Edition: Jun - Aug 2014


Digging for details

It's unreasonable that, under all circumstances, trustees leave no stone unturned in finding complete information about dependents. Mickey Lowther* explains the problem and suggests a solution.

In a number of recent determinations regarding the allocation of death benefits, the Pension Funds Adjudicator has reasoned that trustees had to exercise their discretion properly. It meant that they had to take all relevant factors into account.

If they didn't, their investigation was inadequate. They had fettered their discretion and therefore their allocation decisions had to be set aside. It's been ordered that trustees conduct more thorough investigations into the circumstances of all potential beneficiaries and then re-exercise their discretion.

But how long is a piece of string?

Having acted as independent trustee on a number of retirement funds and been involved in some difficult death-benefit investigations, I empathise with the Adjudicator's aim of doing her best to ensure that the poorer members of society get the consideration that the lawmakers intend. On the other hand, I remember difficulties in getting adequate information particularly where relatives provide conflicting evidence and there are no bank accounts or other records.

I recently surveyed the 600 people (mainly trustees and lawyers) on the Pension Lawyers Association's address list, obtaining 90 (15%) responses. My question was how far their fund's trustee boards go to decide who was dependent on the deceased fund member and the amount of their dependency. They could answer from (1) merely using the details supplied by the deceased and/or the person reporting the death, up to (5) leaving no stone unturned, irrespective of time and cost. This chart illustrates the distribution of their responses:

The results show that these trustees and legal advisers go a long way towards meeting the Adjudicator's goal that all relevant factors be unearthed. In response to another question, the overwhelming majority agreed that there might not be a single 'right' allocation but that this was no excuse for poor investigation.

Mickey Lowther
Lowther . . . time and money

However, there were a number of comments that the Adjudicator had set the bar too high. Trustees may receive or elicit conflicting allegations of dependency, citing multiple issues, where the parties have no evidence and may even be unwilling to co-operate further with the fund's board. But at some point the investigation must be concluded if it is to be reasonable, proportional to the benefit, and fair to the beneficiaries whose dependency has been established.

As an actuary, I have been involved in loss-of-support calculations arising from road accidents and medical negligence. But in those cases the parties usually employ their own experts to research and present their cases to court. Trustees don't have the benefit of this input, and their expenses are ultimately paid by the fund's members.

In my view, a possible solution may lie in an explanation by boards where they have been unable to elicit adequate information. Similar to the 'apply or explain' approach of the King III corporate governance code, boards could summarise their investigation process and explain in particular cases why they believe that it was not unreasonable to have left some stones unturned.

Reinventing the wheel

The Adjudicator's focus on adequate investigations highlights the duplication of effort required for people who were members of more than one retirement fund. This is not limited to the wealthy with multiple investments. A blue-collar worker might leave a benefit in his/her occupational fund and another in a preservation fund.

As matters stand, each set of trustees must spend time and money to make the identical investigation. Whichever board first makes the decision, the financial circumstances of the dependents are altered. These changed circumstances need then be taken into account by other boards. And, to make matters even more complicated, many boards will not disclose their decision to other boards on the grounds of confidentiality.

I have even had experiences where the decision of a board that acted quickly was disclosed to us, although its investigation was clearly inadequate; for example, in having missed the existence of an illegitimate child. We alerted the board that it had to reconsider its decision, hopefully also taking into account the financial effect of the decision we had just made!

Industry or regulatory solutions need to be found for this problem, which frustrates the intentions of the lawmakers and the oversight of the Adjudicator. Perhaps the newly formed Batseta (TT Feb-March) could take the lead in drawing up an industry code for the disclosure of information, as allowed for in the new Protection of Personal Information Act.

* Lowther is an independent trustee and actuary. Other results from his survey, that are relevant to trustees, may be found on the the website of the Pension Lawyers 2014 conference at www.pensionlawyers.co.za.