Issue: Oct 2010/Jan 2011
Back to Basics 6

How are fund members to hold trustees responsible?

Dave Crawford

Crawford...members should be told

By members getting the information the need, argues educator DAVE CRAWFORD who has long provided financial guidance to employees on their retirement funds.

Pension and other retirement funds support an entire food chain. Think about it. These are the following service providers who are all directly paid for services to funds:

  • Risk consultants
  • Benefit consultants
  • Communication consultants
  • Asset consultants
  • Asset managers
  • Transition managers
  • Administrators
  • Actuaries
  • Principal officers
  • Independent trustees
  • Trustee trainers
  • Member educators (largely non-existent)

If we move to secondary roles there are still more: for example, the people who package and price units; the pension lawyers who give legal advice on compliance to the funds, and so on. All these roles require expertise of the highest order.

It is almost inevitable in the SA pension fund industry that pension professionals will have conflicts of interest. There are just a few service providers and a large number of funds. Many people believe that these conflicts can be managed, but it is up to the trustees of any retirement fund to ensure that this management is to the benefit of the members and not the service providers.

A retirement that uses the same service provider to provide administration and consulting services, for example, cannot expect either arm freely to criticise the other. This is well summed up by the definition of conflict of interest in as “a situation where a party’s responsibility to a second party limits its ability to discharge its responsibility to a third party”.

Trustees have to take decisions all the time. This is the nature of their job. And the information on which they must decide is prepared by one or more of their service providers.

In particular, consultants hold enormous sway over the decisions because of their role in guiding compliance. Trustees often come to believe that consultants’ suggestions cannot be contradicted. Obvious conflicts of interest are often ignored due to undue influence. It can lead to members’ interests being prejudiced.

This situation will never resolve unless members are given a lot more intelligible information than they get at present. New trustees are often required to sign an undertaking that they will not discuss anything that took place in trustee meetings without the express permission of the chairman.

The Pension Funds Act says in s7D(c) the trustees must “ensure that adequate and appropriate information is communicated to the members of the fund informing them of their rights, benefits and duties in terms of the rules of the fund”.

This gives trustees almost complete discretion over what members will and won’t be told about their funds.

FSB circular PF130, the new “Ten Commandments” for funds’ governance, says in para 57:

All information about the fund is confidential and may not be released to any person unless such person has a lawful right to such information, such as the rights of members to obtain the registered rules of the fund, actuarial valuations and audited financial statements. In particular, no person, other than board members and service providers, should have access to minutes of board meetings and membership details unless such information is required for a lawful purpose. The board should not, however, be obstructive in supplying information when the person requesting it has a lawful right to access such information.

So members are not entitled to full disclosure, according to PF130. This creates a cosy little circle that may refuse members information concerning their own money. The irony of these comments is that all of this is done in the name of looking after the members’ interests.

The member is, in many ways, treated like a minor, with the “grown ups” deciding what is best for him. This situation does not necessarily lead to abuse, or so we hope, but it can.

If trustees knew that everything they said would be available to members, it should not change anything. Nor should service providers of any description be worried about it. But it isn’t going to happen anytime soon.

For as long as members are permitted to receive only sanitised communications, they will never really know what goes on in their retirement fund. And without the necessary knowledge they will never ask awkward questions because they won’t know what to ask.

So the idea of educating members to understand their retirement funds, and how they work, is hugely important to enable them to make informed decisions when they need to -- and to put pressure on their elected representatives to let them know exactly what is happening.

Sadly, in almost all the cases where members do tackle a fund, it’s only when they leave it. Rarely do members ask questions because of a problem being suspected while they still belong to a fund.

Independent actuary Rob Rusconi authored an elegant and insightful work on SA pension funds. He entitled it: “Whose money is it anyway?” Well, whose?