The trustees of retirement funds are exposing themselves and the funds they manage to unacceptable levels of risk because they do not have proper fund governance policies and procedures in place.
This is one of the main findings of a fairly damning report by Deloitte & Touche after the accountancy firm conducted a survey of the governance of retirement funds. The survey found that fund trustees are operating below par.
The report comes on the heels of Old Mutual losing a court case for refusing to make good money which had been illegally removed from the CAF pension fund by the trustees, Pretoria businessmen Jan and Laurie Korsten.
The report says while trustees may claim to have considered all the opinions and acted in good faith when making investment decisions, "it may be more difficult to demonstrate this if required".
"Good governance and proper procedures are no longer an ancillary but a prerequisite if trustees are to effectively manage their funds properly."
Deloitte & Touche says increased expectations and duties placed on trustees may in many instances be more onerous than those expected of corporate directors.
"It is particularly important in South Africa's unique environment as many fund members may not be in a suitable position to monitor their savings, and have consequently placed reliance on their fund's trustees."
The respondents, who were principal officers and trustees of 41 major retirement funds across all sectors of industry, identified five major risks to funds. These are:
* Poor investment performance and market volatility;
* Administration systems and administration problems;
* Poor governance;
* Trustees' lack of investment experience and a consequent over-reliance on advisers; and
* Poor quality of information.
The main findings of the Deloitte & Touche survey included:
* The Financial Services Board (FSB), which regulates pension funds, had not inspected a single fund included in the survey over the past three years. Two thirds of the funds had not submitted their financial statements to the FSB within the required six months;
* Funds do not have formal and comprehensive procedures in place to identify, monitor and assess risk;
* Trustees do not assess their governance procedures against international or local best practice;
* Trustees have been delegating responsibility inappropriately to, or placing excessive reliance on, external advisers;
* Trustees are not adequately monitoring the performance of their administrators against service level agreements. More than 50 percent of the respondents would change their fund administrators if they could find a suitable alternative and the fund could move its data and records with minimal risk and cost;
* Fewer than 60 percent of funds have a formally documented investment strategy. The majority of trustees have adopted a semi-active or passive role in the development of strategy, with the result that trustees' knowledge of a fund's investment strategy is "not at acceptable levels";
* There is too great a reliance by trustees on past performance of asset managers with the inappropriate use benchmarks to judge performance. Insufficient use is made of investment processes followed by asset managers as well as issues such as research capability and the extent of compliance;
* Insufficient information is being passed on to members; and
* Where individual members are given investment choices, they are being asked to make investment decisions without proper understanding of the choices and with few mechanisms in place to test the level of members' understanding about investments.