For many of us, the money in our company pension fund is all the savings we have at retirement. Yet few of us have the foggiest idea how our fund works - let alone how it's performing. We're only too happy to leave it to our trustees. We give you 10 key questions that you should ask the trustees of your fund.
While the trustees of your retirement fund have a fiduciary responsibility to manage the fund, this does not absolve you of your responsibility to make sure that your trustees are doing their job. Michael-John Albert, a partner at auditing firm Deloitte, says the task of trustees is becoming considerably complex and onerous, from both a regulatory and an investment perspective.
Although consumer activism in South Africa is not yet as strong as it is overseas, members of retirement funds in this country are becoming more aware of their rights and are taking action when they believe their rights are being infringed. Rulings by Vuyani Ngalwana, the Pension Funds Adjudicator, have helped to inform members of their rights, and this is driving activism among fund members.
It is crucial that members take action to ensure that their funds are being properly governed and managed, Albert says. "Members can't afford to be passive, and they definitely can't assume everything is okay in their funds," he says.
It is your financial future that is at risk, and few people can manage to live off the social old age pension of R780 a month, he adds.
As a member of a retirement fund, you are required to make some difficult decisions. For example, you may need to make investment choices if these are offered by the fund. For this reason, you may need professional advice from a financial planner.
Your financial planner should devise a retirement plan for you, and show you how to get the most out of your company-sponsored retirement fund.
It is in your interests that you are informed about your fund, and your trustees should be able to answer all of the following 10 questions for you, Albert says.
1. What are my retirement benefits?
If you want to get to grips with your retirement fund and the benefits it offers, you should start by reading the rules of your fund. Fund rules do not make for riveting reading, but since nobody else is going to look after you in your retirement, you should make the effort to understand them. The rules of a fund typically spell out how benefits are calculated at retirement and in the event of resignation, disability or death.
You will also find information on what is known as the "normal" retirement age of your fund and what will happen if you choose to take early retirement.
Albert says you should know what happens if you are disabled, either permanently or temporarily, and you should assess whether the life and disability cover offered by your fund is adequate for your circumstances. If it is insufficient, you will need to take out additional cover. These days, it is not uncommon for people to change jobs five or six times during their working lives, so you also need to understand the consequences of leaving your company retirement fund.
2. Has my fund given me enough information so that I can make the right investment decision?
You may belong to a fund that allows you to choose, from a range of investments, where to allocate your contributions to the fund.
Some funds give individual members an extensive range of investment options, while others offer only two or three options. Certain funds will allow you to switch your investments daily or weekly, and others allow switches once a year only.
The investment channels open to you and the investment choices you make can have a significant impact on your retirement savings, Albert says.
The information on which you base your decisions must be up to date, he says.
Given the specialist knowledge and skills required to manage and understand investments, Albert recommends that if you are a member of a fund that offers member-level choice, you seek independent financial advice from a qualified and registered financial adviser.
Remember to check that the adviser is registered at the Financial Services Board (FSB) under the Financial Advisory and Intermediary Services (FAIS) Act.
The extent to which your trustees are responsible for ensuring that you make the appropriate investment choices is a grey area, Albert says.
Trustees will argue that they are responsible for compiling an appropriate investment strategy for the fund, implementing the strategy, appointing suitable asset managers and clearly communicating the individual investment choices to members. But the responsibility for making the right investment choice lies with the individual member, they may say.
Members, on the other hand, may argue otherwise. However, the point is that if you are unsure about investments, you should obtain professional advice, irrespective of the outcome of the debate about where the responsibility for the individual's investment decisions lie, Albert says.
3. Does my fund have a surplus and, if it does, am I entitled to a share of it?
The Pension Funds Act was amended in December 2001 to provide for surpluses that may have built up in funds in the past to be shared.
In terms of this amendment, current fund members, former members going back to January 1980 and pensioners are entitled to a share in the surplus in their fund. Pensioners are to share in any surplus by way of an inflation-linked top up of their pensions.
In the past, surplus money accumulated in funds - both defined benefit and defined contribution funds - for a variety of reasons. These include members leaving the fund without being given the full share of the employer's contribution and better-than-expected investment returns. It was up to the actuary of the fund to determine if there was a surplus in the fund at the first valuation after December 7, 2001, when the legislation was implemented.
Today, if a surplus exists, the fund must develop a surplus apportionment scheme, which must be approved by the FSB.
To find out if your fund has a surplus, contact your fund, or any fund of which you were formerly a member. If you cannot track down your fund, contact your former employer.
