Issue: September/October 2006
BOARDS OF TRUSTEES OF RETIREMENT FUNDS
This is the second 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.
A trust creates a special fiduciary relationship which places stringent duties and liabilities on the trustees to prevent possi-ble abuse of the confidence placed in them. It is important that the trustees have extensive knowledge of these duties and liabilities, as well as the Acts that have a bearing on trusts.
In this article we will recap the most important issues that trus-tees have to be aware of in order to perform their function.
A retirement fund must have a board of at least four trustees. By individual written application, the Registrar of Pension Funds may allow fewer than four if it can be shown that is impractical or unreasonably expensive to have four.
Members have the right to elect at least 50% of the members of the board of trustees.
The rules of the retirement fund must stipulate how the trustees are to be elected, their term of office and when they cease to be trustees.
One of the trustees is usually voted to act as the chairperson. The chairperson may have the casting or second vote (in addition to an ordinary vote) to break any possible deadlocks. If the chairperson does not have a casting vote, the dispute may be settled by mediation or arbitration.
The trustees must also appoint a principal officer, and the auditor and actuary, where required.
The trustees’ powers vest jointly in the board of trustees and decisions must be taken together.
Management of the fund
Trustees manage the fund in terms of its registered rules and consequently must know the rules intimately, as well as the financial situation of the fund, and must:
Duties of trustees
A fiduciary duty is the duty of utmost good faith (uberrimae fides).
The trustees must at all times act in good faith towards the fund. They must exercise their powers to the benefit of the fund and in such a manner as to always act in the best interest of the fund and its members.
They have to avoid conflict between their own interests and those of the fund and must never abuse the power given to them.
Should trustees breach their fiduciary duty and it constitutes a criminal offence, the trustees can be prosecuted under the Financial Institutions (Investment of Funds) Act, which prescribes a penalty of R10 000 or 10 years imprisonment, or both.
There could also be action by the fund for breach of trust and the trustees could be liable for any losses suffered by the fund as a result of negligence. The employer can sue the trustees for any losses the employer suffered as a result of negligence, including the possible removal from office.
Trustees must ensure that the fund has adequate fidelity insurance to cover the possible effects of inappropriate actions by its officials.
It is the duty of the trustees to direct, control and oversee the operation of the fund on behalf of the members and to look after the fund assets. They must:
The rules of the fund must contain clear guidelines regarding the meeting procedures of the board.
A proper agenda should be followed at each meeting, including:
Meetings must be properly minuted and any decisions should be duly recorded in a minute book.
The Pension Funds Amendment Act, No. 94 of 1997 introduced time frames within which contributions must be paid to fund administrators and compel the employer to provide the board of management with minimum information regarding the contributions.
The administrator of the fund must appoint a person that will be responsible for checking the receipt of contributions that the employer pays.
If contribution payments fall in arrears or a short payment is made, a writ of execution can be issued. The assets of the employer can be attached and sold in execution to settle outstanding contributions. The employer can also be criminally prosecuted. If the employer fails to pay the full contributions within 90 days, the principal officer or authorised person must report the matter to the attorney general (i.e. institute criminal proceedings) and inform the Registrar of Pension Funds accordingly.
It is the trustees of a pension fund’s duty to pay benefits in terms of the rules of the fund and the Pension Funds Act. If a trustee negligently pays an incorrect amount, or makes a payment to a person not entitled to such a benefit, the trustee may be held personally liable for making good the loss to the fund.
The trustees must at their discretion pay the death benefit to the member’s dependants or nominated beneficiaries in such proportions as they deem equitable. Death benefits are allocated in terms of Section 37C of the Pension Funds Act.
Four situations can arise:
Minimum pension increases
Where pensions are paid from a pension fund, the Act prescribes minimum increases, i.e. the lesser of a full inflation adjustment and the increase that the fund can afford.
The minimum increases must be reviewed at each statutory valuation date. In the case of a defined benefit fund this will be once every three years, and once a year for defined contribution funds.
In carrying out his duty to provide reasonable benefits, the trustee must look at the type of benefits the funds provide and, if necessary, take appropriate action for enhancing the benefits.
In the normal course of events the employer will set the level of benefits in response to what he can afford, although trustees will fail in their duties if they allow the fund to become outdated without bringing this to the employer’s attention.
The trustees may delegate their liability to invest the fund’s assets if the rules of the fund provide for it to a licensed investment manager, but they cannot relieve themselves from their responsibility to invest the fund’s assets appropriately, just by appointing someone else to act in their stead.
If trustees delegate this function, they must enter into a proper agreement with the investment manager.
The board of trustees must:
Termination of a fund
When a fund terminates, the trustee/s must ensure that an independent liquidator is appointed. The Registrar of Pension Funds must approve the appointment. The trustees’ duties then cease.
The liquidator must ensure that the fund is wound up in accordance with the rules of the fund and the provisions of the Pension Funds Act.
Right to information
The Constitution provides that everyone has the right to access any information held by:
In terms of the Pension Funds Act fund members may inspect the following on payment of a prescribed fee:
Failure to provide such information without proper justification constitutes improper exercising of the trustees’ power and amounts to maladministration of the fund.
Trustees have a duty to:
Disclosure is an important element of acting in good faith.
It is a privilege, but also a great responsibility, to serve as a member of the board of trustees of a retirement fund. In order to perform their duties to the best of their ability, trustees should know their duties and powers, and the legislation which governs these.
The most important acts which trustees must be aware of and ensure that the fund complies with, are:
Trustees should also have a thorough understanding of the South African law of trusts.