Edition: Dec 2014 - Feb 2015
Tricky posers for National Treasury
When it sits down to negotiate yet again with labour on retirement reforms, the question of management committees in umbrella funds’ governance structures will need to be addressed. Even amongst service providers, unanimity is elusive.
In the gradual evolution of umbrella funds, there's no shortage of controversy. It's time to ignite another.
Buried in the National Treasury paper 'Charges in SA retirement funds', released last July, the option is mooted ". . . to formalise the role, rights and obligations of employer-level committees in (multiemployer) funds". In plain speak, these committees are variously known by such appellations as management committees (mancos) and joint forums.
Call them whatever. Broadly envisaged are committees, beneath the upper level of umbrella funds’ trustee boards, on which representatives are drawn from the ranks of participating employers and their employees.
As a general principle, they sound a good idea. What they're actually supposed to do and what regulation might require them to do, however, are much more vexed. Let another great debate commence.
For starters, is can be argued that the committees are needed to bridge the structural remoteness of trustees on the boards of institutionally-sponsored umbrellas from the fund's ultimate beneficiaries; between the trustees of these megafunds, the participating employers and the employee members. It has to do with communication and accountability, essentially in the workplace where employers and employees constantly interact. Circulars from on high are insufficient.
There are supplementary arguments. One is that these mancos act as guards over the guardians, to keep watch that the funds are acting in members’ best interests and not overreaching themselves in promoting the interests of profit-driven sponsors.
Another relates to the empowerment of members, for instance not to be excluded from investment policies which relate to proxy voting in investee companies. Whilst in practice this is more fanciful than real, evidenced by disinterest or lack of awareness, provision is made for it in law and regulation nonetheless. It is not ideal for institutions, sometimes conflicted by other in-house services and responsibility to their own shareholders, systemically to have an exclusive say-so without a platform for bottom-up inputs.
Against these arguments is the practicality of costs; the lower they are, other things being equal, the better for members’ benefits. Then there's also the little matter of sponsors making their profits; drive costs down to the extent that profit potential is unattractive, even taking rebates from designated service providers into the mix, and next there'll be worries over the paucity of sponsors willing to compete.
The central questions remain. First is whether there should be mancos at all. Second is whether, if they are to exist, they're to be regulatory or voluntary. Either way:
The debate is spiced by a s7B amendment to the Pension Funds Act that exempts umbrellas from the requirement – for which Coastu had pushed in the 1990s – that fund members have the right to elect 50% of trustees. Up for discussion, and probable dissent, is whether the exemption has created a gap that mancos can usefully fill.
To get the debate going, hopefully in a manner to assist National Treasury, TT solicited views from a straw poll of industry players. Their views are below, necessarily summarised.
Burger . . . get costs down
Rowan Burger of Momentum:
But the reality is that employers play a critical role in a retirement-funding programme, together with the insurance and medical programmes alongside it. The ability to structure the appropriate suite of benefits, attractive to that group of individuals, must surely improve coverage across the industry.
This does require employer-level input. Having a manco responsible for this structure, and holding service providers to account, would then be necessary. This obviously creates an additional level of governance that must come at a cost. It would be offset by employers’ involvement in the programme, meaning that much of the administration be performed by their payroll.
The key is to understand the membership and its needs, and to have people close to the employer for communication on programme benefits. We really can't have umbrellas within umbrellas, where the fund of an individual participating employer is a sub fund of a big umbrella. One can run mancos operationally, but there'd be problems if they were to be formalised.
We're trying to make the system cheaper, allowing clusters of employers to negotiate better terms with service providers and to streamline the administration process. I'd hope that access and efficiency trump governance in the list of regulatory priorities.
Aitchison . . . poor elections
Craig Aitchison of Old Mutual:
In principle, elections for mancos are appealing because they give everyone a chance to become a representative and can help ensure that different parties have a voice in the running of the fund. In reality, even well-run elections tend to have low participation rates and smaller funds struggle to find representatives.
Another issue in elected versus appointed representatives is that you tend to see some turnover of the elected and more stability of the appointed. Over time, this leads to the appointed having a better understanding of the fund and potentially greater influence.
I also worry about making employee or member elections compulsory. Where you have many employers in umbrellas, these exercises are quite costly to do properly. With low response rates, one has to ask whether the exercises add value. I'm not sure of the best solution. We must find ways to ensure that members are properly represented, that they have a voice and are heard.
Further, there could be problems in making mancos compulsory. They'd work for reasonable-sized employers, but what about micro employers? I don't see how an employer of five people will benefit from umbrellas’ scale when suddenly 80% of them must serve on a manco. Smaller companies want to focus on running their businesses, not on running umbrellas. Forcing them to have a manco can undo much benefit of being in an umbrella.