4. Can I expect minimum benefits if I resign?
The Pension Funds Act provides for you, the member, to receive certain minimum benefits when you leave a fund due to resignation, retrenchment or dismissal.
This is to ensure that when you leave a fund, you receive all of your contributions plus all the money that your employer contributed to the fund on your behalf, plus investment returns.
Not only are you entitled to interest earned on the fund's assets, but also to any smoothing reserves. These are the good returns that are held back in a year of good performance to smooth out investment returns to members in subsequent years of poor performance.
5. Is my fund in a healthy financial state?
To ensure that your retirement fund investments are safeguarded, you need information about the financial state of your fund, Albert says.
Typically, such information can be obtained from the annual financial statements, as well as the auditor's report and the actuarial valuation, which must be done every three years.
Up until last year, funds that had all their investments in life assurance policies did not have to be audited. But the Registrar of Pension Funds has scrapped this exemption, because it wants greater accountability by funds of members' assets.
Furthermore, since 2005, all funds have been required to submit annual financial statements to the Registrar of Pension Funds in a new format to bring them in line with developments in the accounting profession and the retirement industry.
If your fund has assets of more than R500 000 and contributions of more than R150 000, the annual financial statements of the fund must be audited.
Albert says your trustees must be up to speed with the latest auditing requirements for retirement funds. As a fund member, you should check that your trustees are doing their duty in this regard.
Members should receive, at the very least, some financial information. This could be a copy of the fund's financial statements or an abridged version thereof, Albert says.
6. Are the trustees of my fund looking after my interests?
Albert says trustees may be faced with a conflict of interest in the execution of their duties.
Trustees may receive a kickback or commission for influencing the board to place business with a certain service provider - for instance, giving the fund's assets to a specific investment management company. Trustees may also be given commission or expensive gifts for introducing financial consultants to the fund or for placing housing loans with a certain bank. Service providers may also offer trustees overseas junkets in an attempt to buy their votes.
The trustees of your fund have a legal obligation to act in your best interests and can be held personally liable if you and the other members lose money because they failed in their duty.
At another level, there could be a conflict of interest between the rights of the participating employer and the fund. If a defined benefit fund is in deficit (due to a dip in investment markets, for example), will the employer-elected trustee choose to reduce benefits or increase contributions to take care of the deficit?
A conflict of interest may also arise as a result of relationships in the workplace. For example, if one trustee is the boss and another is an underlying, the underling may be loathe to adopt a position that differs from his or her boss.
You need to know about these relationships because it could influence your trustees to make decisions that are not in your best interest.
Albert says that all interests should be declared to the board, and trustees who find themselves facing a conflict of interest should recuse themselves from voting on an issue in which they may be influenced to vote in a certain way.
Albert says that some funds have a policy on gifts to trustees and that the value of these gifts may not exceed a certain rand amount.
Few members are aware of the important role that trustees play in a fund, let alone know who their trustees are and why they were chosen as trustees.
Members of retirement funds have the right to choose at least 50 percent of the trustees on the board of management of a retirement fund. However, members of retirement annuity funds, umbrella funds and preservation funds do not enjoy this right.
The questions you should be asking yourself are whether you voted for the member-elected trustees and whether the board of trustees gave you enough information about the nominees in order for you to make an appropriate choice.
You also need to find out what training and support the retirement fund offers to the trustees to help them in areas where their knowledge is lacking or where they may need assistance.
Bear in mind that member-elected trustees in particular are chosen from the employees that work for a company and they may not have any specialist know-ledge on running a retirement fund.
Nevertheless, they may have certain skills that would be valuable. Other employees may be good trustees not because of any knowledge or skills they have, but because they show initiative, have inquiring minds, and are not afraid to tackle issues in the interests of fund members.
There are no legal eligibility requirements for individuals who become trustees, so it is important for members to be proactive in this regard, Albert says.
Also find out if there are any independent trustees on your board. This is not a legal requirement, but it is important that there are trustees who do not have links with the employer or administrator or any of the other service providers to a fund.
Check with your fund whether the trustees are doing their jobs. For instance, are they attending meetings? The rules of your fund will dictate how often your fund should meet. Most funds will meet four times a year.
The trustees will meet with their advisers, actuaries and auditors when necessary. At other times only the trustees will be present at meetings to discuss matters, receive updates on the fund's investments and administration, and to take decisions.
If your trustees are not attending meetings, are they providing input to the fund and playing an active role or are they simply taking up seats on the board?
