Do you know how your retirement fund works or have you relegated your retirement fund to the back of your mind until the day arrives for you to receive your nest egg? Selwyn Feldman, an executive consultant and actuary at Old Mutual Actuaries & Consultants (OMAC), discussed best principles and practices for retirement funds at a Personal Finance/OMAC seminar on retirement fund governance in Johannesburg recently.
Growing consumerism, complex legislation, corporate failures - here and abroad - and the publication of corporate governance reports, such as the King Report and the Myner's Review in the United Kingdom, have all had a significant impact on the responsibilities of retirement fund trustees.
There is now a greater recognition of the fiduciary role of trustees and the consequences of mismanagement.
Trustees need to do the right things, and as importantly, retirement fund trustees need to be seen to be doing the right things, Feldman says.
He says every retirement fund needs a governance framework that:
- Identifies the major interested parties, such as the employer or sponsor of the fund, the employees and the board of trustees;
- Defines the purpose of the fund, sets out its objectives, defines the relationships between the various parties and defines their roles and responsibilities; and
- Establishes the fund by setting out the benefit structure, legal compliance procedures and rules relating to, for instance, the appointment of trustees and what should happen if the fund is liquidated.
Your board of trustees has the primary responsibility for your retirement fund, but there are also other organisations and individuals which have a role to play and assist the trustees with their task. These include the regulator, the principal officer, the valuator, the auditor and suppliers of services, such as consultants, administrators and asset managers.
Feldman says the three main duties of the trustees are to ensure that the fund complies with the law; makes appropriate investments; and is properly governed.
The trustees must ensure that your fund complies with all the relevant laws and regulations. This function includes keeping proper records, maintaining proper control systems, communicating with members, ensuring the timeous payment of contributions, obtaining expert advice and appointing the auditor, actuary and principal officer of the fund.
Newly revised regulations to the Pension Funds Act will require the appointment of an investment consultant and the design of an appropriate investment strategy for the fund.
Feldman says the governance role of trustees includes designing a business model for the fund. For instance, defining the fund's various functions and clearly demarcating the roles and responsibilities of the board, its committees and the executive.
The executive committee has to ensure good governance in the fund. To do this, it must adopt and maintain policy, appoint and monitor service providers and appoint sub-committees with clear mandates.
A fund can have sub-committees to take on various tasks. For instance, there could be a sub-committee to monitor whether the fund is attaining its objectives, another to monitor whether role players, such as administrators and asset managers, are doing their jobs efficiently, and another to ensure that trustees are competent and act with integrity. A board can also have sub-committees for the executive management function, for finance, for administration, for trustee management, for education and for remuneration.
The sub-committees should carry out their mandates, reporting to and making recommendations to the board of trustees. And, if necessary, trustees should appoint extra members to complement the knowledge and skills base of the committee.
Feldman says trustees should not hesitate to seek expert advice where it is lacking.
Daily operations
The principal officer of your retirement fund is essentially the chief executive officer of the fund and carries the executive and operational responsibility for the fund.
The tasks of the principal officer include a secretarial function for the board, the administration of the fund (such as keeping member records, accounting and paying out benefits to members), as well as the ongoing compliance with the fund's rules.
The principal officer is also responsible for communicating information about the fund, by providing members with information about benefits, providing advice and paying out death benefits to members' dependents. The principal officer's other duties include reporting to the board of trustees, project management and assessing how regulatory and other changes affect the fund.
Good governance
Feldman says effective governance of the retirement fund requires:
- Time and effort;
- A disciplined approach;
- Attention to detail; and
- Continuous focus.
Following processes and procedures does not offer certainty, but can lower the risks that a fund faces.
Often it is the soft issues that will make the difference to how well a fund functions and is managed, Feldman says. Soft issues include the attitude of the trustees and staff appointed by the fund, their values, their sense of responsibility and their willingness to take action.