Do the right thing while doing things right
The South African financial services industry has become increasingly complex since the introduction of the Financial Advisory and Intermediary Services (FAIS) Act. As financial advisers come to terms with the Act and its various Codes, the country’s prod
One of these challenges, expanded upon by James Downie, director at Ginsberg Asset Consultancy, is to fulfil both legal and moral responsibilities to your clients (in the case of advisers) and pension fund members (in the case of employers, Principal Officers and Trustees). Downie was presenting to attendees at the 17 August 2012 Sanlam Multi Manager International retirement conference in his personal capacity. In his 18-plus years as an independent Trustee, Downie has had plenty of opportunity to consider the legal versus moral dilemma. He believes that legal responsibilities are met by “doing things right” whereas issues of morality are typically resolved by “doing the right thing”!
Following rules and laws “by the book”
Doing things right is easy. The role of the employer, Principal Officer and Trustee are set out in the rules and laws contained in various legislation and industry circulars including Section 7 of the Pension Funds Act (PFA) and the FSB’s PF 130. “As a Trustee you need to manage the fund according to the rules and laws stipulated in the PFA,” says Downie. “You cannot deviate outside the set of rules because you will get into trouble with the FSB”.
The PFA requires Trustees to ensure that their members’ interests are protected; to act with care, due diligence and in good faith; to communicate with members; to make sure that the employer pays over fund contributions in time; and to avoid conflicts of interest. One of the difficulties with avoiding conflicts is that all Trustees are conflicted in some way. Whether a Trustee is independent or appointed by the employer or employee they tend to be deeply embroiled in matters affecting the fund. “We are all conflicted – even independent Trustees like me – so the real issue becomes undisclosed conflict,” notes Downie. “You have to know where each Trustee comes from plus the baggage they bring”.
Regulation 28 requires that Trustees monitor their pension funds against a range of compliance parameters too. They must ensure that the fund earns adequate risk adjusted returns suitable for members’ liabilities, compile an Investment Policy Statement and meet a range of other requirements relating to the education of Trustees, compliance, black economic empowerment (BEE) and due diligence on new investments. “Before we spend a rand of members’ money we are required to complete a due diligence that considers all possible risks – a virtually impossible task,” exclaims Downie. He says that Regulation 28 requires Trustees to monitor their fund for compliance breaches on a continuous basis when in reality most perform the function on a monthly basis at best. “We need to engage with the FSB and let them know we will not be doing this on a daily basis,” he says.
Communicating the retirement fund message
PF130 requires that pension fund Trustees communicate with fund members. It is apparent that the levels of communication across the pension fund industry are wholly inadequate and that the glossy brochures that win awards at retirement industry events cannot be relied upon to carry the retirement message to fund members. Correspondence sent by email or via the post office does no always reach the recipient – in the event it reaches the fund member it is not always read – and when read by Joe Average it is often not understood.
Trustees – in much the same way as advisers – are often hindered in their compliance efforts by product provider practices. As an example Trustees who grill their asset managers on Environmental, Social and Governance (ESG) issues – by asking whether they are signatories to South Africa’s Corporate Responsible Investment code (CRISA) – receive standard and often unsatisfactory responses... Trustees can meet their legal obligation to fund members by asking the question, but have they met their moral responsibilities by not demanding a more comprehensive response?
One could also ask whether the Trustees of defined contribution funds are fulfilling their moral responsibility by simply ticking that the employer transferred the employee contributions on time… The employer should be taken to task for sitting on funds for an additional week and earning extra interest on it, for example.
Going beyond checkbox compliance
There is no room for Trustees to approach compliance with a “we comply within reason” attitude. “How many of us received the PF 130 document, signed it off, and placed it in the governance folder never to see the light of day again,” asks Downie. “We are ticking the checkbox of Trusteeship without measuring the effectiveness of it”. It is not difficult to do the right thing. The PFA presents few challenges because it makes little mention of investments. Regulation 28 introduces a massive compliance burden including compliance, risk analysis, ESG, BEE, due diligence and asset class limits, to name a few. Meanwhile PF 130 brings fund performance to the fore. (Although PF 130 is a circular, and not a law, most Trustees have implemented its requirements).
The Trustee’s moral obligation arises from Section 37C. “That’s where we are forced to use moral judgement in deciding who receives the death benefits in the event of a member’s death,” says Downie. Trustees have to exercise discretion taking into account religious, cultural, ethnic, sexual and criminal issues. There is no way to put a tick in a box when it comes to these matters. “Trustees are responsible to a whole stack of people, beginning with the member, but including employers, unions, pensioners and former members,” concludes Downie. “To live up to your moral and ethical responsibilities you must be responsible to yourself, because if you do that – glib as it sounds – you do your job properly and know that you have done your job to the fullest possible extent”.
Editor’s thoughts: Trustees and financial advisers face similar challenges due to legal and compliance issues diverting their attention from moral responsibilities to pension fund members and clients. Would you agree that today’s regulatory burden is making it more difficult to perform your job? Please add your comment below, or send it to gareth@fanews.co.za
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