Issue: Mar/May 2011
Back to Basics 2


Thanks to the FSB for having compiled and provided this hypothetical case study. It will be serious fun for trustees to do the exercise. No prizes for making the right decisions.

Following a trustee election in November, you have been elected as a member trustee of Fairest Cape Promotions Pension Fund (“the Fund”). Its registered office is at 45 Cable Car Road in Cape Town. The participating employer is a company, Fairest Cape Promotions (“Fairest Cape”), which aims to promote tourism in the Northern and Western Cape provinces. The main revenue stream of the company is by public donations and grants from these provinces. Administration of the fund is outsourced to Shady Employee Benefits (“Shady EB”).

As a new trustee, you have already received your Trustee Welcome Pack and attended trustee training. You are eager to get up to speed before your first board meeting, scheduled in three weeks’ time. You have requested the following information from Shady EB to obtain some background on the fund:

  • Minutes of board meetings for the last two years;
  • Latest set of rules;
  • Latest set of approved financial statements;
  • Latest actuarial valuation;
  • Administration reports for the previous meeting.

On scrutinising the information provided, you became suspicious of various matters and obtained more information from Shady EB. You made a number of discoveries, as follows:

The last three meetings were held without a properly constituted board.

  • The minutes indicated that there was a member-trustee vacancy in the Northern Cape province;
  • The fund rules provided for a board comprising two employer-nominated and two member-elected trustees, but lacked provision for alternates. The principal officer was also an employer-nominated trustee;
  • The rules further defined a quorum as a minimum of four trustees.
  • You noted that important decisions were taken in respect of, in particular, the appointment of Shady Investments as investment manager and the approval of two death claims.

The financial statements reflected a large amount in respect of trustee expenses.

  • The administration reports indicated that each trustee was entitled to receive a monthly cellphone allowance of R300. Nevertheless, in addition to the allowance, the cellphone claims of all trustees were settled in full. Upon further investigation, you found that the average monthly bill was R1 400 per trustee.
  • The administration reports revealed monthly expenses in respect of laptop rentals and Internet 3G card usage for each trustee. You noted that all the trustees each incurred monthly bills of R2 000 or more, indicating a probable misuse of the facility. The minutes did not contain any concerns or remedial action by the trustees or by Shady EB;
  • There was no record of a fair-usage policy or conditions of use;
  • The principal officer signed off on all expense claims, including his own.

The minutes indicated that trustee meetings were held in exotic locations alternating throughout the two provinces.

  • The minutes showed instances where trustees debated the issue of staying over the night prior to the trustee meeting and who would be liable for associated costs, as the Travel & Accommodation policy did not allow for stayovers;
  • The venues were, in most cases, not only large distances away from major airports but were casinos, game farms or wine farms with four-star ratings or higher. The Travel & Accommodation policy specified three-star hotels only;
  • Your investigations further revealed that in cases of such stayovers, and contrary to the funds’ Travel & Accommodation policy limiting the consumption of alcohol, copious amounts of liquor were consumed at dinners and paid for by the fund;
  • Contrary to fund rules, which forbid any remuneration of trustees, each trustee received a tax-free allowance of R5 000 for each meeting attended.

You compared the amounts spent in respect of car rentals and air fares noted in the administration report with the tariffs of well-known service providers via their websites.

  • The Travel & Accommodation policy allowed for a maximum of a Class B vehicle and an economy-class air ticket;
  • The cars utilised for travel to the said venues were luxury German vehicles and air fares were business class;
  • You noted that in respect of trustees who did not make use of air travel for a particular meeting, and rather elected to drive to the meeting venue, a number of similar (in value) claims were lodged, despite the trustees travelling from different towns. This appeared to indicate that all the occupants of a particular vehicle, not only the driver, lodged travel claims.

The fund used a subcommittee to evaluate death claims.

  • The subcommittee comprised the principal officer and a member-elected trustee;
  • There was no evidence of a mandate to regulate the functions of the subcommittee;
  • Benefits allocated to beneficiaries were based on a fixed formula;
  • Benefits to minors were placed in a trust, regardless of the circumstances;
  • The minutes did not indicate whether the decisions taken were ratified by the board.

You were concerned at the level of fidelity cover employed by the fund

  • According to the latest financial statements, the fund had an asset base of R456m;
  • The fund had a high incidence of deaths across all spheres of membership, based on a 3x annual salary reinsured benefit;
  • Fidelity cover was pegged at only R1m.