Issue: February/March 2006
Edutorials
Liberty Life

EMPLOYEE RETIREMENT FUNDS – COMMUNICATION AND DISCLOSURE

This is another article in our series on the boards of trustees of retirement funds, sponsored by Liberty Life to inform trustees in the public interest. Liberty Life does not endeavour to promote, through the content, its own products or services. One of the fiduciary duties of trustees is to communicate relevant, meaningful and timeous information to members of their funds. The information must be communicated to keep members informed of their duties, obligations and benefits, as members will require this information when they have to make important decisions or exercise their rights in terms of the fund. In this article we will look at the statutory requirements in this regard.

RIGHT TO INFORMATION

The Constitution provides that everyone has the right to access any information held by:

  1. the State; and
  2. any other person, including a retirement fund where such information is required to exercise or protect any right.

In terms of the Pension Funds Act fund members may inspect the following on payment of a prescribed fee:

  • rules of the fund
  • last revenue account
  • last balance sheet
  • last valuation report or valuation exemption certificate

The trustees cannot refuse to make this information available.

If the fund is not in a sound financial condition, the scheme should bring it to such condition.

ADEQUATE AND APPROPRIATE INFORMATION

Sections 7C and 7D of the Pension Funds Act (“the Act”) should be read together.

Section 7C provides that the trustees must take all reasonable steps to ensure that the interests of members are protected at all times, especially in the event of:

  • amalgamations or transfers in terms of section 14 of the Act
  • splitting of the fund
  • the termination or reduction of employer contributions to the funds
  • any increase in member contributions
  • withdrawal of a participating employer

It is the trustees’ duty (section 7D) to ensure that adequate and appropriate information is communicated to the members of the fund informing them of their rights, benefits and duties in terms of the rules of the fund.

ANNUAL REPORT

The trustees must prepare an annual report that covers matters such as benefit changes, member movements, the accounts, the valuator’s report and the financial affairs of the fund, the fund’s investment policy, and so on.

A summarised version of the trustees’ report can be distributed to members as part of the trustees’ duty to keep them informed.

AUDITOR’S DISCLOSURES

The auditor must ensure that the necessary books of account, annual financial statements and auditor’s report are drafted in accordance with Generally Accepted Accounting Practice and the requirements of the Pension Funds Act and other requirements of the Registrar and the Commissioner for the South African Revenue Service.

The annual financial statements should fairly represent the financial state of affairs of the fund and should inter alia include:

  • A balance sheet/statement of funds and net assets.
  • An income statement/revenue account.
  • Notes to the financial statements.
  • The auditor’s report.
  • The valuator’s report, which must express an opinion on the financial soundness of the fund.
  • The trustees’ report.
  • Any other statements or reports that may be presented to members.

RULE AMENDMENTS

It is the duty of the fund’s principal officer to inform the members (in a summarised form) of any amendments to the rules that were registered during the fund’s previous financial year. This must be done within six months after the fund’s financial year-end. This information is usually included in the annual member benefit statement.

NOTE:

The fund rules are considered by many to be an agreement between the employer and the employees. Any decision that will reduce or adversely affect past service benefits should in principle be taken with the consent of both parties or their representatives.

Amendments in terms of future service benefits may be done without consensus between the parties, as long as it is done in accordance with the rules of the fund.

RELEVANT CIRCULARS

The Financial Services Board (FSB) issued various circulars pertaining to disclosure and communication with members. These circulars are not legally binding, but are merely codes of good practice agreed to by the FSB and industry representatives. Their main purpose is to clarify and give practical guidance on particular sections of the Pension Funds Act and the Regulations thereto.

1. Circular PF 86

This circular lays down the minimum disclosure requirements to active members of the fund.

  • New members to the fund should be given an explanatory pamphlet within three months after the date of their admission to the fund.
  • An annual benefit statement must be given to each active member not later than six months after the financial year-end of the fund.

Both documents may be in any format. They may be combined into one document, provided the annual benefit statement is automatically issued to a new member.

The following minimum information must be included in the annual benefit statement:

  • Fund details, such as the name and registered address of the fund, the name and contact details of the person who will answer queries with regard to the fund and the fund’s reference number.


  • Benefit details, such as the member’s name, date of birth, admission date and the member’s pensionable salary.


  • Rate of contributions, i.e. current contributions payable by members and the employer and the frequency thereof.


  • General information, for example internal dispute resolution procedures and information about the Pension Fund Adjudicator should internal procedures fail. It should also state the importance of nominating dependants and beneficiaries and keeping this information up to date.


