Issue: September/October 2006
Edutorials
Liberty Life

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.

Introduction

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:

  • ensure that proper records are kept of any movements of members in or out of the fund.
  • ensure that they receive regular statements of account showing the fund’s financial position.
  • know where fund assets are invested.
  • take control of the assets of the fund - if they lose control, it is their duty to regain control and to initiate legal action to do so if necessary.

Duties of trustees

  • Fiduciary duties

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.

  • General duties

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:

  • ensure that proper registers, books, and records of the operations of the fund are kept, including minutes of board meetings.
  • ensure that the fund employs proper control systems.
  • ensure that appropriate and adequate information is communicated to the members of the fund.
  • take all reasonable steps to ensure that contributions are paid timeously to the fund.
  • obtain expert advice on matters where they lack sufficient expertise.
  • ensure that the rules, operation and
  • administration of the fund comply with the relevant acts.
  • Administrative duties The trustees may appoint a licensed administrator to perform administrative duties on behalf of the fund. Trustees must:
  • ensure that new members join the fund in accordance with the fund’s eligibility conditions.
  • collect, bank and invest contributions.
  • arrange risk insurance (death and disability), pay premiums, submit and pay claims.
  • keep accounts and issue fund statements.

Meeting procedures

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:

  • approval of quarterly management accounts/annual financial accounts
  • performance of fund investments
  • any amendments to the rules
  • payment of benefits, bonuses, pension increases and gratuities
  • review and possible upgrading or increase of benefits
  • movements of members and pensioners
  • membership statistics
  • analysis of actuarial or other relevant reports
  • general business, e.g. pending litigations
  • communication with members

Meetings must be properly minuted and any decisions should be duly recorded in a minute book.

Contributions

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.

Benefit payments

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:

  1. Allocation to dependants where no beneficiaries have been nominated

    The Pension Funds Act defines people who qualify as dependants of the deceased member. The trustees may make an allocation to some of, or all the dependants. The trustees have 12 months in which to trace dependants.

  2. Allocation to beneficiaries where there are no dependants

    If a member has nominated a non-dependant as a beneficiary and the trustees are unable to trace any dependants within 12 months of the member’s death, the benefits may be paid to the nominated non-dependants in such proportions as the member has selected or as the trustees may deem equitable.

    NOTE: If the member’s estate is insolvent, the unpaid debts will be settled first and only then will the balance left (if any) be paid to the nominated non-dependants.

  3. Allocation to nominated beneficiaries and dependants

    Where the member has a dependant and the member had also nominated a beneficiary who does not qualify as a dependant, the trustees may pay the benefit or such portion thereof to the dependant or nominee in such proportions as they may deem equitable.

  4. Allocation where there are no dependants and no beneficiaries have been nominated

    If the trustees do not become aware of, or cannot trace any dependant of the member within 12 months of the death of the member, and the member did not nominate any beneficiaries, the benefit will be paid into the deceased member’s estate. If the Master of the High Court has not registered an estate, the benefit may be paid into the Guardian’s Fund.

    The rules of the fund will determine whether benefits can be paid to a trust or not. When a retirement fund makes a payment to a trust on behalf of a dependant or nominee, such payment is deemed to be paid to such dependant or nominee.

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.

Investments

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:

  1. ensure that the assets and contributions of the fund are invested in accordance with the rules of the fund;
  2. draw up a document that sets out the fund’s investment policy, including delegation to investment managers and custodians where required, with the procedures necessary for monitoring investment performance and the appropriateness of investments;
  3. declare its voting policy with regard to investments held by the fund;
  4. invest the monies and manage the assets of the fund so that they yield an adequate return;
  5. ensure that the responsibilities of investment managers are clearly defined in a written agreement;
  6. ensure that the investment manager operates within the fund’s investment policy, and has adequate controls to ensure security of the assets;
  7. ensure that clearly defined investment guidelines and performance benchmarks are in place.

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:

  1. the State; and
  2. by 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:

  • the rules of the fund
  • last revenue account
  • last balance sheet
  • last financial and valuation report
  • details of bringing the fund in a sound financial condition

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:

  • provide generic information that affects all members
  • provide fund specific information on request
  • disclose benefit options to members and beneficiaries
  • notify members of a fund restructuring
  • notify members of any amendments to the rules
  • assist members to make benefit or investment choices

Disclosure is an important element of acting in good faith.

Conclusion

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:

  • Pension Funds Act
  • Income Tax Act
  • Divorce Act
  • Tax on Retirement Funds Act
  • Financial Institutions (Investment of Funds) Act
  • Long-Term Insurance Act
  • Inspection of Financial Institutions Act
  • The Constitution of the Republic of South Africa

Trustees should also have a thorough understanding of the South African law of trusts.