Issue: July/August 2005
Editorials

PRINCIPLES FOR PRINCIPALS

Ewing
Ewing . . . standards must be
formalised

Every retirement fund must have a principal officer who executes the instructions of its trustees, similar to a chief executive’s relationship with is directors. Unlike chief executives, in whom company employees usually show intense interest for their immediate welfare, the role of principal officers enjoys lesser attention although the future welfare of fund members relies heavily on the expertise they bring to bear. They comprise the unsung hard core of the industry, with responsibilities ever more challenging.

Take a guess who said this: “The closest thing I’ve ever had to an accounting course is a preliminary course in economics. I know what I don’t know, and to this day I don’t know technology. I don’t know accounting or finance.”

No, it wasn’t some poor unionist suddenly rebuked for falling down in his duties as a retirement-fund trustee. Neither was it a managing director in his annual report. It was Bernie Ebbers, former chief executive of WorldCom, on trial for fraud in one of the biggest corporate scandals to have hit the United States. Now convicted, Ebbers is going to jail.

Pleas of ignorance don’t work, criminally or civilly, whether in running companies or retirement funds. People who accept fiduciary roles are assumed to have basic skills for fulfilling them. Since the financial sophistication of fund trustees is not always at the highest level, reliance on a fund’s principal officer is the greater.

Yet the only requirement of a “principal executive officer”, says the Pension Funds Act in stipulating that every registered fund must have one, is that he or she be resident in South Africa. It’s as basic as that, even without a regulation that they be “fit and proper”. The letter of the law makes compliance deceptively easy, certainly unreflective of stature and function; certainly too hit-and-miss for competence and efficacy.

Neville Ewing, managing director of the Principal Officers Association (POA) and principal officer of the SA Breweries Staff Provident Fund, emphasises the glaringly obvious: “There is now a critical need to formalise standards for accreditation. ”An increasingly complex environment requires increasing professionalism as a bulwark against the excuse, entirely unhelpful to fund members losing out on their savings, that key functionaries knew no better.

The role of the principal officer is not merely administrative. Especially in an industry where trustees come and go, where the rate of churn is high and the level of skill is low, this is the person who provides the continuity. This is the person who should ensure that trustees cover all strategic issues relevant to a fund, and to whom they’d look for guidance. This is the person who has to make sure that there’s compliance with applicable legislation in running the fund, and liaises on its behalf with the Financial Services Board (FSB).

The principal officer should also, by virtue of experience and knowledge, be in the strongest position to help trustees with interrogation of consultants so that appropriate mandates are selected and executed. Fundamentally, he or she must see to it that a fund can meet its obligations to members.

To do all this, principal officers obviously need a little more than South African residence. Effectiveness requires that they won’t be bamboozled by actuaries and accountants; that they’re familiar with the intricacies of investment management, administration and employee benefits; that they know about relevant law, meetings procedure, information technology, project and relationship management; that they’re comfortable as communicators.

Principal officers face different challenges depending on the size of a fund’s membership and the complexity of its benefits structure. They’re the lynchpins of their funds nonetheless. Historically, notes Ewing, no specific educational path was mapped out for an aspirant principal officer. Now, he emphasises, this must change.

A voluntary non-profit organisation, the POA is taking initiatives. It has active chapters in Johannesburg and Cape Town. A third is being established in Durban and next in its sights is Port Elizabeth. Regular workshops are held, not for teatime chats but for educational updates and provocative discussion on topical themes. Johannesburg workshops, held through a morning every two months, usually host over 100 members.

“Our people are sensitised to big changes taking place in the fund environment,” says Dion George, the livewire who chairs the POA training committee. “There’s a real need for what we do. When the new Act comes out, we’ll be ready.”

From a tiny base, in recent months the POA has rapidly grown to over 200 members. It’s difficult to guess how many principal officers there might be in total, but it’s potential membership should be far greater. In theory, 15 000-plus funds means as many principal officers; in practice, there’re a lot fewer because of umbrella funds’ proliferation and because it’s not uncommon for several funds to have the same principal officer.

It’s also difficult to guess because FSB records, to the extent that they exist, are out of date. As remarkable as the absence of accreditation is the absence of a means by which the FSB can know who must report to it. Neither is a legacy for new brooms at the FSB to leave as is.

In the narrowest sense, the principal officer’s duties are akin to a company secretary’s as the record keeper and reporter. But they go much further. For example, to:

  • Promote good corporate governance of the fund;
  • Ensure that contracts with service providers and consultants are complete on detail, then manage them;
  • Put in place an infrastructure that enables compliance with all aspects of the Pension Fund Act;
  • Have a good understanding of the process to be followed in formulating an appropriate investment strategy for each fund, including the setting of benchmarks and asset-manager mandates, then to supervise and monitor the strategy’s implementation;
  • Establish how socially responsible investments and shareholder activism should be pursued;
  • Know sufficient about actuarial issues to act as the main link between the fund and the valuator, and “take ownership” of the valuator’s assumptions, to understand the effect on the fund of each assumption change;
  • Oversee the daily operation and execution of trustee decisions, facilitating the process for them to perform their duties.

The list goes on and on. To prevent conflicts of interest, it’s preferable that principal officers don’t simultaneously act as trustees. But often they do, in which case their responsibilities are the more onerous.

For all this, what are principal officers and trustees paid? Usually nothing additional to their company salaries if it’s part of their job as say a financial or human resources manager, or if the trustee is elected by fellow employees. With independent outsiders, the fees paid by funds vary so enormously with fund sizes and trustee numbers that they defy ballpark guesstimates.

While it’s difficult to put a figure on the matching of responsibility to remuneration, here’s a thought to tickle the funds: the better skilled their principal officers become, the less the need for delegation to expensive consultants.