7. Is my fund being properly managed?
Essentially, Albert says, you want to know what your trustees are doing for you.
- As a starting point, find out how your board of trustees is structured. For instance, does the fund have sub-committees to deal with specific areas? Depending on the size of the fund, it may have sub-committees to deal with areas such as investments, death claims, administration and communication. Whether a fund has or needs sub-committees will depend on factors such as the number of trustees on the board, the size of the fund and the workload of the trustees.
- A fund faces many risks and while it is not able to avoid all these risks, many can be mitigated. You should check with your trustees what are the main risks facing your fund, and find out what they, as trustees, are doing to lessen those risks, Albert says.
All funds should have a formal risk assessment, which means the trustees should go through a process in which they identify all the risks facing the fund, document these risks and devise a strategy on how to deal with these risks. Professionals can assist the trustees with this process. The three main risks in a defined contribution fund are under-performance of the fund's investments, non-compliance with legislation and the fund rules, or problems with the data.
- A major part of your trustees' responsibility is to establish an investment policy and a strategy for the fund. But how much do you, as a member, know about your fund's investments?
It is crucial that you, as a member, know the policy of your fund, how it is being implemented, whether it is being monitored and how often the strategy is being revisited, Albert says. Trustees must tell members how they went about devising the investment strategy so that the members can decide whether it is an appropriate strategy.
Further to the investment policy, do you know how your fund selected the asset managers that invest the money belonging to you and your fellow members? You also need to know the fund's investment benchmarks. This is important so that you can assess the performance of the asset manager.
Your trustees are not investment experts and must obtain professional advice on how and where to invest the fund's assets, how to set investment benchmarks and how to interpret the performance of the asset managers, Albert says.
Ask your trustees what they are doing to ensure that your fund is complying with all the requirements laid out in the fund's rules.
The rules of a retirement fund set out how the fund will operate and cover a host of topics, including the structure of the board, the appointment of trustees, how often the trustees should meet, and what your options are if you want to move to another fund.
The rules will also specify the contributions that you and your employer must make to the fund, spell out whether you can make voluntary contributions, and define, in great detail, the benefits paid by the fund and how these benefits must be calculated.
Retirement funds are also obliged to comply with the Pension Funds Act and other relevant legislation.
The laws applicable to retirement funds include:
* The Financial Institutions Act, which defines specific duties for anyone acting in a fiduciary position, such as trustees;
* The Income Tax Act, which sets down how retirement funds, members and beneficiaries will be taxed;
* The Divorce Amendment Act, which deals
with interests in retirement fund savings in a divorce settlement;
* The Long-Term Assurance Act, which governs risk and investment policies bought by a retirement fund on behalf of members and beneficiaries; and
* The FAIS Act, which governs the dispensing of financial advice. (The trustees of your fund are not allowed to give advice to individual members unless the board is registered to do so.)
8. Is my fund keeping me informed?
You need regular and relevant information from your fund if you want to understand how it works and make sure that it is being properly managed.
Albert says it is the responsibility of your trustees to ensure that you receive adequate and prompt communication on all relevant matters.
The Pension Funds Act requires that you are sent a benefit statement once a year, within six months of the fund's financial year-end. Unfortunately, some members do not bother to read their benefit statements, Albert says.
Your fund should be giving you feedback on decisions taken at meetings of the board of trustees.
Your trustees must consider the most appropriate method of communicating with the members. It is no good their sending all communication via email when only some members have access to email.
Your fund should take into account the information that members would like to receive. If there is anything that you want to know about your fund or your retirement benefit, ask one of your trustees.
9. Are my contributions being paid over to the fund promptly?
The Pension Funds Act requires that your employer, who deducts your fund contributions from your salary every month, pays your contributions to the fund within seven days of the calendar month in which the contributions were deducted from your salary.
This requirement is to prevent your employer from using your money to bankroll its business. You lose out on investment growth if your contributions are not paid over to the fund as soon as possible after being deducted from your salary.
Albert says the late payment of member contributions is generally not a problem in funds sponsored by large companies, but it can be a problem in smaller businesses.
In terms of the Act, the principal officer of the fund is required to report late payments to the Registrar of Pension Funds. An employer who fails to pay the contributions to the fund on time will have to pay interest on the late payments.
Albert says members have the right to know this information, and trustees should be informing members when late payment of contributions is taking place. For every day that the contributions are paid late, the members lose out on the opportunity to earn investment returns in the market. Sometimes the interest paid by the employer on the late contributions will be lower than what can be earned in the market.