We do need guidelines on the responsibilities of mancos. It probably would be good to have some minimum responsibilities, and then to require that umbrella-fund trustees write them out for application by all mancos. Employers should be allowed to put onto mancos whomever they think are appropriate, regardless of qualifications. Perhaps there should be minimum training requirements for mancos, with trustees ensuring that there are training programmes and monitoring compliance.
Gluckman . . . structures in place
David Gluckman of Sanlam:
Under our methodology, we know that many employers don't hold these forums. But we work continually to improve the situation, and are making progress. We also have a final lever that we can pull. It's to suspend fees to the consultant for breach of contract.
Were there to be a legislative requirement, I fear we'd have teams of compliance people trying to enforce something that isn't enforceable. We'd have much less time for working towards improvement in the lot of members. They'd be worse off, although those that like tick-box compliance will be smiling.
As we state in our product material: "All participating employers must establish a joint forum comprising employer and member representatives for each sub-fund. Members’ representatives of every joint forum are invited to attend the annual general meeting where they will be given the opportunity to elect the independent trustees of the Sanlam Umbrella Fund.
"Joint forums are designed to facilitate the process of consultation and decision-making between the participating employer and its employees in respect of their group retirement benefits within the spirit of the Labour Relations Act. The joint forum is convened and chaired by the contracted benefit consultant who guides the forum to ensure that the sub-fund's benefit structure remains relevant."
The joint forum is the main consultation and communication channel between the umbrella fund, the employer and its employees supported by their appointed consultant. Ideally, it would comprise equal representation of employers and employees (2+2 usually being sufficient), and all members should elect their representatives as they wish. We aren't seeking skilled retirement professionals – they exist elsewhere in the structures – but we'd like to see elected representatives who are trusted by members and who can usefully aid the consultation and communication elements.
But this is subject to the caveat that the consultation/communication infrastructure is perhaps not cost-viable for smaller employers. Possibly to be considered is a two-tier structure within the same legal entity e.g. a mini-fund definition for to-bedefined smaller employers with more streamlined requirements for administration, consulting, intermediary servicing and governance.
Visser . . . unnecessary layer
Eric Visser of Sentinel:
We deal directly with the individual member. They're able to receive all the information they want through our website, where their specifics are updated daily, and through email communications. Once registered on the website, they're in control of their own affairs. They don't have to work through employers. All we expect of employers is payment of contributions.
Commercial umbrella funds, on the other hand, usually have employee-benefit consultants to deal with the employer and to manage the employer's relationship with the fund. Their best forum is to create a manco. However, it's a layer of cost to the fund and profit to the service provider for the arrangement of meetings, secretarial services and the like.
Neither is it clear why retirement funds should be singled out from other employee fringe benefits, such as medical aid, to have mancos. If the employer and employees want a manco, that's fine so long as there isn't a requirement that they must. And if they do want a manco, they must ask what they want to achieve given the cost.
What's the difference between a bank and a retirement fund? A bank holds your money and a fund holds your shares. Both have rules for withdrawals.
For a retirement fund, there are basic layers of costs. The critical issue is transparency. There must be trustees and manco members who know the right questions to ask of service providers and can assess whether they're getting the right answers.
Vital too is that funds disclose to members both the gross and nett returns on their investments, at the least in the individuals’ annual benefit statements. We provide the gross and nett performances at each month-end.
Aletzhauser . . .
Anne Cabot-Alletzhauser of Alexander Forbes:
A critical member of the manco should be an external consultant able to help bridge the gap between the umbrella fund's policies or offerings and the members’ needs. If the offerings at hand aren't sufficient to address the requirements for members, these consultants provide the link and the technical wherewithal to effect the necessary changes.
Moses . . . members’ voice
Marcelle Moses of Workers Retirement Fund:
Mancos, comprising employer and employee representatives, are custodians of members’ interests. It is unfair for employers’ human-resource departments to make decisions on behalf of members. These departments often have no insight into members’ personal lives and rarely go the extra mile to investigate whether they're making the right decisions for them.
Member representatives, on the other hand, spend lots of time with members and know them. They can assist trustees on members’ needs.
When the employer works with members, it removes the suspicions of corruption and abuse that are encountered when employers make decisions on behalf of their staff in their absence. Mancos can create a more worker-friendly environment.
Each branch of a participating employer should have a manco, where distance between branches is a factor, so that transport costs are kept down and production isn't disrupted. Members should be able to elect representatives whom they feel are fit and trust sufficiently to deal with their savings.
Minimum educational requirements will be introduced for trustees. Manco members should also be required to obtain a set level of skills so that they can effectively represent fund members.