  • Additional information. Funds may give more information than the minimum required, for example, information regarding permanent disability benefits and the unapproved group life assurance that does not fall within the ambit of the Pension Funds Act.


  • Specific events that will have an impact on the fund, such as:


    • Restructuring of the fund, such as voluntary termination of the fund, conversion from a defined benefit to a defined contribution arrangement, reduction or increase in benefits or contributions, and transfer of the business of the fund to another fund.


    • The trustees need to give reasonable notice of not less than 60 days to the members of the intention to restructure the fund in order to allow members the time to object if they want to.

  • On withdrawal from service, the trustees must explain to the members all the withdrawal options set out in the rules of the fund before a cash payment is selected.


  • A notification explaining the available options should be sent to a member before the date of retirement.


  • After the trustees have decided to whom a death benefit is payable in terms of the Act, they must send a letter to all beneficiaries notifying them of their decisions and set out all the available options.

2. Circular PF 90

Circular PF 86 and PF 90 must be read in conjunction, as PF 90 is an extension of PF 86.

This circular deals with the disclosure of specific information to pensioners, deferred pensioners and dependants of deceased members.

  • General information, including the name and registered address of the fund, the name of the principal officer, the names of the trustees and brief information on the policy relating to the governance of the fund, investment and so forth.


  • Initial disclosure to pensioners should contain the pensioner’s full name, date of retirement and date and frequency of payments.

  • Initial disclosure to deferred pensioners should contain the name of the deferred pensioner and the date of cessation of active membership of the fund.


  • Initial disclosure to dependants. The trustees must disclose the deceased member’s name, date of death, the dependants’ full names and date and frequency of payments.


  • Annual disclosure should include the date of annual disclosure as well as details of all variations to the initial disclosure.


  • Special disclosure should include details of any special event, for example conversion of the fund from a defined benefit to a defined contribution fund. The trustees must explain what effect, if any, it will have on the pensioners, deferred pensioners or dependants. It must include information about any action or recourse that a pensioner, deferred pensioner or dependant may take if dissatisfied with or aggrieved by such special event.

Liberty Life

FIDUCIARY DUTIES REGARDING FUND INVESTMENTS

The trustees should draw up a document setting out the investment policy of the fund. This should include information about the delegation to investment managers and custodians where appropriate, with the procedures necessary for monitoring investment performance and the appropriateness of investments to provide benefits in terms of the rules.

The trustees should ensure that clearly defined investment guidelines and performance benchmarks are in place, in line with the investment policy. The responsibilities of investment managers should be clearly defined in a written document.

The trustees should declare their voting policy with regard to the investments held by the fund.

DUTY TO DISCLOSE INTEREST

A trustee must, as far as possible, prevent a situation from arising where his duty as a trustee conflicts with his other business or private interests. A conflict of interest may arise where a trustee benefits as a member of the fund at the expense of other members and beneficiaries. A trustee may not make any profit during his term as trustee, unless the fund rules specifically allow for the remuneration of trustees.

Where there is a conflict of interests, a trustee has an obligation to disclose it. If the conflict of interest is not trivial and it is impossible to prevent it, the trustee should resign from his or her office of trusteeship.

In terms of the Financial Institutions (Protection of Funds) Act, a trustee may not alienate, invest, pledge, hypothecate or otherwise encumber or make use of any trust funds or trust property, or furnish any guarantee in any manner calculated to gain directly or indirectly any improper advantage for himself or any other person at the expense of the fund.

Although a trustee may generally not make a profit or benefit from the administration of a fund, in limited cases it is possible for a trustee of a retirement fund to have a personal interest in fund matters. Such interest may not be “improper” and for practical purposes extends only to benefits due to the trustee if he is also a member of the fund, and to proper investments with an institution in which the trustee has some incidental interest.

It is, however, a gross breach of a trustee’s general duty of good faith to receive any undisclosed benefit or profit, whether received directly or indirectly (by way of money or in any other way).

Where an investment is made on behalf of the fund with an institution in which the trustee has some interest or control, this must be disclosed fully and in detail.

The Act also provides that a director, official, employee or agent of a financial institution who takes part in any decision regarding an investment in which he has an interest, either directly or indirectly, must declare his interest to the trustees before the decision is made. This declaration must indicate the nature and extent of the interest, and must be included in the minutes of the meeting where the declaration is made or considered.

CONCLUSION

It is clear that communication with members and transparency is a very important aspect of trustees’ duties and trustees should always keep these in mind in all their dealings with members.