10. What should I do if I have a problem with my fund?
As a member of a retirement fund, you have rights, which you should exercise. You are entitled to proper answers to all reasonable questions, Albert says.
If you are unhappy with the way your retirement fund is being managed, take action. The fund exists purely to provide you and your fellow fund members with benefits. Furthermore, it is your money that the fund is managing.
Should you have a problem with your fund, take up the issue with your trustees.
If the trustees fail to deal with your problem to your satisfaction or refuse to deal satisfactorily with your complaints, you can complain to the Pension Funds Adjudicator.
Assessing a fund's financial health
To assess the financial health of your fund, Michael-John Albert, a partner at auditing firm Deloitte, says you will need to establish the following from your trustees:
- What is the funding level of the fund? This is the extent to which the fund has assets to support its liabilities. In a pension fund, the liabilities are the benefits that members receive at resignation or retirement. The level of assets to liabilities should be 100 percent. In other words, the assets must be equal to the liabilities.
Establishing the funding level will indicate whether or not the fund has enough money to pay the benefits due to members when they retire or withdraw from the fund.
- Did the actuary raise any concerns in the valuation report, especially over the quality of the fund's membership data? For instance, are there duplicate membership records? Has the fund failed to receive certain members' contributions from the employer?
- Does the fund have any contingency or other reserves, and if so, why are these reserves necessary? Contingency reserves are fairly common in funds. The fund's actuary will establish a contingency reserve if he or she is worried about something in the fund - for instance, an error in the membership data whereby the fund has insufficient funds to pay out the members.
Members must understand why the fund has reserves and whether they are re-evaluated regularly. These reserves should not be excessive, Albert says.
- What process did the fund follow in the selection and appointment of its auditors? You need to know whether your fund has to be audited, how your fund appointed the auditors (not appointed simply because they were the cheapest), and whether they are capable of performing at the required level, taking into account the size and complexity of your fund.
- What was the result of the annual audit? Albert says there are essentially three types of audit reports: an unqualified opinion, a qualified opinion and a matter-of-emphasis opinion. These are views that the auditors express on the finances of the fund.
An unqualified opinion means that the auditor has not picked up any significant problems with the financial statements of your fund.
A qualified opinion means something is so seriously wrong with the financial statements that the auditor either cannot express an opinion or may express an opinion, but modify it in some way. The auditor will usually point out the problem. For instance, that the fund is operating under rules which were not approved by the Financial Services Board (FSB), or that mistakes have been made in the way the fund's benefits have been calculated.
With a matter-of-emphasis opinion, the auditor draws attention to something in the financial statements about which he or she is concerned. However, the auditor does not qualify the opinion.
The purpose of this is to alert readers of the report to something - for instance, that the board of trustees is not made up as specified in the fund's rules. Something which might not affect the fund's finances, but which might have an impact on the governance of the fund, Albert says.
- If the auditor's or valuator's report is qualified in any way, you need to know what the trustees, fund administrators or your employer are doing about rectifying the issues raised by the auditor or valuator.
- Included in the auditor's report is a list of questions on the operation of the fund that the FSB requires the auditor to answer. For instance, have all the contributions to the fund been paid on time?
Find out if the auditors raised any concerns in their report to the FSB. Ask how problems arose and what the board of trustees is doing to rectify the problems.
- At the conclusion of an audit, the auditor will give your fund a trustees' report, called a management letter or letter to the trustees. This report contains all the findings of the audit. An example of a finding may be that the records of, say, four members were not updated with their monthly contributions. Ask if the auditor raised any items in his or her report, and ask your trustees how they are dealing with these matters.
Definitions
Retirement fund member:
Pension funds, provident funds, retirement annuity funds and preservation funds are all defined as pension fund organisations by the Pension Funds Act. You are a member of a retirement fund if you belong to one of these funds.
Pensioner:
Pensioners who receive their pensions from a fund are also regarded as members of a retirement fund.
Trustees:
Every fund must have a board of trustees, which is responsible for managing the fund in the best interests of members. By law, members are entitled to elect at least half the board members.
Defined contribution fund:
In this type of fund, the contributions of the fund member and the participating employer are fixed. The contribution is invested and whatever is available at the member's retirement date is available as the member's retirement benefit.
Defined benefit fund:
In this type of fund, the benefit is defined as a percentage of the final salary for each year of service rendered by the employee. The member's contribution is defined in the rules of the fund and the employer's contribution may vary. Many defined benefit funds have converted to defined contribution funds because employers are no longer willing to take the risk of carrying any shortfall in the pension promised to fund members.
