A survey by PricewaterhouseCoopers (PWC) reveals that there is a serious lack of skills and knowledge among pension fund trustees and that few funds have a policy on how to manage conflict of interests among trustees. These are the issues at the heart of the Fidentia scandal.
In many cases, especially with smaller pension funds, people’s retirement money is left in precarious hands.
The survey, which represents the responses of 110 chairpersons across a wide spread of retirement funds, showed that more than a quarter of trustee meetings are either not fully attended or that not all trustees have read the papers in advance.
Forty-one percent of trustees have not assessed whether they have appropriate knowledge and understanding to fulfil the role — for example, even lacking the basic understanding of the Pension Funds Act — and 81% of trustee boards have never evaluated their effectiveness.
This means they have no process to check that financials are done on time, that benefits are paid out timeously or whether members are actually happy with the performance of the trustees.
Gert Kapp, PWC national retirement fund leader, says these issues are particularly relevant in South Africa, where there are a greater number of defined contribution funds. This means that members rely completely on the performance of their contributions to fund their retirement and therefore carry the full risk if the fund is not managed properly. Yet, despite the members carrying the risk, boards of trustees have very little communication with members.
Apart from not keeping them informed, some funds do not ask for trustee input when setting their agendas, which means that the advisers of these funds would tend to play an unduly influential role, according to Kapp. This is particularly worrying as the survey showed that, although trustees relied heavily on the advice of their advisers, the majority of chairpersons were not comfortable with the process of appointing advisers, which include the administrator, asset manager and auditors.
The majority said the process was not standardised and the selection was subjective.
Nine percent of respondents admitted that they never reviewed the performance of advisers.
Kapp says these problems tended to be common among the smaller funds, which do not employ the services of professional trustees.
The United Kingdom has shown a similar trend to South Africa, with the skills and knowledge of trustees not being a top priority.
But, Kapp says, this has changed over the past few years since the UK introduced legislation in 2004 that required trustees to complete a certificate of competence.
Nevertheless, it still remains an issue in the UK and Kapp believes the root of the problem is the shortage of professional trustees. “The reason this issue scores low in both countries is that trustees are not remunerated,” says Kapp.
He adds that larger pension funds tended to score better than smaller funds as they tend to have professional trustees. After all, with the personal liability that a trustee has to accept as part of the position, who would want the job?
Pension fund rules require that 50% of trustees are drawn from staff, which Kapp says tends to be the person who is the most popular rather than the most appropriate.
This is borne out by the numbers, which show that 48% of trustees are chosen with no regard for their knowledge or skills.
Kapp says it is not surprising that the level of trustee knowledge is so low, considering that the person is not paid for the job, so is therefore less likely to take the time to improve their skills. Yet, if trustees are not carrying out their job, the fund’s performance could suffer.
“The time for the professional trustee has come,” says Kapp, who argues that the increased cost to the pension fund could be offset by better performance by the fund as a result of more effective decision-making.
Although, as the recent conflicts of Danisa Baloyi show, payment does not make for better trustees — especially if there are major conflicts of interest. The survey revealed that conflict of interest and corporate governance were also not high on the list of priorities. Although South Africa scored well relative to the UK in adhering to fund rules, there are serious issues around corporate governance.
“Only 15% of funds surveyed had a policy around managing conflict of interest, which is very worrying,” says Verwey Wieze, PWC Cape Town director. One just has to look at the Fidentia debacle to understand that conflict of interest is a very real problem in the industry.
Wieze also says that only 29% of funds surveyed had assessed their corporate governance compliance in line with King II, compared to 92% of funds in the UK. Sixty-one percent of funds did not have a formal corporate governance mandate, despite a requirement by the Financial Services Board (FSB) for funds to complete a questionnaire in this regard.
Kapp says industry rumour is that the response rate has been low, requiring the FSB to extend the deadline to the end of this month.
Wieze says that in the UK they have now also introduced a whistle-blowing stick and trustees who do not report anomalies to the regulator will personally be fined £5000 (about R70800), and a larger pension fund company could be fined up to £50000.