Issue: March 2013 / May 2013
Editorials

FUND GOVERNANCE

Guards of the guardians

There are critical roles for member committees to play in umbrella structures. Workplace interaction with employees is only one of them.

The term “independence” has many splendid connotations. Springing to mind are people capable of exercising discretion without fear or favour, having the competence to make fair decisions in the necessary areas of their professional expertise, and being beholden to nobody.

In the complex world of retirement funds, do such people exist in sufficient numbers? Clearly not. Were it otherwise, National Treasury and the Financial Services Board wouldn’t be so anxious about prevailing standards of poor governance and taking steps to remedy it by the introduction of “fit and proper” barriers to trusteeship.

It goes without saying that appropriately-skilled trustees are a prerequisite for good governance. Equally essential is their independence. No matter the qualifications they attain, independence extends further than disclosures of financial interests and similarly formalistic criteria. Ultimately, independence is a state of mind in which capability and integrity co-exist.

For trustees, so for directors.  As it’s put in King III: “An independent director should be independent in character and judgment and there should be no relationships or circumstances which are likely to affect, or could appear to affect, this independence.”

Oh, boy! Apply this test to the conflicts-ridden environment of retirement funds and turn it onto its head. The first obstacle is in sheer numbers.

There are thousands of funds, each requiring a minimum of four trustees. Assuming that there are now about 3 000 active funds, there’d have to be at least 12 000 serving trustees. Try bringing most of them up to speed within a reasonable timeframe, say the next three years for the assessments offered by the trustee toolkit of the FSB, will be Herculean.

According to FSB’s annual report for 2012, slightly over 1 700 candidates had registered for the course. Of these, 73 had completed the summative assessments. Certification will advance them as “fit and proper”, but independence doesn’t necessarily follow.

Even with funds rapidly consolidating into umbrellas, there are dozens of umbrellas and there’ll always be hundreds of standalones. Numbers will reduce but remain formidable.

As a matter of common practice, independence of trustees has long been compromised. Consider the temptations: for employer-nominated trustees to keep an eye on the interests of their company above their fund, and on their career prospects; for member-elected trustees to be influenced by constituencies, dominant colleagues and possibly bosses as well..

On top of this come perks, notably from service providers. It’s par for the course: extraneous gifts, tickets to soccer matches, travel to seminars synonymous with entertainment. Refrain and service providers can face the loss of business.

These practices are so pervasive that they’re expected, despite the disclosures and limits imposed by the FSB. Other than the most public service-orientated exceptions, why else would amateurs in the business of retirement funds be prepared to accept the fiduciary responsibilities and commit the after-hours time for a job that pays minimally if there’s any remuneration at all?

Umbrellas aren’t the total panacea. Sponsors might assemble panels for approval, half for their nomination and half for election by member representatives. It looks a sufficiently straightforward process, and it would be if there were plentiful candidates with the proven abilities from which to choose. There’s a skills shortage here as much as anywhere.

Ultimately, independence is a state of mind in which capability and integrity co-exist.

With the best will in the word, conflict is integral. It’s between the sponsor, responsible to shareholders for maximising profit from the products and services it sells, and the trustees responsible only to the fund irrespective of how they’re appointed.

The perceptual risk is that trustees who don’t oblige the sponsor can be out on their ears. Better to go softly on independence than sacrifice the remuneration commensurate with their time and experience. Conversely, such behaviour should be quickly apparent and nipped in the bud before it contaminates the industry.


Gluckman...always room for improvement

“There are umbrella funds and there are umbrella funds,” notes David Gluckman of Sanlam. “Maybe it’s true that there is improvement still to be made in this area at an industry level,and there definitely are funds that have a lot of improvement still to make.”

Nevertheless, he points to the agm of the Sanlam Umbrella Fund: “We had an election by member representatives for the three independent trustee positions. All six trustees on the panel were independent of the sponsor.”

Hugh Hacking of Old Mutual insists that the potential for conflict be openly admitted and addressed upfront: “The relationship between the sponsor and the fund must be properly managed. It begins by setting the ground rules. We follow a process where the sponsor puts together a list of candidates that meet the requirements (say investment or actuarial specialities) for a particular position on the management board. The current board then selects its preferred candidate. Ultimately the fund and the sponsor must agree on the new appointment.”

For all the advantages of the umbrella system, it has the defect of distancing fund members from the fund trustees. It controverts the intention of 1996 amendment to the Pension Funds Act, which introduced 50/50 employer/member trustees, to broaden stakeholder empowerment by extending participation in fund decision-making to the workplace. The amendment had been motivated by Cosatu, under its leadership at the time, and might have worked had this leadership not been denuded.

In time, however, it fell apart. The take-up of training was abysmal. Members hardly bothered to vote for trustees, and few could identify the trustees elected. This was shown in survey after survey. Governance was more lethargic than enthusiastic, far too many trustees being only to happy to leave such strategic matters as drafting investment policy statements and complying with the Code for Responsible Investing to their service providers.

For all that, the need for effective member interaction – top-down and bottom-up – remains as strong as ever. It means that an essential adjunct to the boards of umbrella funds must be the member committees, comprising employer and employee representatives of the umbrellas’ constituents, as the second management tier.

They won’t have fiduciary duties and they won’t require “fit and proper” certification. Nor will they need knowledge of retirement-fund intricacies. But they must be sufficiently in touch with their respective members and be enabled to ensure, by direct lines of access to trustees, that these needs are met.

The committees have another important function. It’s oversight of the independence that umbrella-fund trustees, both nominated by sponsors and elected by member representatives, are expect to assert.

Focus on it or this model will fail too.