Edition: May/July 2018
COVER STORY 3
All good and well, if the contagion exists. The neglected issue, and necessary context, is how trustees can be fairly incentivised.
Welcome to dreamland. So pervasive has corruption supposedly become in the retirement-fund industry that Registrar Dube Tshidi has considered it necessary to issue a directive that will prevent it. The directive bears the formidable title “Prohibition on the acceptance of gratification”.
So inadequate are existing provisions of the Pension Funds Act (for trustees to avoid conflicts of interests and to act independently) and the general code of conduct for authorised financial- services providers under the Financial Advisory & Intermediary Services Act (which defines the “financial interest” that a provider can legitimately offer) that they’re defective for implementation.
So confident is the Financial Services Board in the power of new regulation that funds’ service providers and trustees will be frightened into compliance, more than they fear the ability of the Financial Services Board to enforce existing legislation.
So sweeping is the directive that it is premised on the altruism of member-elected trustees (such as shop stewards), more likely to be discouraged than encouraged by the deprivation of life’s little pleasures. If their integrity can be compromised by a fancy bottle of whisky at Christmas, they shouldn’t be trustees anyway.
The problem with such regulation is its attempt to quantify limits, and to identify practices, between what’s acceptable and what isn’t. Now they must be policed. But principles of honesty defy prescription.
The good intentions of the Tshidi directive, “to combat and prevent corruption” in the industry, don’t entirely correlate with foreseeable consequences that are bad.
It’s obviously undesirable that funds’ service providers offer bribes, or that fund trustees solicit them, for the attraction or retention of business.
Future under threat
Bribery is illegal, irrespective of the Registrar’s directive. Less obvious, filtering through the directive’s noble terminology, is the incentive that remains for fund members to stand for election as trustees.
Where they aren’t remunerated at all or receive token payments - for the skills they’re expected to acquire, for the hours they’re supposed to spend on preparation and attendance at board meetings, for the acceptance of personal liability in the execution of fiduciary duties and compliance with the plethora of regulation – perks offer modest consolation. But the directive bans even entertainment at sports events and payment of conference costs.
Perks for companies’ clients are officially sanctioned for tax purposes; hence, for example, the corporate suites at Newlands and the Wanderers. It’s hard to imagine why something that doesn’t equate to corruption by companies should equate to corruption in retirement funds.
And when it comes to conference costs, the ban is even trickier. Tshidi, whose habit is not to appear at the annual industry conferences of Batseta and the Institute of Retirement Funds, might ask why they’re usually held at resorts. The answer, for his edification, is that Durban and Sun City are venues most favoured for maximum attendance.
Trustees are only too happy to accept the generosity of service providers who, in turn, are only too happy to extend it. But now the ban extends to subsistence, travel and accommodation expenses as well.
Without the contributions from service providers, these conferences are at risk of collapse. Alternatively, were funds to pay the costs, the attendance by trustees and principal officers will reduce significantly.
The cost of a typical annual conference for the industry is around R7 000 per delegate, plus some R500 for the dinner, plus airfares and hotel accommodation for two nights; say R12 000 in all. Then say that four trustees attend and the cost to a fund, ultimately to its members, will touch R50 000. Money well spent?
Go a step further. Consider that revenues raised from these conferences – delegate fees plus speaker slots plus service providers’ exhibition stalls where charges relate to the number of delegates expected– are vital to the viabilities of Batseta and the Institute. Does it matter if they went defunct?
For all the criticism of these conferences – that they’re entertainment jamborees – they do provide opportunities for showcasing, networking and updating. Were they to disappear, how could their benefits be replaced? To assume their continued operation, exclusive of service providers’ pockets, is in the realm of fantasy.
From the particular to the general, the directive presents other disturbing aspects.
First, with no explanation, it is a departure from the usual practice of being preceded by a process of public consultation. Tshidi originally declared it to be effective from its March 8 date of publication. A few days later, on March 22, Deputy Registrar Olano Makhubela issued an “urgent clarification” that “where possible” the directive would not prohibit commitments entered prior to March 8.
It doesn’t indicate how firm these commitments must be; for example, finally accepted or finally promised. Arrangements for the Batseta winter conference were already well under way.
Second, the directive is not contextualised for haste or necessity. It is devoid of evidence suggesting that corruption in the retirement-fund industry has suddenly become so prevalent and extreme that the directive must overtake the provisions related to trustee independence, interest conflicts and gifts in that FSB good-governance circular PF 130 that’s been operational since 2007. Turning a circular to a directive isn’t a magic wand.
Third, it waffles on the “duty to report” corrupt practices. If SA’s recent experience teaches anything, it’s that people wanting to engage in bribery can conceive dozens of different ways to camouflage it.
An unintended spin-off from the directive is to exacerbate the need that trustee remuneration be addressed by comprehensive research into the wide disparities and thumbsuck determinations that currently apply: first by proper research that can offer benchmarks for practice; then, once done, for levels of remuneration – direct and indirect, inclusive of allowances and gifts – to be disclosed on funds’ websites. Open disclosure is the best deterrent to largesse, more so than a directive.
At present, remuneration levels (to the extent that they can be ascertained) are inconsistent and rarely disclosed publicly. And fund websites (to the extent that they exist) are not mandatory despite their effectiveness for member communication. Take a leaf, as few do, from the annual report of the Government Employees Pension Fund that the FSB doesn’t regulate.
If only the Registrar were to force similar disclosure, giving impact to his directive would become a whole lot easier and the industry wouldn’t be tarnished by the broad brush of corruption painted as systemic.
Of course, the health of the industry requires “independent” trustees. The concomitant is definition of what “independent” is supposed to mean. To confuse matters, the directive excludes remuneration paid by a sponsor of a retirement fund to a trustee appointed by the sponsor. Better than tickbox rules, public disclosure of payments to trustees will let in the light for assessments of independence going beyond the avoidance of interest conflicts.
By the same token, behaving in the belief that there’s this deep pool of aspirant trustees competently looking to serve under the conditions imposed on them, is fanciful. The imperative to incentivise trustees, fairly to draw them, should be addressed more urgently than additional layers of regulation.
The desired result, set out in the directive, is clear. The route to its achievement is convoluted.