Issue: September 2012 / November 2012


Opportunity lost

So it would seem, unhappily. The good intentions of 1996 are overtaken by the hard realities of 2012.

Between the rafts of regulation and rushes toward consolidation in the pension-fund industry, the principle of ‘democratisation’ stands to be squeezed out. Is it a good thing? Is it inevitable and unavoidable?

Yes, many would argue. When SA pension funds have almost R3 trillion under management for over 8m members, past experience and foreseeable dangers require ever-increasing layers of rules to protect these savings. And when there are thousands of standalone funds too small to enjoy the cost efficiencies of critical mass, member interests dictate that they merge into larger units.

Also, it can be argued, there simply aren’t sufficient numbers of trustees suitably skilled to serve on myriad boards. Yet the incessant plethora of regulation presumes that there are, that there’s no shortage of aspirant and incumbent trustees competing for the role and competent to exercise the fiduciary duties required of them.

A dozen or so years ago there were more than 15 000 funds registered with the Financial Services Board. By law, since each must have a minimum of four trustees, a gathering of all these trustees would fill the seats at Ellis Park. Now, with the number of active funds down to perhaps 3 000 and shrinking, they can be better managed and easier for the FSB to supervise.

But it comes at the expense of the ‘democratisation’ that the Pension Funds Act introduced in 1996. The idea in giving members the right to elect half of funds’ boards, for there to be 50/50 representation between employers and employees, was for them to have an equal say in deciding their own financial futures. Trustees elected by workers, it was anticipated, would attend training courses to acquire the skills necessary for stewardship.

In reality, it hasn’t happened on a scale that comes close to matching the early idealism. The take-up of training has been less than adequate; horses can be offered water but not compelled to drink. The contribution of member-elected trustees, generally speaking, has been less than hoped. Attendance at training courses is exceeded by attendance at junkets.

Moreover, participation of members in the democratised model has similarly been less than enthusiastic. Survey after survey reveals that few members bother to vote in trustee elections. Fewer know who their elected trustees actually are.

There are reasons for the mismatch, some doubtless valid. Amongst them is the amount of time, which many employers are apparently reluctant to accommodate, for trustees to attend training courses and to prepare for board meetings. On top of this is the paltry payment, if there’s any at all, for serving as a member-elected trustee.

The matter is left unaddressed. Were trustees to be paid additionally to their day jobs, the payment would have to come from the fund and therefore increase its costs. Alternatively, on a brighter view, better-trained trustees would partially offset the payment costs by reducing reliance on well-remunerated service providers. There isn’t much incentive to become a member-elected trustee, except for public spiritedness, given the regulatory compliance expected and the penalties of personal liability threatened.

Pity the lay wage-earner who volunteers to enter such a miasma. He’d need a basic understanding of investments and pensions law, be atop the voluminous circular PF 130 on the good governance of pension funds, sign off on the fund’s investment policy statement which includes mandates to asset managers, have at his fingertips the implications of Regulation 28 for prudential guidelines, select service providers whose performance they’re then to monitor....

Having miraculously managed all this, his term expires. Trustee churn is endemic. The period for holding office is normally three years. Correctly, the FSB envisages a ‘fit and proper’ qualification for trustees. Possibly, unless it’s not much more than a probity clearance, it will further limit the trustee pool.

And yet, and yet. The amendment to the Act came about largely at the instigation of trade unions. It is therefore they who’re largely responsible to make it work. Were they to fail, democratisation fails.

So far, they’re failing. To no noticeable degree is their presence felt on private-sector occupational funds: for instance, to pressurise employers for time to attend training; to sit on boards of non-union funds (themselves managed with varying degrees of effectiveness); to assert their influence as indirect shareowners in JSE-listed corporates where they can constrain executive remuneration that they consider excessive and oppose B-B BEE schemes that dilute their pension funds’ shareholdings. In June alone, two large schemes were approved without a peep of protest or attempt at fund recognition.

All the while, consolidation proceeds. From the perspective of the 1996 intent, a weakness in the structure of umbrella funds is the absence of worker representation on their boards. For all the value added to these boards by professional independent trustees, for all the elections that take place and assurances that interest conflicts are avoided, their focus is on benefits to the exclusion of broader social agendas.


A key aspect of the governance of pension funds is the role of trustees. Trustees must have the relevant education, experience and skills to make investment decisions consistent with the best interest of the pension fund and its beneficiaries. They should at all times exercise their fiduciary responsibilities towards the fund, and not necessarily to the persons appointing them, be it employees or employers.

The impetus for demanding high levels of expertise and integrity from trustees requires the following: application of fit and proper standards to the appointment of trustees and to their conduct, mechanisms to achieve proper training of trustees, and the use of independent professional trustees. Government is also considering making it a statutory requirement that trustees be fit and proper with certain minimum qualifications, which should be achieved within a fixed period from the date of appointment.

-- National Treasury policy document, May 2011.

These are handled down the line by respective asset managers who’ve signed up to the Code for Responsible Investing, not bottom-up by mandates from funds that have been absorbed. So long as benefits keep flowing, it seems, members couldn’t care a hoot.

By their own volition, unionists are neither heard not seen in these consolidated umbrellas growing larger by the year. The shop-floor participation, which the amendment to the Act envisaged, swings uncontested to institutional centralisation, which it didn’t.

If that’s the way unions want it, contradicting their earlier standpoint, so be it. In the absence of anybody arguing to the contrary, it must be a good thing.

Allan Greenblo,
Editorial Director