Issue: September/October 2005
Editorials

FIRST WORD

Retirement funds are like beached whales. Every man and his dog can take a bite. The funds are easy meat because the biters are as astute as the bitten are defenceless, except for their thick skins.

Between the biters and the bitten are supposed to be trustees, poor things. They've hardly a hope in hell, and sometimes don't even know about the bites until they've been savaged. Of course, it isn't supposed to be so.

But examples abound: the outbreak of controversy over costs, sparked by the Pension Funds Adjudicator, highlighted by actuary Rob Rusconi, renewed in hostilities between Deutsche and Old Mutual; the outline of abusive practices, a number bordering on the corrupt, identified in National Treasury's discussion paper on retirement-fund reform; the sewage about to spill through the industry from the scheme of insiders to steal funds' surpluses. The scandal of speculation in maize futures, which last year wiped out a third of a fund's assets, seems by comparison to be innocent child's play.

For the whales to stand a chance, at least two things are needed. One is a new Retirement Funds Act, which will someday eventuate, giving effect to the discussion paper's numerous recommendations. Among them are proposals to promote good governance, avoid interest conflicts, and sharply define the responsibilities of trustees (who have fiduciary duties) relative to consultants (who haven't).

The other is proper education and training of the trustees themselves. Without the capacity and will to execute those responsibilities, the rest is hot air. Not that brassy qualifications alone are sufficient. There's been no shortage of corporate disasters under luminary-led boards to underscore the point.

The difficulties are practical. And they are exacerbated by expectation born from a plethora of laws, codes, charters and policy pronouncements.

Consider a few scenarios:

  • The entitlement of fund members to elect 50 percent of funds' boards introduces a new category of trustees. Organised labour was in the forefront of promoting the amendment but has yet to make full use of it.

    Once it walks through the open door in a big way, and it can only be a matter of time before it does, all sorts of things are in the offing: some real shareholder activism, some acrimony with employer-nominated trustees, of which the Seifsa dispute (TT May and June ‘05) is a foretaste, and some areas of deadlock, say, on the allocation of funds to "social" investments.

    Although trustees are beholden to promote the best interests of their funds, not use them to advance the interests of one stakeholder group at the expense of another, on individual interpretation of "best interests" the whole area of retirement funding can become highly politicised;

  • Trustees are stewards for billions of rand in retirement-fund assets. At least some trustees – old, new and aspiring – simply don't and won't have the wherewithal to act with "due skill and prudence". They're vulnerable to experts in fees and gobbledegook;
     
  • Any incentive, or any reason, to become a trustee is not easily apparent. Unlike company directors, who're generously remunerated, trustees rarely receive even a token stipend. Like company directors, similarly responsible for huge assets, trustees take on personal liability.

    They're at risk, but (aside from "relationship-building" gifts and hospitality, which can compromise them) they get no reward. What they can get is sued. Yet they're expected to commit weeks for training, days for meetings and more days for preparation.

    Sometimes employers give them all the necessary time, sometimes not. Either way, to take on such commitments voluntarily requires a dose of craziness or an attack of chronic public-spiritedness;

  • Then, having been through the training rigours, they drop out. Predictably, under the circumstances of realising what they've taken on, the level of trustee churn is incredibly and unacceptably high; 
     
  • Who's to pay for the training? If a course is accredited, employers can claim back part of the fee from their skills-development levies, provided they've paid for the training. The reality is that usually the funds pay for it. Because funds don't pay levies, there's no claim-back;
     
  • Who's to do the training? Service providers have a wealth of material and knowledge to impart. They also have the motivation to impart it, if not entirely through altruism and goodwill then through the need to shine their images with existing and potential clients.

    There's also the Financial Sector Charter's requirement for institutions annually to invest a minimum of 0,2 percent of taxed operating profits in "consumer education", and specifically to help pension-fund trustees "enhance their understanding of investments".

    But the unions are particularly mistrustful of service providers, seen to be furthering trustee training to further the sale of their products and services. Yet it's criminally wasteful not to take the excellent material freely on offer, screened if need be for objectivity and adapted if required for use on accredited courses. To wait for something better to arrive from bureaucracy is, well, to wait;

  • What, precisely, is "training" to comprise?

    Given the huge differentials in trustees' investment knowledge, it can range from the importance of minute-taking to the intricacies of derivatives.

    Given the massive swing from defined-benefit to defined-contribution retirement funds, which transfers the investment risk from employers to members, it can range from drafting a statement of investment principles to the appropriateness of an asset-allocation strategy and the complex handling of individual member choice.

    Given the intention of National Treasury to upgrade the standard for judging trustees' conduct from what's expected "of a person in the position of the trustee in question" to "the skills and prudence of persons familiar with the issues", implementation of laudable objectives is all the more formidable.

    There's no way to short-circuit the commitments of time and resources required to meet a priority in the scale of social challenges. Unless competent trustees can prise the whales back into the water, people won't get the best pensions to which their savings entitle them.

Allan Greenblo
Editorial Director