For trustees to allow a serious conflict of interest to continue unmanaged is a betrayal of trust, and that trust is the essence of the fiduciary duty of trustees of retirement funds, Mickey Lowther, an independent consulting actuary, said at the recent Personal Finance/Old Mutual Actuaries & Consultants seminar on retirement fund governance in Johannesburg.
Conflicts of interest that may undermine good corporate governance can present themselves in many different ways to a trustee of a retirement fund, Mickey Lowther says.
Lowther says retirement fund trustees are bound, or will soon be bound, by common law, the Pension Funds Act, and a proposed Financial Services Board code of conduct on how to deal with conflicts of interest.
Examples of conflicts of interest for a trustee include:
- Being offered incentives by a service provider so that the fund will use its services; and
- Dealing with an adviser who provides both asset consultancy and asset management services, or who advises both the trustees and the sponsoring employer.
Lowther says it is not sufficient for trustees merely to declare conflicts of interest. Instead, trustees must properly manage these conflicts in the interests of the fund's members.
Managing conflicts of interest is a four-step process. The steps are:
Step 1: Identify a potential conflict of interest
Lowther says in any financial relationship where there is an element of trust, a fiduciary obligation is placed on the person in whom the trust is placed. Trustees cannot do such things as secretly enrich themselves at the expense of retirement fund members.
Step 2: Evaluate the potential conflict of interest
Lowther says trustees must evaluate the likelihood for potential conflicts of interest to arise, as well as the severity of the likely loss to fund members arising from such a conflict. Trustees need to evaluate whether or not the potential conflict of interest will:
- Create a situation where the trustees will become liable for any loss to fund members; and
- Result in a transgression of the Pension Funds Act.
Step 3: Mitigate the potential conflict of interest
Lowther says the potential for conflicts of interest to arise can be reduced if boards of trustees have written procedures for such things as selecting the fund's service providers and how the fund is governed, as well as a code of conduct.
Boards of trustees should require service providers to disclose to the fund such things as cross-ownership with other service providers and the incentives paid to their staff to get new business.
Ideally, the fund's advisers should be independent of the fund's service providers. However, Lowther says, there are times when this cannot be achieved. For example, there may not be a sufficient number of qualified, independent advisers or service providers.
In such cases, boards of trustees or individual trustees should pro-actively raise the issue, disclose the conflicts of interest, and reach agreement on whether they are not "fatal".
Service providers must be asked upfront to undertake liability for problems that may arise from a conflict of interest. A service provider must be required to disclose all fees and commissions, provide written reasons for advice given to the trustees, and insert "an escape clause" in a contract of service that will allow the trustees to cancel the contract if a conflict of interest cannot be properly managed.
Step 4: Review
Lowther says the last step in any process of risk management is a regular review of progress (say, every six months). This becomes step one of the next process.
He says one of the good governance procedures that should help trustees manage conflicts of interest is a trustee code of conduct. He says although codes of conduct are being drafted by regulators, "best practice" cannot be legislated - it must be voluntarily adopted by trustees.
A good code of conduct, he says, will include the need to disclose to fund members such things as the code itself, what remuneration trustees receive, how the performance of trustees is evaluated, and what steps will be taken if trustees do not meet the required standards.
See also: Know your rights for own protection