Mort . . . employers’ initiative
Jonathan Mort of Mort Law:
It has been clear at least since 1998 (when the Pension Funds Act became effective for fund members to elect 50% of trustee boards) that the function of trustees is highly skilled, complex and requiring both specific skills and experience. I would attribute in as being the main reason behind dysfunctional retirement funds, with high costs or significant lack of confidence by memberships in the trustee boards.
For members to have the requisite confidence and trust in the boards should not depend on that board comprising persons elected by those members. Thus a manco should simply be an employerconstituted committee which can include employee representatives if the employer so decides, and to carry the responsibility of the employer in relation to the umbrella fund.
The responsibilities of an employer are greater, not lesser, where it participates in an umbrella rather than a standalone occupational fund. On this basis it would be the manco which expresses the view of the employer about the appropriate investment arrangements (where the employer has that power when participating in an umbrella); reviews the costs of the umbrella-fund arrangement; decides whether to terminate participation; requires reporting about the operation about the fund, and so on.
The manco would then have a measure of fiduciary responsibility. But this is a fiduciary responsibility of the employer, not of the umbrella's trustee board.
I am specifically not in favour of a trustee board delegating fiduciary responsibilities to a manco, for example in respect of death benefits. It would be imprudent for a trustee board to delegate fiduciary responsibilities to such a committee unless it can be satisfied that the manco will have the requisite fiduciary skills. With most employers, this is highly unlikely.
In any event, under the Act any such delegation would not relieve the board of its liability.
Geral . . . balanced role
David Geral of Bowman Gilfillan:
Trustees cannot assume that the manco reflects all interests in an employer group. Thus the trustees should not abdicate responsibility to build and maintain effective mechanisms to access the "voice" ordinarily expected from member-elected trustees in a non-umbrella. A manco should not be an agent of the board or indemnify the board in any way.
The election of members to a manco is important because, in the nature of engagement with the umbrella, it's the employer (through its humanresources or finance department) that appoints the umbrella (often on the advice of the employer's consultant/broker) and negotiates (to the extent that there is any negotiation) the employer-participation schedule. So from the outset the set-up is generally employer-driven and most employer-friendly, as is the business relationship with the umbrella provider (which has a profit incentive to keep the employer happy and maintain continued participation).
For manco members, I'd favour awareness training. They should be exposed to relevant issues either before being permitted to stand as candidates or perhaps as a probationary requirement following election but prior to taking office. The candidate needn't pass a course at any given level, but would need some kind of certificate for attendance at modules related to core skills e.g. basic oversight of management contracts, analysing reports, trustee duties, fund objectives and rules, reporting and whistleblowing.
Davidson . . . big doubts
This should allow space for a fair balance between technical competence and democratic representation of member interests. The cost of this training should be borne by employers as it is a cost that theoretically empowers their employees in important life skills, serves to bolster the governance of their employees’ savings, and can reduce the employer's public-indemnity insurances for its directors and officers.
Samantha Davidson of Shepstone & Wylie:
DRAFT PROPOSALS ONLY
The broad position of Liberty Corporate, says head of umbrella fund solutions Arno Loots, is to encourage the formation of mancos. Examining it for the group is Patrick Mayne, principal officer of its Corporate Selection Umbrella Funds.
He has also been attempting to piece together for Batseta an industry offering on the detail. Batseta, the council of retirement funds, is working on a discussion paper to assist in policy formulation.
Mancos are seen as important because, amongst other reasons, they're intended to be bodies independent of the employer and administrator to which fund members can seek answers to queries and make complaints. They can also source education for members, especially on investment issues, and act as a forum to discuss benefit structures. Also, adds Mayne, they provide a strong link between the employer and the administrator.
So far, up for consideration is a draft on the duties and responsibilities of a manco i.e. the management committees for an umbrella fund that has been "established for the benefit of eligible employees of various employers between whom there is no principal/subsidiary relationship". It envisages that:
Serious thought and research have clearly been put into the proposals, for they present detailed suggestions implicitly intended to enhance umbrella funds’ efficiencies. Amongst other possible functions, the manco:
Mayne . . . detailed
The success of a manco appears to rely on the goodwill and efforts of its members, not fear recourse, to make it work. The draft indicates that the trustee board, administrator, insurer or any other person employed by the fund "shall not be liable for any loss incurred by any member or beneficiary resulting from the employer or the employer's representative failing to provide timeous or accurate information in terms of...any section of the rules". If no liability attaches to them, then presumably it can't attach to mancos either.
By employers accepting such proposals, in whatever final form, the mancos can take a load off the umbrella funds’ administration services. This should enable commensurate reductions, to the benefit of fund members, in the fees charged by umbrellas to employers for their participation.