Issue: June 2012 / August 2012
Expert Opinion

Rapid changes

Much more is expected of trustees now than in the past. Muitheri Wahome, head of technical solutions at Investment Solutions, points out where skilled professionals can help. trends
SA’s retirement fund industry has moved beyond a philosophical dialogue on the impact of legislation. Instead, businesses are now making real decisions with legislation in mind. This significantly alters the way the industry manages itself and will perform in future.

The trend to more stringent legislation was driven by the 2008 financial crisis and the subsequent losses suffered by investors globally. The result is that retirement fund trustees are now expected to address many important issues and risks beyond what was previously expected of them.

This shift from discussion to active compliance has immediate implications for:

  • The organisational governance of trustee boards;
  • Trustee boards’ decision-making and efficient implementation;
  • Skills, knowledge, time and resources required by trustees to deal with increased risk-management complexity;
  • Trustee boards’ contractual agreements with intermediaries, and
  • The cost of administering funds.

So it is all the more important that trustee boards regularly update each intermediary’s duties to avoid confusion and the risk of falling short of new regulatory requirements. New issues affecting trustees include:

  • Investment administration, risk and performance reporting to meet new Regulation 28 requirements for compliance;
  • Applying more rigour to setting the strategy, and reflecting a thorough understanding of the fund’s asset and liability risk. Being able to demonstrate that assets have been considered relative to liabilities is an imperative, not a nice-to-have;
  • Communicating with and informing fund members. This is now an important aspect of compliance. Key is to promote education of members by providing them with online tools, platforms and portals -- empowering them to understand their retirement investments and make the kind of decisions that will augment, rather than erode, fund performance. Since people could change jobs several times within their careers, these tools can be used to demonstrate how devastating their non-preservation of retirement savings between jobs can be. Better informed members are also likely to challenge results more often. As such, a far higher standard of reporting and communication is required than in the past. Similarly, the revised Regulation 28 places greater emphasis on the education of trustees to meet the duties of being a trustee;
  • Designing portfolios using new opportunities created by the growth in managers and funds along with alternative investments, like hedge funds and private equity. Due to Regulation 28, these join the mainstream;
  • Identifying and selecting tomorrow’s winning asset management firms where clients want to build bespoke strategies.

The impact of legislation is also increasing investment in performance and compliance systems, along with the bolstering of compliance and risk teams by asset managers. This in turn has fostered the trend, which began in the last decade, of outsourcing non-investment related activities such as compliance, investment administration and performance reporting.

A broader long-term implication of these changes is that, inevitably, asset manager and intermediary businesses will have to be of a certain size to deliver within legislative requirements. The days of the single-person managed fund are probably over, in SA at least.

The intentions of these legislative changes are good and will lead to funds being better managed, with increased protection for savers and retirees. But from now on trustees will need to work much more closely with skilled professionals, ensuring that robust processes are in place to monitor the assets for which they’re responsible.