Issue: September/October 2006
Editorials

FIDELITY INSURANCE

Jennifer Grefen of Glenrand MIB Grefen ... essential protection

When you’re in the firing line, you’d better make sure you have adequate insurance. The ruling by the Adjudicator, that trustees of retirement funds are personally liable for consequences of their negligence, sounds a wake-up call for them to check that fidelity insurance policies are properly in place.

Insurance is a good thing, particularly when the premiums are paid by others (fund members) to protect those who’re supposed to be looking after their interests (trustees). It’s also a necessary thing, particularly when the law says so. If justification were needed, it’s provided by the Adjudicator’s ruling that fund members can hold trustees personally liable for damages (see separate article).

In terms of the Pension Funds Act, each fund must have a management board comprising at least four members. Known as trustees, they are required to manage their fund with due care. By this is meant the diligence and skill that can reasonably be expected of a person who manages the financial affairs of another. Straightforward as it sounds, the whole employee- benefits arena is continually changing. Over recent years, it has also become highly complex because of the numerous Adjudicator determinations and the spate of legislation affecting retirement funds. “To compound matters,” notes Jennifer Grefen of Glenrand MIB, “the environment has become increasingly litigious.”

By regulation under the Act, all funds must provide for a fidelity-guarantee insurance policy that indemnifies the fund against any losses that may arise through one or more of its officers committing such wrongful acts as:

  • Negligence;
  • Theft;
  • Fraud;
  • Dishonesty;
  • Breach of duty;
  • Breach of trust;
  • Misleading statements;
  • Errors or omissions, and
  • Defamation.

The term “officer” includes present and past board members, the principal officer, employees, agents and third-party service providers. So far as the latter is concerned, Grefen points out that the policy will include the fund auditor and valuator: “However, the third party itself is not covered. Only the fund is covered for liabilities incurred as a result of errors or omissions committed by the third-party service provider.”

Companies often hold fidelity cover under group arrangements, but it’s unlikely in these instances that the insurance will extend to the retirement fund’s officers. So it’s recommended that the fund, its members and trustees have a dedicated policy to cover specific risks such as negligence by fund officers. The policy will then pay, on behalf of trustees jointly or severally, for losses that arise from claims. Just make sure the cover includes personal liability.

The amount of the sum assured for each fund is not regulated. It’s previously been based on an “honesty index”. The fund would aggregate 20 percent of its guaranteed assets (usually at market value) and 10 percent of its annual contributions, then apply the figure to a prescribed table.

More recently, the trend has been to move from this index to a recommendation of the Financial Services Board. It’s that the sum assured be at least two percent of total assets and annual contributions, subject to:

  • Minimum of R500 000, or the total of the two highest death claims;
  • Minimum sum assured of R10 million for funds with assets greater than R500 000.

Many funds used to opt for the R500 000 recommended minimum. Now, aware of the litigation possibilities, they’re opting for higher levels. It’s difficult to offer ballpark estimates of the cost because of subjective calls that must be made on the potential for claims and their possible size. But on a broad generalisation, Grefen reckons premiums will “in all probability” not exceed R5 500 per R1 million, with the rate decreasing after the first R5 million.

Several insurers provide fidelity cover. Like all insurance, she suggests, a good rebroke exercise will reveal soft rates: “The most important thing is to ensure your fidelity cover is as comprehensive as possible.”

FSB KEEPS WATCH

Under the Pension Funds Act, Regulation 30(2)(u) requires that all pension, provident and other funds provide for an insurance policy to indemnify the fund against any losses that may arise from the dishonesty, fraud or misconduct of any of its officers.

Checking that a fund does have fidelity cover is part of the fund’s audit. If a fund is found not to have this cover, it would be noted in the financial statements submitted to the Financial Services Board (FSB). The FSB would then request the fund to put the insurance in place.

Trustees have every reason to ensure it’s done. In the event of a claim against them, they’d be personally liable both jointly and severally.