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