Issue: December 2007/February 2008

To avoid another Fidentia

While ‘beneficiary funds’ have been introduced, umbrella trusts will continue. GISELLE GOULD, marketing director of Fairheads Umbrella Trust Company, shows how confidence in them can be restored.

Umbrella trusts are to be largely superseded by a new vehicle called ‘beneficiary funds’. Unlike umbrella trusts, beneficiary funds will be governed by the Pension Funds Act.

This has come about as a result of the Fidentia scandal. It had highlighted glaring gaps in the regulation of umbrella trusts and the management of funds left in trust by deceased members of retirement funds.

But umbrella trusts won’t disappear. Not only do they fulfill an important social role, but existing trusts need to run their course. It is thus envisaged that they will run parallel with the new beneficiary funds. Crucially, confidence must restored in the reliability of umbrella trusts. Trustees of retirement funds need to show that they have undertaken adequate due diligence on umbrella trusts and their trustees before recommending that funds be put into trust.

The Fairfund Trust, Fairheads’ flagship umbrella trust, has as its primary objective the management of death and disability benefits in trust for minor dependents and dependents with legal disabilities. It is the fiduciary responsibility of the trustees to ensure that the funds are used appropriately for the beneficiaries’ education, maintenance and advancement.

This trust and its trustees have recently been subjected a corporate governance audit. We recommend that trustees evaluating umbrella trusts insist on the same or similar process:

• Basic information

Obtain proof of: the registered details and all relevant licence numbers of the administrator company; trust registration with the Master of the High Court; the trust deed and any amendments, and the name and practice number of the compliance officer.

• Trustee information

Obtain full details and CVs of the trustees who have a fiduciary responsibility to manage the trust. How frequently do they meet?

• Policy on trustees’ code of conduct/conflicts of interest

Is a policy in place? Is the administrator, as well as key individuals and authorised representatives, registered with the Financial Services Board (FSB)? If so, they are required to comply with the “fit and proper requirements” for financial service providers in terms of the FAIS Act.

This code of conduct under the Act provides strict guidelines in terms of personal character qualities of honesty and integrity as well as competency and operational ability.

Trustees are also required to undergo reference checks to ensure compliance with this code and sign declarations attesting to their fulfillment of these requirements. They are further required to sign a declaration disclosing any possible conflicts of interest.

• Insurance / professional indemnity

Obtain proof of professional indemnity and fidelity insurance cover for the administrator, trustees, investment managers, and any other service provider.

• Details of auditors, audited accounts and auditors’ management letter

Although there is no legal requirement to have umbrella trusts audited, Fairheads has a policy that each umbrella trust is subjected to an independent audit annually. KPMG is the appointed auditor of the Fairfund Trust.

• Investment policy statement

The trustees should have an approved investment policy statement providing a framework for the investment of assets in the trust. It should include an asset allocation model where applicable, details of the asset managers and their investment fee schedules. (The Fairfund Trust policy was reviewed by independent investment experts, as well as an employee benefits expert. The choice of the investment manager for any investment product remains with the trustees of the trust.)

• Controls to detect/prevent fraud

Fairheads Umbrella Trust Company has an anti-money laundering policy in terms of the FICA Act. Each Fairheads employee has received training from the compliance officer. Each head of department and trust director is required to sign an anti-money laundering certificate which attests to their adherence to procedures contained in the policy as well as the internal rules pertaining to the reporting of unusual and suspicious transactions.

• Risk control evaluations

Is there a risk management policy? Fairheads has a risk management policy in place. The compliance officer and the internal auditor are engaged in continuous risk assessment and risk profiling in terms of overall company policies and procedures. The compliance officer also engages in risk assessment and risk monitoring specifically pertaining to the various umbrella trusts.

• Other information relevant to trustee independence and corporate governance

Is there a service-level agreement? The Fairfund Trust is continuously monitored by the compliance officer in terms of its overall performance levels and compliance with the Fairfund service-level agreement. Overall corporate governance is also monitored by the compliance officer with regard to company policies and procedures.

Finally, does your service provider go the extra mile? Fairheads has an internal audit, risk and compliance management committee in line with the King code of corporate governance.

For more information, you're invited to contact Giselle Gould, marketing director of Fairheads Umbrella Trust Company on (011) 883 9755 or
She'll be happy to attend to your queries.