Issue: April/May 2006
Cries of the Cuckoo
You wanna be a trustee? You gotta be nuts! The most basic question in retirement-fund reform is how competent people can be encouraged to perform a role that carries such heavy responsibility and such light reward. Until it’s answered, the rest is built on a shaky foundation.
The retirement-fund industry exists in a kind of cuckoo land. It’s predicated on having trustees skilled at what they’re doing, motivated to assert their fiduciary duties without interest conflicts, and able to communicate at the touch of a button.
On all these scores, the system falls flat. And that’s describing it diplomatically. Describing it bluntly, the principles and the practices are as far removed as reality from fantasy.
Of course, there are good and conscientious trustees. Lots of them. But generally there aren’t nearly sufficient by number or time available for the sheer scale and nature of the responsibilities with which they’re entrusted. The upshot, as Paul Myners expressed it in his seminal examination of the UK industry, is that consultants lead them by the nose.
In South Africa, it’s all too apparent. There’s a fanciful presumption that fund trustees are brethren-in-arms of company directors, chasing sinecures rich with the promise of financial reward and flaunting the competence to deserve it. Were this only so.
Then come their communication hassles. Regulators and service providers are supposed to communicate with trustees, and trustees are supposed to communicate with fund members, then again back up the chain. But:
- Rarely are trustees paid for their role. Apart from a handful of professionals, the regular employer or employee representative on the board of an occupational fund has the job thrust upon him as an addition to his or her salaried commitment. Guess which assumes priority;
- Rarely are trustees clear on their fiduciary duties. At best, they might think they’re clear. But once they take a look at the confusion around this issue (see Law), they’ll catch a wake-up. Even among themselves, the specialist retirement-fund lawyers aren’t clear;
- Rarely are conflicts of interest avoided. At one level, it’s when employer and employee representatives reckon they represent their respective constituencies rather than the fund as whole. At another, it’s when a particular service provider nominates the trustees. And at yet another, it’s when trustees are enticed by incentives to compromise their objectivity in the allocation of fund business;
- Rarely are elected trustees in the job for sufficiently long that their acquired expertise and experience are brought to bear. Why should they be? When they realise what’s involved, they can be forgiven an inclination to head for the exit. After all the unrecompensed time they’ve devoted to meetings, for which they’re supposed to prepare and ask intelligent questions, and attend training courses, so that they can tell the difference between one asset class and another, they’ve had enough. To serve a three-year tenure is exceptional, and a high rate of churn is unexceptional.
To top it all, trustees are liable for the proper management of their funds. They get no money. They get no thanks. But they can get sued.
- The Financial Services Board does not have a database of trustees. It only has a database of funds, where the contact details are usually those of the service provider or administrator. That the regulator must rely on the service provider to pass on the communications makes direct communication rather difficult;
- The service provider or administrator will have a list of trustees. However, because of the high churn levels, the list is frequently out of date. This makes communication, between the service provider or administrator and the trustee, rather more difficult;
- The content of communication, with trustees and by trustees, leaves something to be desired. Usually, courtesy of consultants, fund members get little more than annual statements of investment values and benefits. Usually, despite the weight of knowledge they’re supposed to have about investments, trustees are subjected to the most highly technical information about the performance of those investments. Not a peep here about the possible introduction of narrative reporting, along the lines of the financial and operational review being introduced in London, as if our users of financial statements are so sophisticated that they can unravel the complexities of modern accounting being dished to up them.
So here’s a fundamental question for the new National Treasury discussion document to address, before it soars into other niceties of retirement-fund reform: Why on earth would anybody, of sound mind, want to be a trustee?
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