Members of retirement funds should be afforded far greater insight into how their retirement savings are being managed, Jonathan Mort, the chairperson of the Pension Lawyers Association, says. Mort, who is also a director of law firm Edward Nathan Friedland, was speaking at the recent Personal Finance/Old Mutual Actuaries & Consultants retirement fund governance seminar.
You, as a member of a retirement fund, should be entitled to receive a lot more information about your fund than is currently the case, Jonathan Mort says.
Furthermore, he says the Pension Funds Act should be amended to make it easier for you to sue your fund's trustees if they do not manage your retirement savings properly.
Mort says the rights of members should be strengthened in a number of respects. These include:
- Tougher legislation to make trustees more legally culpable to members.
In terms of company law, Mort says, shareholders have a right to sue a director for a loss suffered by a company as a result of any act or omission by that director.
This right applies even if the person concerned is no longer a director of the company, and even if the com-pany's existing directors have condoned the act or omission.
Mort says that although the courts would probably find that this right also applies to retirement fund members, it should be specifically written into the Pension Funds Act.
Among other things, he says, this right would mean that a fund member would not have to try to quantify his or her loss (establish the exact amount of money he or she lost) before suing the trustees for bad management. Instead, the member could sue the trustees for any loss suffered by the fund overall as a result of the trustees' mismanagement.
- The introduction of annual general meetings (AGMs).
Mort says the meetings should be similar to those held by companies. However, Mort says he does not think that fund members should have the power to pass resolutions binding on trustees, as shareholders can in respect of company directors.
He says if retirement funds held AGMs, it would force trustees to explain their actions and to demonstrate their competence in administering the fund.
- Entitlement to more information.
Mort says your rights as a member could be enhanced if you were entitled to more information about your fund. Currently, you are only entitled to the annual financial statements and a valuation report (if the fund is subject to actuarial valuation).
Mort says he would like to see this extended to information relating to the remuneration and expenses of trustees and the costs charged by service providers. Such information would enable members to assess whether or not their fund is being managed in a cost-effective way.
"I have heard horrific stories about the actual capital cost per member (sometimes up to four or five percent of the assets under administration), and if such costs were more widely known there would be more competition, which would result in a savings for the funds, and ultimately the members," he says.
Need for clarity
Mort says a number of issues concerning the governance of retirement funds need to be more carefully defined. These include:
- Member investment choice.
Mort says it is unclear whether the investment choices offered to members amount to a delegation by the trustees of one of their responsibilities. The issues that need to be resolved in this regard include:
- Whether trustees remain ultimately liable for an individual member's investment choice - particularly if the investment sours; and
- Whether trustees could be found liable for not offering a sufficiently comprehensive list of options or for offering too many options - again, particularly if incorrect choices were made or if other choices which gave better returns were not available.
- Investment mandates.
Mort says many of the investment mandates trustees give to asset managers "are woeful".
Investment mandates, which are instructions from trustees on how a fund's money should be invested, "should be clearly spelt out".
Mort says mandates should deal with issues such as penalties for inadequate investment performance.
- The appointment of independent trustees to retirement funds.
Mort says independent trustees have a valuable role to play in fund governance, particularly in the case of umbrella funds and retirement annuity funds, where the funds do not have elected trustees.
Elected trustees of umbrella and retirement annuity funds should be answerable to the Registrar of Pension Funds and empowered to report directly to the registrar in matters of concern to them.
In all cases where the governance of a retirement fund is problematic, Mort says, the registrar should have the power to impose one or more independent trustees, who should report directly to him or her.
- Investment regulations.
Mort says draft regulations which set down new rules for how retirement funds can invest money should be made law as soon as possible in the interests of good governance. He says the draft regulations are "vastly superior" to the existing regulations.
- Removal of trustees.
Mort says the Pension Funds Adjudicator and the Registrar of Pension Funds should have the power to remove trustees without having to apply to the High Court in cases where it is clear that there has been serious breach of corporate governance.
- Delegation of trustees' powers.
Mort says there are significant problems concerning whether or not trustees can delegate some of their responsibilities. Among other things, clarification is required on whether service providers to whom powers are delegated also have a fiduciary obligation to the fund and its members.
Mort says, in his view, service providers - consultants, fund administrators and asset managers - do have a fiduciary duty to members.
He says court cases concerning non-retirement fund issues have found that service providers do have a fiduciary duty to members and can be found liable when things go wrong.
Mort says it would be better if fund members did not to have to rely on an extension of a principle of law to ensure that the fiduciary obligations they are owed are upheld. Instead, the principle should be clearly established in the new Pension Funds Act.
Mort says clarifying fiduciary duty would also help prevent many of the conflicts of interest involving service providers, particularly where the same service provider is providing more than one service to a fund.
Rethink needed on home loans
There needs to be a major rethink on retirement funds granting home loans to their members, Mort says.
Mort says the practice may result in a number of problems that affect all the members of a fund. In addition, members' retirement savings may be undermined. The problems identified by Mort include:
- Debt administration orders, which are granted in terms of the Magistrates Court Act, sometimes result in the borrower not having to pay interest on the loan. Mort says there are proposals to resolve this problem by amending the Magistrates Court Act.
- Members are sometimes granted loans shortly before they transfer to another fund. The loan is paid out before the transfer takes place. Mort says this should not be allowed, because it is of paramount importance that a fund preserves its benefits. "To allow this is an effective loophole in this principle," he says.
- Employers not deducting the interest due to the fund from a member's salary. As a result, the unpaid interest is capitalised (added to the loan, with interest being charged on the interest) and the member becomes incapable of servicing the loan. Mort says in such circumstances where the employer is at fault, the employer should have to carry the cost in the form of an interest-free loan to the member.