Issue: Mar/May 2011
Back to Basics 5


Key questions for trustees, on issues too often overlooked. Ian Haigh, senior consultant at Old Mutual Corporate, sets them out.

Here’s a guide, based on practical experience of retirement funds’ general practice.


Haigh . . . at the coalface

What do the trustees and employers do to ensure that new members of their fund or umbrella fund understand the investment choices available to them?

  • Do fund trustees and employers encourage members to speak to a financial advisor to obtain investment guidance before making an investment choice in a fund? Some funds ask the member to confirm in writing, on joining the fund, that the member has sought investment advice from an accredited advisor before making their choices;
  • Do fund trustees and employers ensure that members continually review the investment choices they have made? More should be done on an annual basis than simply sending out a benefit statement;
  • Is your communication at the right level of understanding for your members? Do your members really understand the choices available to them?

Is the correct default portfolio being offered by funds?

Without adequate investment knowledge and/or communication, members tend to end up in the default portfolio if they are given investment choice. It is therefore important for trustees to consider carefully the most appropriate risk-profiled investment strategy for the default portfolio.

Should funds be offering a cash portfolio as an investment option or as a default option?

  • With lower interest rates, is cash an appropriate investment vehicle for long-term growth? There are investment vehicles that offer market-related growth with capital guarantees;
  • Is your asset consultant reviewing the appropriateness of having a cash portfolio available to members?
  • Is your administrator advising you of members who have been in a cash portfolio for more than six months?

Why do many trustees make a decision to appoint a new service provider based on a tender and presentation?

Service providers may have slick presentations. That is not what you are buying. Trustees need to ensure they are asking the right questions of the service providers and of the references provided. Proper research is needed to check the credentials of the service provider before a decision to appoint is made.

Are trustees regularly benchmarking the service providers?

How often do you actively go to tender for your various services? Trustees should ensure that service providers are delivering the best service at the best price by regularly benchmarking their service to the industry. There are ongoing changes and trustees need to ensure they know what is available. One way is by going out to tender on a frequency that is appropriate for the fund e.g. risk benefits reviewed annually and administration services reviewed every three to five years.

Do trustees know the ideal components of a service-level agreement?

At present there are few standard benchmarks on which to measure service providers’ deliveries. Service providers draw up service-level agreements and many funds’ boards do not challenge some of the more contentious clauses. These agreements need to be regularly reviewed to ensure the agreements and clauses are still relevant. What are the penalties on the fund, employer and the administrator for late and non-deliveries? Are these penalties documented?

Why are employers and trustees not assisting members leading up to the critical time of decision-making at retirement?

Members will need information that includes the implications for taking cash; the types of annuities available in the market, and the pros and cons of each annuity. This should be done well before retirement date. Your administrator should be advising you of those people nearing retirement. Members have saved all their working lives to reach this point only to be left to make one of the most important financial decisions of their lives. They might possibly purchase an inappropriate annuity for their needs or, even worse, take it all in cash.

When a member retires, do funds ask their members to sign an indemnity form - before any money is paid out - in order to protect the trustees?

You may wish to consider implementing an arrangement with your administrator that an indemnity form is signed by the member and spouse (if applicable) before money is paid from the fund to the annuity provider. This is to protect trustees from repercussions on decisions the members make when purchasing a pension.

The indemnity could include:

  • Full and final settlement of all claims against the fund;
  • Ackowledgment that the fund provided no advice;
  • The member has carefully considered the choice of insurer and appropriateness of the annuity;
  • The spouse would acknowledge that he or her has been duly consulted by their spouse, has consented to the annuity, and has no further claim against the fund.

This is not too much to expect of your trustees, is it?