This presentation covers the fiduciary duty of trustees, how good governance of pension funds is measured and more...

1. Good Governance of
Pension Funds
Presented by J Mort, Director, Jonathan Mort Inc
10X Pension Fund Conference
24 July 2013

2. Agenda
• Why is it so important for trustees to understand their fiduciary duty to
members?
• How do you measure good governance of pension funds?
• What should you look for when assessing the governance arrangements in
umbrella funds?
• What are the risks for employers and members in umbrella funds?
Governance of Pension Funds

3. Fiduciary Duty
• A fiduciary duty exists if the following 3 characteristics all apply :
•There is scope for the exercise of some discretion or power;
•This power or discretion can be used unilaterally so as to affect
another person’s legal or practical interests;
•There is a peculiar vulnerability of the other person to the exercise
of that discretion or power.
See Phillips v Fieldstone African (Pty) Ltd (2004) 1 ALL SA 150 (SCA)
Fiduciary Duty of Trustees

4. • Trustees owe a fiduciary duty to members and beneficiaries
See Tek Corp Provident Fund v Lorentz [2000] 3 BPLR 227 (SCA)
Meyer v Iscor Pension Fund [2003] 3 BPLR 4427 (SCA)
Preamble to Reg. 28
Fiduciary Duty of Trustees (cont)

5. • The fiduciary duty owed by trustees is in respect of accrued benefits only.
• There are 3 consequences if a fiduciary duty is owed :
•A fiduciary owes a duty of loyalty to the beneficiary and may not
permit his personal or other interests to interfere with this duty as fiduciary;
•A fiduciary must account to the beneficiary about the state of
investment and the beneficiary’s share;
•There is an automatic duty of care of the trustees towards the
beneficiary.
• Trustees also have a fiduciary duty to ensure the financial soundness of
a fund, but the primary duty is that to the members and beneficiaries.
Fiduciary Duty of Trustees (cont)

6. • This is determined according to whether the governance purposes have
been achieved. There are 4 governance purposes :
•That the benefits promised by the fund are delivered;
•That these benefits are optimal within an appropriate level of risk;
•That the costs of providing such benefits is transparent and
justifiable;
•That the process of providing these benefits can reasonably be
trusted by the stakeholders of the fund.
(Stakeholders being the members, beneficiaries, employer, sponsor and Registrar of Pension Funds)
How do you Measure Good Governance of Pension Funds?

7. • These 4 purposes should inform every decision by the trustees:
- how the trustees govern themselves,
- how the trustees govern the fund business and
- how the trustees manage the fund’s relationships with its
stakeholders.
• For example – annual board appraisal
- trustee remuneration and expense policy
- investment arrangements
- management of service providers
- communication policy
How do you Measure Good Governance
of Pension Funds? (cont)

8. Four main areas :
• quality of the board of trustees;
• quality of administrative systems in benefit administrator;
• investment arrangements;
• costs.
What should you look for when assessing the
governance arrangements in umbrella funds?

9. Quality of the board of trustees
• independent trustees must be genuinely independent;
• independent trustees must preferably be at least ½ the board, and have
expertise and experience as trustees;
• sponsor trustees are usually operational trustees as well, and important to
have a sense of their operational capability and skills;
• the board is able to demonstrate a 4th
governance purpose especially.
What should you look for when assessing the
governance arrangements in umbrella funds? cont

10. Benefit administrator’s operating system
• very complex to administer an umbrella fund;
• significant losses have been suffered by members because of the need to
have data rebuilds as a result of poor administration systems;
• PF 130 requires :
“a regular review, preferably with the assistance of independent external
advisers, of the information processes, operational software systems, and
accounting and financial reporting systems involved in the operation of the fund.”
What should you look for when assessing the
governance arrangements in umbrella funds? cont

11. Investment arrangements
• How does the sponsor benefit from the investment arrangements of the
umbrella fund?
• If there is member investment choice :
•is the default option appropriate?
•how many members exercise member investment choice?
•is there a captive investment arrangement?
• Are the investment charges fully disclosed and benchmarked?
• Is the investment performance stated as being after investment costs, and
against both an appropriate benchmark and inflation?
What should you look for when assessing the
governance arrangements in umbrella funds? cont

12. Costs
• Umbrella fund costs are high because umbrella funds are much more
complex and more difficult.
• Are the costs able to be compared with other umbrella funds?
• Is there disclosure of the total costs on an average of per member share
given, and expressed as a percentage and Rand amount?
What should you look for when assessing the
governance arrangements in umbrella funds? cont

13. • Employer, not members, determines which umbrella fund;
• Important for employer to do a proper due diligence of the umbrella fund :
•Do the trustees appreciate the governance purposes?;
•What are the cost involved?
•Are the investment arrangements appropriate?
•How sound are the administrative systems?
• Employer may have a liability if no proper due diligence.
Role of Employer in Umbrella Fund

14. The main risks are :
• Poor benefits at retirement, death or withdrawal, either through high costs
or poor investment return or both;
• Risk of poor governance in the fund, resulting in loss to members through,
for example, the need for data rebuild or litigation;
• For the employer, poor pension fund arrangements are an employee
benefit issue which may jeopardize labour relations.
Risks for Employers and Members
in Umbrella Funds

15. •Trustees owe a fiduciary duty to members;
•Trustees must understand and apply 4 governance purposes;
•Significant risks and costs in umbrella funds;
•Employer has important role to play in ensuring good governance.
Conclusion

16. Thank you