15 October 2004 Angelo Coppola

The recent liquidation of five pension funds that had lost more than R18 million under management, which led to the funds' trustees being charged with fraud and offences relating to contravention of the Pension Funds Act, highlights the responsibility of

This responsibility is onerous, as the Pension Funds Act (Act no. 24 of 1956) stipulates that a board of trustees is obliged to:

  • Act with impartiality
  • Avoid conflicts of interest
  • Act with due care, diligence and in good faith
  • Ensure members' interests are protected at all times

Angela Weinstein, head of institutional operations at Investment Solutions, says trustees may only invest in financial instruments approved by the Financial Services Board as stated in Regulation 28.

Pension funds are limited to unlisted investments up to a maximum of 5% of assets and alternative investments up to 2.5%.

The regulation requires such investments to be undertaken with extreme caution after thorough investigation, taking into account the investment risk, the soundness of the investment and the entity involved.

"The quality of the evaluation of unlisted investment instruments relies heavily on the investment manager's evaluation methodology and could result in increased risk for the assets under management," she says.

"Ideally, to diminish the potential investment risk, as well as the liability of pension fund trustees, investment decisions should be outsourced to a reliable independent third party or investment expert capable of objectively evaluating the investment opportunity.

"Factors such as the analysis or identification of the risk involved, analysis of the legalities of the investment, and the frequency of the evaluation, will help ensure assets under management are well managed and that members' assets are well protected," says Weinstein.

"In addition, the expert must have comprehensive knowledge and understanding of the dynamic and often volatile investment market environment."

She adds that anything short of fulfilling these basic requirements is not in the interest of good corporate governance and could result in trustees being held liable for contravening the Pension Funds Act and other applicable legislation.

The Pension Funds Act stipulates that the most pertinent duty of a board of trustees is to ensure proper registers, books and records are kept, proper control mechanisms are in place, appropriate advice is sought on matters which the board may lack expertise and to ensure that the rules, operation and administration of the fund comply with applicable laws.

"If pension fund trustees do not have the necessary knowledge or expertise, it would be prudent that they outsource their duties and responsibilities to experts, to ensure the safekeeping of the fund's assets as prescribed," says Weinstein.

Pension fund trustees can also outsource their duties to external auditors to check the accounting standards and evaluation method, and lawyers to ensure the legal aspects of the assets under their management are sound.

Weinstein also says legal contracts between a pension fund and other parties must be irrefutable. "It is in the interest of good corporate governance to ensure that an independent party verifies the existence, soundness and valuation of the investment."

She says some form of collateral is another important consideration in safeguarding assets under management. If an unlisted investment transaction has been inappropriately valued, investors could have a valid claim against the investment manager and in addition will have the collateral to claim against, thereby decreasing the risk exposure of the fund's assets.

The investment arena is ever changing and Regulation 28 could be amended to prescribe a greater limit regarding unlisted and alternative investments to be utilised by a fund.

If this happens, trustees and the financial services industry will need to be even more vigilant to ensure the safeguarding of assets under management.

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