Participating employer:
This is the organisation or company for which the fund members work and which makes contributions to the fund on behalf of its staff.
Trustee held liable
In a ruling last year, Vuyani Ngalwana, the Pension Funds Adjudicator, held a trustee personally liable for the losses suffered by the beneficiaries of a member of the Art Medical Equipment Pension Fund.
MG Thobois, the sole trustee of the fund and managing director of the company, was found to be "grossly negligent, if not dishonest," and of "flagrantly breaching his duties as a trustee" when he allowed a group life assurance policy to lapse, thereby depriving the beneficiaries of a fund member of a death benefit.
The Art Medical Equipment Company, as well as the fund were liquidated, so Ngalwana ruled that Thobois pay the death benefit.
Trustees have a duty under the Financial Institutions Act to observe the utmost good faith and exercise care and diligence in executing their powers and duties, Ngalwana said.
Getting the message across
One pension fund that knows better than most how to communicate with its members is that of the diamond company De Beers. Year after year, it is either the winner or runner-up in the Institute of Retirement Funds/ Personal Finance Communications Award.
Most retirement funds do the bare minimum to communicate with their members. They send their members the required benefit statement once a year and that is that.
De Beers has a multi-pronged approach to communication, aimed at both contributing members and pensioners.
Andy Wingreen, the manager of the De Beers Pension Fund, attributes the success of the fund's communication strategy to the "passion of the management team to empower our members through effective communication".
Wingreen says the team has come to understand that true communication is not a one-way channel. "It's not about telling people what you want them to know or, worse, what you have to tell them to comply with legislation. Rather, it is about helping people to receive and understand the information they want and need; about empowering them to make informed decisions and take meaningful action that will result in financial security into their retirement."
He says to achieve this the fund does some research. Small, informal focus groups are held with members and pensioners over coffee and biscuits to get feedback on expectations, levels of knowledge and communication preferences. These same focus groups are again used later, to evaluate the success of communication initiatives.
Then measurable outcomes-based objectives are set, such as what the members should think, or preferably do, after getting the message.
Only then is the "how" considered, with consideration given to whether to send out a newsletter, compile a booklet, produce a CD-Rom or have face-to-face presentations to get the messages across.
The De Beers fund communicates, where appropriate, in different languages, but in such a way as not to duplicate costs. Instead of sending multilingual communication to all members or pensioners, for example, the fund has analysed the member database so that each member can receive a bilingual document. Presentations are done with the aid of interpreters, where necessary.
The De Beers fund also addresses the particular information needs of its members in different ways. These include:
- Pre-retirement workshops.
Members of all literacy levels have been found to absorb information best in this personalised, face-to-face and interactive format. Targeting members (and their spouses) over the age of 45, these workshops aim to empower members to approach their retirement in a more structured and prepared way. The full-day workshop covers not only fund-related and financial issues, including wills and estate planning, but also the psychological, health and practical aspects of retirement.
Much of the information is presented by a De Beers pensioner (rather than a younger fund staff member) to add credibility. Interpretation in languages other than English, where necessary, ensures that all members understand the information.
- Explaining the fund benefits.
The De Beers Pension Fund is a defined benefit fund, where the final pension is dependent on the member's final salary and number of years' service. However, trying to communicate mathematical formulae to sometimes semi-literate members was found not to be the best way to go about explaining the fund's benefits. A presentation and a graphic pamphlet have been designed to simplify the formulae into a graphic concept. The concept is to equate a member's normal pensionable monthly salary (at retirement) to a full loaf of bread, and then to show how this loaf could diminish with fewer years' service, on taking cash lump sums and/or incurring early retirement penalties.
- Pension calculator wheel.
The wheel, which has been developed by the fund, allows members more flexibility to explore different retirement age scenarios. This manual calculator was developed to allow members to calculate what percentage of their salary they can expect to receive, based on their years' service and age at retirement.
- Cartoon pamphlets.
Short cartoons have recently been introduced to convey one or two "simple" messages, which, if stated by the fund rather than a cartoon character, may be found to be potentially insulting to people's perceptions or understanding.
- Newsletter.
In our age of information overload, the newsletter is purposefully kept to only four pages. Information is "chunked" for ease of reading, while liberal use of white space and functional illustrations helps make traditionally "boring" fund information more accessible. The communication team believes that this newsletter should be understood by grade seven learners.
This article was first published in Personal Finance magazine, 1st Quarter 2006. See what's in our latest issue