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Pension Funds
Thursday, November 1, 2007
Circular rules

In the aftermath of the Fidentia scandal, trustees may feel uncertain of their ability to avoid unscrupulous financial service companies. While this is largely an issue of trust, well-considered application of the principles contained in the Financial Services Board’s Circular PF130 could go a long way to helping funds avoid bad apples.

The principles in the circular contain guidelines for the governance of the board of trustees, the governance of fund operations and the management of stakeholders.
Craig Aitchison, Head of Old Mutual Actuaries and Consultants, in addressing a meeting of retirement fund trustees and principal officers in Johannesburg and Cape Town, said the aim of PF 130, issued earlier this year, was to streamline the principles of good governance for the trustees of retirement funds and to bring together the major principles in a single document.
“These principles and guidelines are definitely not just more red tape but, if applied by all retirement funds, should improve fund governance and help all stakeholders to run funds properly and in the best interest of its members.” They shold also help trustees to untangle red tape.
By way of illustration, Mr Aitchison cited Principle 1 which outlined the roles and responsibilities of the board, the chairman, the principal officer and the trustees. He stressed that trustees had to act independently of their constituency and that the board was required to have a Code of Conduct, including a gift policy, acceptance form and a declaration of their interest.
He said that where services were delegated to service providers, such service providers had to be subject to regular in-depth performance appraisals. “This could bring any conflicts of interest to the fore. When a service provider is appointed, the trustees should not consider only price and performance, but make a more in-depth assessment of the service provider and its capabilities. Therefore a clear set of written rules about the evaluation and appointment of service providers is critical for a board.”
Where independent expert advisers are appointed to assist a fund, he advised trustees to ask for assurances that they were truly acting independently.
Questions that trustees should be asking were:
• Is the advisor linked to a financial services company?
• What assurances can they provide that they are acting independently?

“If there is any doubt in the trustees’ mind, they should conduct independent checks on the consultants. This is important because the trustees are responsible for decisions based on the expert advice given.” He also urged all funds to create a risk management policy and to update it annually.
“A retirement fund can only explore efficient ways of dealing with risk once it is identified. Trustees are advised to step back and consider areas where things can go wrong, then to ask themselves if they would be protected from any massive governance failure.”
According to principle 8 in the FSB’s circular all retirement funds should have an Investment Policy Statement (IPS) and update it annually.
“If you can’t remember when it was last updated, it was too long ago,” said Mr Aitchison, who emphasised that the IPS needed to capture the complex circumstances of the fund and that the trustees had to be satisfied with the investment mandates.
Members and beneficiaries could only make appropriate financial decisions if they had an understanding of the rules of the fund and all relevant developments. Trustees were therefore obliged to have a communication policy statement in place in line with minimum disclosure standards.
“It may not be good enough for a fund to send out a regular newsletter to fund members. It should also schedule other forums where issues such as, what may be raised at an annual general meeting, are clarified. This affords members an opportunity to come to grips with their fund,” he said.
Mr Aitchison said the relationship between a fund and its sponsor should be one of mutual cooperation, independence and good faith and that communication between the fund and the sponsor had to take place through the chairman.
“This is important, because a retirement fund is a separate legal entity. Trustees who serve on the boards of retirement funds should avoid bringing work-politics into their fund and should concentrate only on running it in the best interest of its members.”
Yet, simply following the instructions set out in PF130 may not be enough. Funds will benefit from this circular to the extent that they apply the principles in a way that is appropriate to their needs. Trustees that treat PF130 as a laundry list of tasks are denying themselves the opportunity to get to grips with the governance issues in their funds and recent experience has shown just how devastating the consequences could be.

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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