Trustees fully responsible for compliance with Reg 28

With the December deadline looming for pension funds to comply with the revised Regulation 28 of the Pension Funds Act, trustees must ensure their funds are compliant. “Nor can they abdicate this responsibility to their asset managers and advisers as they may have in the past,” said Francisco Khoza, Director of Banking and Finance at law firm Bowman Gilfillan. He was speaking at a recent Cape Town Forum of the Compliance Institute Southern Africa.

The Regulation was effective from 1 July 2011, but as compliance is complex the Registrar allowed for a transition period to 31 December. The transition period allows time for funds to not only adjust their portfolios to comply with the new asset limits, but also to adjust their monitoring and reporting systems to ensure compliance, said Khoza. “Funds are left with just over two months to ensure that monitoring processes are in place come next year.”

In addition to setting limits on the types and amounts of different assets a fund can invest in, the Regulation also prescribes a set of principles with which trustees must comply. These aim to strengthen the investment decision-making processes, improve the transparency and accountability of funds, and inform their investment approach.

According to Khoza, an important consideration is the level of expertise of boards of trustees with regard to investment and liquidity requirements, governance and risk management. “Boards are required to empower both employer trustees and member trustees, many of whom may lack the necessary understanding to ensure compliance. It’s no surprise then, that one of the principles with which boards must comply is the active promotion of trustee education,” said Khoza.

Boards are also required to ensure that their fund’s assets are appropriate for its liabilities and understand the changing risk profile of the assets over time, taking into account a comprehensive risk analysis, including but not limited to credit, market, liquidity and operational risk, as well as currency, geographic and sovereign risks when it comes to foreign assets.

The promotion of broad-based black empowerment when contracting the services of a third party supplier is a further principle trustees must adhere to.

The principles also instruct trustees to perform a reasonable due diligence before investing in an asset either directly or through a third party. “And when this includes taking credit ratings into account, trustees can’t rely wholly on credit rating agencies for assessing credit risk. They have to perform their own due diligence as well.”

Over and over again, Regulation 28 stresses that while tasks can be delegated, responsibility cannot be abdicated, Khoza concluded.