How corporate governance protects pension funds
Corporate governance is not just a regulatory checkbox for pension funds; it is the foundation on which financial stability, ethical conduct, and member trust are built. In South Africa, where pension benefits often represent the largest single asset for many individuals, effective governance is essential to ensure that retirement funds fulfil their long-term promise.
To better understand the relationship between governance and pension fund performance, FAnews spoke to the FSCA’s pension team, who highlighted how principles like transparency, accountability, board independence, and ethical leadership are instrumental in protecting beneficiaries and strengthening fund resilience.
The cornerstones of pension fund governance
Effective governance in pension funds begins with strict adherence to the Pension Funds Act, 1956 (PFA), and the broader regulatory framework. These laws are not abstract ideals - they are directly tied to fund sustainability and member protection.
Quoting a key legal interpretation, the FSCA notes: “General public interest requires that pension funds be operated fairly, properly and successfully and that the pension fund industry be regulated to achieve these objects. That is the whole purpose which underlies the Act.”
According to the team, strong governance, when fully implemented across all levels of management and operations, delivers three core outcomes:
- The benefits provided for in terms of the rules of the fund will actually be delivered;
- Benefits will be optimised, and the associated investment risks minimised, with these opposing concepts being appropriately balanced against each other; and
- Cost implications to members and beneficiaries will be transparent and quantifiable by stakeholders.
These outcomes are not aspirational - they are achievable when fund boards and managers embody the core duties outlined in Sections 7C and 7D of the PFA, which, according to the team, include:
- Due care, diligence and good faith;
- Avoidance of conflicts of interest;
- Impartiality towards all members and beneficiaries;
- Ensuring proper control systems are employed; and
- Obtaining expert advice on matters where board members may lack sufficient expertise.
Together with Circular PF No. 130, these principles create a clear blueprint for good governance.
Accountability, independence, and stakeholder engagement
Governance is not just about complying with laws - it's about cultivating a governance culture where independence, performance review, and engagement drive better decisions and outcomes.
The FSCA emphasises that: “Board independence is more than a practice; it is a statutory requirement under section 7C(2)(e) of the PFA.”
Even though board members may be elected by members or appointed by employers, the law requires them to act independently of these stakeholders. Their fiduciary duty is to the fund, not to the party who appointed them.
Performance evaluations are equally vital. “Principle 4 of Circular PF130 prescribes a Code of Conduct and a performance evaluation mechanism for board members to evaluate individual performance and identify knowledge gaps and other training requirements.”
This ensures board members remain fit and proper to serve - a key element of fund stability and regulatory compliance.
On the engagement front, the FSCA points out that: “Stakeholder engagement creates trust and promotes transparency between the board and fund members, leading to better fund outcomes.”
This includes quarterly FSCA meetings, trustee training, and broader communication initiatives. For fund boards, Section 7D(1)(c) requires regular member communication on key issues such as rights, benefits, and duties - helping members feel included and informed.
Transparency, ethics, and risk management
One of the pillars of good governance is transparency, especially in fund operations, investments, and costs. The FSCA outlines key mechanisms that ensure transparency:
- Section 15(1) of the PFA requires funds to submit financial statements to the FSCA within six months after the end of their financial year... members should have access to such financial statements.
- Section 16(1) requires funds to submit valuation reports at least once every three years to assess financial soundness.
- Members must also receive annual benefit statements, and AGMs offer direct engagement opportunities.
When it comes to ethics, the FSCA underscores that trustees must uphold the highest standards of integrity due to the unique nature of retirement savings: “Pension benefits account for the single largest asset for most South Africans... accordingly, this poses unique ethical considerations for individuals who take it upon themselves to act as fiduciaries for pension fund members.”
Despite the critical role trustees play, barriers to entry remain relatively low. Therefore, fund members and employers must be cautious about who they elect or appoint. “Legislation and other regulatory instruments can only go so far in protecting members, improving performance and mitigating risk.”
On the issue of conflicts of interest, Section 7D(2)(c) of the PFA is clear. Board members must act only in the best interest of the fund. “As a point of departure, one should not accept appointment or election to the board if it is foreseeable that his or her position will come into conflict with one’s personal interests.”
In addition, Section 9B introduces a whistle-blower obligation - board members must report any conduct, including conflicts of interest, that may harm members. FSCA Directive 8 also prohibits acceptance of impermissible gratification, where such conflict is inherent.
On risk management, the FSCA explains that: “The pension funds industry is highly regulated and has no shortage of legislation to cushion the fund against investment risk.”
For example, Regulation 28 to the PFA limits asset exposure, thereby protecting funds from volatility. But the onus remains on boards: “Board members are required as a governance matter, to be reasonably versed in such matters as risk management, investment risks and strategies, benefit structures, legal issues etc.”
Poor governance: the cost of complacency
Failure to follow governance principles is not just a compliance risk - it can severely damage a fund’s reputation and financial viability.
The FSCA warns that: “Poor governance results in mistrust among members and other fund stakeholders, which leads to poor outcomes for the fund. A poorly governed fund inevitably suffers reputational damage as a result of negative press coverage, lawsuits and regulatory action by the authorities.”
This loss of trust can cause employers and members to leave the fund, potentially triggering liquidity and solvency concerns. “Financial damage is an inevitable consequence of poor governance, which in turn leads to the fund failing to remain financially sound and meet its obligations.”
Accountability to both the regulator and beneficiaries is critical. Section 132 of the FSR Act empowers the FSCA to conduct on-site inspections to identify noncompliance. Moreover, Section 30I of the PFA allows for a complaint resolution process via the Pension Funds Adjudicator, ensuring member grievances are heard and acted upon.
Governance… the guardian of member security
The FSCA’s guidance offers a timely reminder: governance is not a one-time task; it’s a continuous obligation. From enforcing board independence and ethical leadership to ensuring transparent communication and sound investment decisions, pension fund governance is essential to safeguarding South Africa’s retirement system.
Boards must embrace their fiduciary role with integrity, diligence, and foresight. As the FSCA puts it, “At the heart of good governance is the board’s strict adherence to the applicable laws.”
Only through this commitment can pension funds deliver on their promise to current and future retirees, ensuring security, sustainability, and dignity in retirement.
Writer’s Thoughts
To ensure the sustainability and trustworthiness of pension funds, effective governance must go beyond compliance, fostering a culture of independence and accountability. When boards embrace their fiduciary responsibilities with transparency and integrity, they help secure not only the financial health of the fund but also the future well-being of South Africa's retirees. Please comment below, interact with us on X at @fanews_online or email me your thoughts.
