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Consequence of breach of fiduciary duties by trustees of a pension fund

06 July 2022 Ayanda Nondwana, Director at Fairbridges Wertheim Becker

In Moropa and Others v Chemical Industries National Provident Fund and Others [2022] ZAGPJHC 420 (29 June 2022), the court found that trustees who breached their fiduciary and statutory duties by committing fraud and failed to avoid a conflict of interest are not fit and proper persons and therefore, are susceptible to be removed as trustees.

The finding made by the court arises from an application instituted by the erstwhile fund administrator to the Chemical Industries National Provident Fund ("Fund") to review and set aside the appointment of certain service providers by the Fund. The central question concerned the conduct of certain trustees, whether their decision to terminate the services of the Fund's administrator was tainted by fraud and constituted a breach of their fiduciary and statutory duties owed to the members of the Fund.

It was contended that the three trustees of the Board of the Fund, namely, the principal officer, chairperson and his deputy received bribes from a service provider with a view to influencing the decision to appoint the service provider as the administrator, consultant and actuary to the Fund. It was common cause that the trustees received payments from a related entity to the service provider immediately after the appointment of that service provider as the Fund's administrator without a credible and plausible explanation to the payments conferred by these trustees. The court found that the payments were evidently corrupt payments constituting bribes for the roles played by these trustees in the decision to terminate the erstwhile Fund administrator and in the appointment of the new administrator. Accordingly, the decision to terminate the erstwhile Fund's administrator was reviewed and set aside on the basis of fraud and legality.

The secondary issue that the court traversed related to the statutory and fiduciary duties of the trustees. The court remarked that in making a decision to terminate the services of a fund administrator, the Board of the Fund is constrained to act lawfully. The trustees can only act within the four corners of the Pension Fund Act ("PFA") and the Rules of the Fund and for the benefit of the Fund, when passing any resolution. In terms of section 7C of the PFA, the Board and each of its members are required to act with due care, diligence and good faith (section 70(b)) to avoid conflicts of interest; (section 7C(c)); to act independently (section 7C(e)); to exercise a fiduciary duty to members and beneficiaries in respect of accrued benefits or any amount accrued to provide a benefit, as well as a fiduciary duty to the fund, to ensure that the fund is financially sound and is responsibly managed and governed in accordance with the rules and this Act; (section 7C(f)); and to comply with any other prescribed requirements (section 7C(g)).The court stated that when a Board makes a decision to terminate the appointment of an administrator, it acts not in its own interest, but in the interests of the Fund. It (and each member of the Board) is obliged to act in accordance with their fiduciary duties and include the duties to act with due diligence, independence and impartiality in accordance with section 7C(2) of the PFA.

The found that these trustees acted in their own personal interests, not in the interest of the Fund when they accepted the bribe to appoint the new administrator and evidently, breached the fundamental duty to avoid a conflict of interest. The court also found pertinently that the trustees are clearly not fit and proper persons to be trustees. The court remarked that the PFA requires that all trustees are fit and proper persons. The duties of the trustees to the Fund are governed both by the common law principles and by statutory law, notably section 7C of the PFA, which provides in the relevant parts that the object of the Board is to direct, control and oversee the operations of a Fund in accordance with the applicable laws and the rules of the Fund. In pursuing its object, the Board is enjoined to take all reasonable steps to ensure that the interests of members in terms of the rules of the Fund and the provisions of the PFA are protected at all times. Moreover, members of the Board are required to act with due care, diligence and good faith. Accordingly, the court ordered the removal of these trustees from the Board of the Fund.

The judgment provides some useful insight into the fiduciary duties of trustees of pension funds and re-emphasize that, at all times, the trustees must act lawfully and in the best interests of the fund and its members or beneficiaries and to avoid conflict of interests, failing which, that there is a real risk that they can be removed as trustees.

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