Issue: June/July 2006
Retirement Funds – Fiduciary Duties of Specific Persons
This is the third last 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.
The trustees of a fund need to take an active interest in and exercise their discretion in respect of every aspect of the fund and its business. For this reason trustees need to have a detailed knowledge of the duties of all other parties involved in the fund.
In this article we take a closer look at these parties.
Fiduciary duties of specific persons
Trustees need to have a detailed knowledge of the duties of the other persons employed by the fund.
The principal officer
Every fund must appoint a principal officer. The principal officer must reside in the Republic of South Africa and must be appointed in accordance with the rules of the fund.
The principal officer may serve in the capacity of principal officer and trustee simultaneously. The Financial Services Board, however, require that he or she should not serve as chairman and principal officer at the same time.
Fund documents must be signed by at least three persons, namely the chairman, the principal officer and an ordinary trustee.
If the principal officer has already been appointed at the time of the registration of the fund, the name of the principal officer must be disclosed to the Financial Services Board.
If the principal officer has not been appointed at the time of registration, the person managing the business of the fund must notify the Registrar of the name of the principal officer within 30 days of the registration of the fund.
The principal officer has the following duties:
The principal officer is the official representative or contact person of the fund with the Financial Services Board.
The investment manager
The most important duty of the investment manager is to ensure that the fund has money available to pay benefits as and when they fall due, and that the fund’s assets are invested in such a way that the optimum returns are achieved subject to an acceptable level of risk.
In determining the type of investments in which to invest the fund’s assets, the investment manager must have regard to:
The fund valuator
The Pension Funds Act requires certain funds to appoint a valuator. The valuator must be approved by the Registrar and is an actuary who is experienced in the valuation of retirement funds.
The valuator’s primary duty is to evaluate the financial soundness of the fund by valuing assets and liabilities and to advise on:
The valuator must examine the expected income from, and capital growth on, the investments held by the fund as compared to the expected benefit outflow, and must advise the trustees whether he feels the choice of investment is appropriate to the fund’s requirements. In this regard the valuator must work closely with the fund’s investment manager.
The valuator must take account of whether the contribution inflow is adequate to meet the outflow of benefits. Any shortfall has to be made up by income from the assets of the fund. He must advise the trustees as to whether the fund is likely to produce sufficient investment income or not.
Where significant outflows are expected, such as in a provident fund where the full interest of the member is paid out on retirement, the valuator must advise the investment manager so that the fund can ensure that it has sufficient liquid assets to meet the expected disinvestment.
The valuator’s duty of providing this advice is achieved through periodic valuation of the fund, which must be performed every three years. The valuation follows a format laid down in the Pension Funds Act and regulations prescribed by the Registrar.
When making the periodic valuation, the valuator must estimate future withdrawals, deaths, disabilities, ill-health retirements, early retirements, normal retirements, mortality after retirement, the levels of salary, pension increases and investment returns.
In all his calculations the valuator must take into account the interests of the employer, the trustees, the members and the regulatory authorities. It is the valuator’s duty to act as a watchdog for the regulatory authorities and he must report infringements of the Registrar’s directives.
The fund auditor
It is the auditor’s fiduciary duty to ensure that the necessary books of account, annual financial statements and auditor’s report are drafted in accordance with appropriate, Generally Accepted Accounting Practice. Also, it must comply with 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 must include:
A report by the valuator should form part of any annual financial report and must express an opinion on the financial soundness of the fund.
The auditor must also ensure that the fund’s investments are in accordance with the prudent investment guidelines as determined by regulation 28 to the Pension Funds Act.
The auditor must institute and conduct regular audits, ensure that the accounting system is both effective and working efficiently and introduce the appropriate audit checks and balances where necessary. He must also liaise closely with the fund’s valuator and investment manager on matters such as asset valuation, investment performance and expected future capital and income growth.
Where an insurer is the fund administrator, the auditor must be satisfied and certify that the insurer’s accounting systems and controls are adequate for retirement fund administration, and that such administration is carried out in compliance with the provisions of the Pension Funds Act.
The employer owes the fund certain fiduciary duties. These fiduciary duties arise because the employer has, by establishing a fund, entered into an agreement with his employees to help provide for their retirement, and because the money contributed to the fund, both by the employer and the employee, constitutes trust money.
The most important fiduciary duty of the employer is the duty to act with the utmost good faith, care and diligence when dealing with the affairs of the fund and to exercise his authority in a fair and reasonable manner.
The employer is, inter alia, expected to exercise this fiduciary duty when:
It is the employer’s duty to cooperate fully with the trustees and administrators of the fund, particularly with regard to furnishing details of salary increases, marriages and staff turnover.
The fund administrator
The fund administrator is responsible for the efficient running and administration of the fund. The administrator must ensure that the various fund employees, the trustees and the participating employer perform their particular duties promptly.
All the fiduciary duties relating to administrative matters, investment of fund monies, running the affairs of the fund, and so on, equally apply to the administrator. More specifically, the administrator must ensure:
Whenever a registered fund is to be terminated, an independent liquidator must be appointed to oversee such termination. This appointment must be approved by the Registrar.
The liquidator must be completely independent of the fund. Once appointed, the liquidator steps in the shoes of the trustees and the board of trustees terminate. The fiduciary duties applicable to the trustees are equally applicable to the liquidator.
The former trustees have a duty to assist the liquidator by furnishing any information he may require.
The liquidator must as soon as possible deposit the preliminary accounts with the Registrar. The preliminary account must show the assets and liabilities of the fund at the commencement of liquidation, and also the way in which it is proposed the assets should be realised and the liabilities discharged.
The preliminary account must lie open for inspection at the registered office of the fund, the Registrar’s office and in the appropriate Magistrate’s Court for the district for a period of 30 days. The liquidator has a duty to advertise this fact.
Once the liquidator has finalised the liquidation and paid all claims, he must send the Registrar a final liquidation and distribution account, showing the assets and liabilities of the fund on the date of distribution and the manner in which the assets have been realised and liabilities discharged.
Once the Registrar is satisfied that the accounts are correct and that the liquidation has been completed, he will cancel the registration of the fund. The liquidator should ensure that such cancellation is in fact effected.