical manner.
- Transparency. She says this means trustees must communicate properly with fund members in a useful and understandable manner. This includes telling members about any remuneration the trustees may receive and the expenses they incur.
- Independence. Trustees must avoid conflicts of interest, and take decisions in the interests of members only, if necessary on the basis of sound advice.
- Accountability. The trustees are ultimately responsible for the fund, so sufficient internal controls should be in place to ensure trustees approve and authorise all decisions made on behalf of the fund. This includes accountability for investment performance, administration systems and information on the fund.
- Responsibility. A board of trustees remains responsible for all out-sourced or delegated functions.
- Fairness. The trustees must act fairly, impartially and in good faith when making decisions on behalf of members and their dependants.
- Social responsibility. Trustees have an obligation not to discriminate against or exploit any particular class of members.
Mokupo says the good governance structures trustees need to create should include setting:
- The objectives and goals of the fund; and
- The policies and strategy to achieve the objectives.
There also needs to be a system in place to ensure that the objectives and strategies are monitored
Mokupo says that good corporate governance largely depends on the legal or fiduciary duty of trustees to behave properly and in the interests of all stakeholders.
She says trustees have a fiduciary duty to act in good faith, impartially and with loyalty; to exercise the due care, skill and diligence of a prudent person; to interpret the fund's rules fairly, impartially and in good faith; and to prevent personal interests from conflicting with those of the fund.
The board of trustees also has a fiduciary duty to:
- Ensure prudent investment, especially when a retirement fund offers individual investment choice to its members;
- Ensure that members and their dependants receive the proper benefit payments;
- Ensure that contributions are received by the fund; and
- Maintain proper communication with stakeholders.
Mokupo says the trustees themselves must be competent to handle the affairs of the fund. This means they must have the skills and dedication to fulfil their governing responsibilities.
Trustees are required to: understand and manage the fund's risk; understand actuarial principles in valuing the fund and benefits; understand investment risk and strategies and benefit structures; and if they are not sufficiently competent,trustees must use external advisers or appoint sub-committees to advise them.
Mokupo says communication with members and transparency have become essential parts of the good governance of retirement funds. Communication must be honest, accurate and timely, and based on a "communication policy guide" compiled by the trustees.
The information provided to members should be useful and reliable and must enable stakeholders to make informed decisions. It should also be transparent, about such things as how the trustees operate, the administration and the investments of the fund.
Information in the financial and benefit statements should be clear, useful and understandable.
Mokupo says trustees must also set up internal control procedures to identify potential risks and manage these risks with clear written rules regarding control processes of: financial management and funding; investment management; safeguarding of assets; delegation of duties; out-sourcing of functions; and evaluation and appointment of service providers.
The control policy should also be clear on the frequency and content of reporting by administrators and other service providers to ensure that the fund is administered and managed properly and responsibly.
Mokupo says there must be a clear policy on conflict of interest so that trustees understand where they may be in a position of conflict of interest and have a structure whereby potential conflicts of interest can be reported, discussed and decided on.
Finally, she says, boards of trustees must review the applicability and the effectiveness of their fund's good governance procedures and measure the achievement of the objectives regularly.